Europe’s Energy Crisis Is Going to Get Worse.
UMost people think of energy less often than air. Americans have been mostly shielded from the growing energy crisis in other countries, some of which can be fatal. In many other places, especially Europe, the escalating situation is impossible to ignore, and it’s going to get a lot worse.
The energy crisis is here and Russia is to blame. Mid-August saw natural gas prices rise to $3100 for 1000 cubic metres, an increase of 61% over last year according the Dutch TTF market. This price means that many power plants cannot continue to function at full capacity. In Europe, the benchmark electricity price has risen by almost 30% in 2022 due to rising costs of input fuels. These records have been broken. Energy prices have risen ten-fold in the past five years, putting them ten times above the average.
The average household is struggling to pay the high cost of heating and electricity. But, governments also are falling short. It isn’t enough that the recent allocation of $279 million by European governments to support small consumers has been sufficient. Britain’s National Energy Action charity projects an increase from 4.5 million U.K. households to a full 8.5 million will face energy poverty this winter. Kosovo already experiences rolling blackouts that last two hours for every six. In other European countries, blackouts and brown are possible.
It is not over yet. Dmitry Medvedev, the Russian Security Council’s Deputy Chairman, threatened that oil prices would reach $5000/1000m3 before 2022. It is still far from being ready. The cooling system consumes electricity during warm weather. It can generate electricity from natural gas or wind power, coal or geothermal, as well as nuclear. By contrast, in cold weather—the “heating season”—consumption draws mainly from fossil fuels, especially natural gas and oil, because most heating systems are still petroleum-fueled. As every year, winter will see a dramatic increase in natural gas demand. Putin is able to leverage a lot of power, as Europe has become dependent upon Russian imports for more than 40% of its natural gas requirements, 46% for coal, and 27% for petroleum. He is not being friendly this year.
Gazprom, Russia’s state-owned natural gas company, has been gradually restricting gas exports to Europe since 2021, an effort to weaponize energy against Putin’s opponents, perceived enemies, and erstwhile Soviet satellite states, including Ukraine. These difficulties were used to promote fractures within NATO and the other west alliances. He is using this tactic with an unprecedented level of fervor, although it is not new.
The threat now is that Gazprom cuts off gas to Europe completely to punish the continent for sanctions imposed in response to Putin’s invasion of Ukraine. Hopes that Russia’s dependency on the European energy markets—more than $120 billion in revenues over the last ten years—would keep Putin from such a drastic step were clearly misplaced. He seems evidently willing to sacrifice his own country’s economic wellbeing to spite Europe. The International Monetary Fund is one of many experts who now see a possible scenario for a total cessation in Russian gas exports from Europe. Others believe it possible and evidence is mounting.
Russia started emptying German gas storages and slowing down its production in 2021 in what appeared to be, retrospectively, preparation for the invasion of Ukraine. Gazprom has used a variety of excuses since March 2022 to shut down the energy lines. Gazprom demanded payment in rubles for gas to remove financial sanctions. Gazprom also cut off six other buyers, which included those in Finland and Denmark as well the Netherlands and Germany.
Gazprom saw a drop in gas flow of less than 40% over the Nord Stream 1 natural gaz pipeline, which is 55 billion cubic meters (bcm). This was claimed by Gazprom to have been caused by maintenance problems in Siemens-made gas compressor engines. The turbines were later sent to Canada for repair. Canada agreed to exempt it from the sanctions in order to return the turbines to Nord Stream 1 under Russian pressure. This is a decision that continues to cause controversy for Canada’s government. As soon as the turbines were returned, Gazprom immediately shut down Nord Stream 1 entirely for ten days’ implausible “maintenance”. A July 14 letter was sent to customers, invoking force majeure and arguing that Gazprom cannot guarantee continued gas supplies. While some flow resumed on July 21st they were at around 20% of their capacity as only one compressor was operational. Gazprom claims there are problems with the Siemens compressor turbines’ repairs and paperwork. A three-day additional shutdown was announced for September 31st to Sept. 2. The charitable term for shenanigans is “Shenanigans”.
Gazprom has been diverting more of their gas to China, rather than Europe. Gazprom is also transferring more gas to China through its Power of Siberia natural gaz pipeline. This runs from Siberia eastward to China. The daily volumes have increased 61% since 2021. They are now a record breaking 3900% higher than the Russian contractually mandated supply. Gazprom claims Europe is responsible.
Natural gas exports through other pipelines to Europe have been halted or reduced. Although gas continues to move from Russia through Ukraine at minimum contractual volumes of 40 bcm—the Gazprom-Naftogaz contract expires at the end of 2024—the Yamal pipeline has been flowing in reverse, eastward, for months. From July 21-August 10, Gazprom shut off supplies to Latvia, accusing the Baltic state of “violating conditions for gas withdrawal” without explaining further. No doubt a coincidence, Latvia’s parliament had voted just before to ban Russian gas imports from January 2023. Gazprom has started burning natural gas to make Europe more aware of Russia’s use of energy. Flares have been seen every day since June 17 at Gazprom’s Portovaya compressor station, which can be seen from Finland.
If Russia cuts off the gas—perhaps when, not if—the European consequences will be massive and the global economic consequences could be tragic. Mid-July saw the IMF calculate that Hungary, Slovakia, Czech Republic and other countries could see their GDPs drop by up to 6 percent if Russia cuts off all natural gas. The global economic growth rate would fall by 2.6% and 2% respectively in 2022-2023. Some people won’t have heat, while others will need to choose between food and warmth. The Economist has preemptively labelled it the “winter of discontent” due to the looming “gasastrophe.” According to energy expert Llewellyn King, the end of this year for Europe is likely to be “its worst winter since the one at the end of World War II, from 1944 to 1945.”
There are no immediate solutions, other than tightening the belts. In an attempt to substitute Russian fuel, many renewable energy projects have been proposed. A new LNG terminal has also been built to facilitate more U.S. exports. There is a rush to add nuclear capability in countries around the world. E.U. The European Union has been trying to locate alternative sources of fuel. This includes U.S. Liquefied Natural Gas (LNG), as well Azerbaijan. There are new pipelines being constructed. Despite these efforts, it will be a long time before Russian energy is replaced. The new projects need at most six months of biomass production, and up to ten years in nuclear. This winter will not be the best time to start any of these projects, so reducing Europe’s consumption is our only option.
And political will notwithstanding, escaping Russia’s energy web is hard. Even while momentum increases on alternatives, Europe’s imports of Russian diesel have increased by 22% since the beginning of July, a fact that underscores just how difficult replacing Russia fuel is in the short-term. E.U. has paid €85 billion to Russia for energy supplies just since the February 24 invasion of Ukraine. That’s an increase of €6.6 billion per month over last year, despite reducing Russian energy imports by 15%. Russian internal documents show an expected 38% increase in revenue from energy exports over 2021. The reason is that gas exports may have declined from 205.6 BCm to 170.4 BCm but oil prices are high.
Reduced consumption is more likely to aid this winter. In order to cut Russia’s natural-gas imports, the European Commission will implement the REPowerEU by 2020. This is expected to result in a reduction of 100 million cubic metres. Europe targets a 15 percent reduction in gas consumption by March 2023. Each country in Europe has its own rationing programs and will likely have to activate them. There are many reasons to believe that this plan will succeed. It is possible that Europe will become energy-secure by 2023.
However, Winter 2022 is likely to be painful.
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