Economics/Class Relations

Is Europe heading toward an energy disaster when the weather turns?

The Signal

Is Europe heading toward an energy disaster when the weather turns? Samantha Gross on the likely paths of a major gas crisis.
Thom Holmes
Thom Holmes
Natural gas could now be rationed across the EU until the spring of 2023, according to a European Commission plan announced this week, as the continent experiences what a number of economists are calling its worst energy crisis ever. For decades, Europe has depended on Russia for much of its natural gas, but Vladimir Putin drastically reduced exports to the EU after it imposed harsh sanctions on Moscow for invading Ukraine. Discussing the rationing proposal, European Commission President Ursula von der Leyen said, “Russia is blackmailing us. Russia is using energy as a weapon.” The human costs of the natural-gas shortage are already apparent, as some housing cooperatives in Germany are limiting hot-water usage by residents. Utility bills for some Europeans are up 500 percent from last year, contributing to steeply rising inflation that’s provoked labor strikes in several European countries. And even as the record heat wave in much of Europe severely strains the union’s power grids, the prospects for the winter are even worse, as most EU homes and businesses rely on natural gas for heating—and Putin could still further decrease supplies. How bad could this crisis get?
Samantha Gross is the director of the Energy Security and Climate Initiative at the Brookings Institution in Washington. In her view, European countries don’t have any easy solutions to the emergency. They can’t just switch to another energy source to power their homes and businesses, and they can’t buy up enough natural gas elsewhere to make up for the Russian shortfall. EU states are trying to stock up as much gas as possible now for the winter months, and they’ll try to cut back on gas usage wherever possible—including asking citizens to conserve at home. But, Gross says, rationing gas could easily push the continent into a recession, as turning off the power needed for industry would cost many workers their jobs. As she sees it, the next stage of the crisis will largely depend on the winter’s weather and Putin’s actions—both highly unknowable. Putin could completely shut off Russia’s gas pipelines to Europe, because oil is more important than gas to his state’s overall revenue—and because maintaining that revenue is important for continuing his war in Ukraine. On the other hand, Gross says, Putin wouldn’t be able to ship that gas anywhere else, and the country’s gas fields could be permanently damaged by halting production even temporarily.
Michael Bluhm: Why is natural gas so expensive in Europe?
Samantha Gross: The natural-gas market is fundamentally different from the oil market. Oil is relatively easy to transport; you can put it in tankers and move it around. But for a long time, natural gas only moved through pipelines. The relationship between producers and consumers connected by pipelines was like a long-term marriage.
This has changed with liquefied natural gas, or LNG. As more LNG is produced, more gas can move between markets, so you get more price similarity in natural-gas markets than you could before. That said, Europe is still very dependent on pipeline gas from Russia. It gets about 40 percent of its supply from Russia. Certain countries—especially Germany—are even more dependent than that.
Russia has been using its gas supply to Europe as a weapon. Europeans and other Western countries are not buying Russian oil, to try to punish Russia. But Russia is trying to punish Europe by sending less gas. They have cut off supply completely to Poland and Bulgaria. They’ve cut way back on shipments to Germany through Nord Stream 1, the direct gas pipeline from Russia to Germany.
This energy weapon works both ways. The West is using it against Russia, and Russians are using it against the West. In Europe, there’s not enough other gas available to replace the Russian pipeline gas. There’s not enough liquefied natural gas. That’s why you’re seeing natural gas prices so high in Europe: They’re losing so much of their most important supply, and there’s not enough available in other places to make up for it.
Bluhm: Back in May, you said the EU wanted to wean itself from Russian gas supplies, even though that poses potentially serious economic problems. How is the effort to quit Russian gas going?
Gross: The EU would certainly like to wean itself off Russian gas, especially because the profits Russia is making by selling gas to the EU are funding the war in Ukraine.
But you can’t eliminate that gas use quickly. Some Russian gas is used to produce electricity, and that gas is easier to replace with renewables, while some countries can replace it with nuclear plants or even coal plants—and that’s happening now. But a lot of European gas is used in places where it’s extremely hard to replace quickly.
Germany is a good example. The majority of gas there is used for two purposes—home heating and industry—and neither of those can replace gas easily. In a factory that’s built to use gas as part of an industrial process, you can’t just change that right away. In home heating, changing would require switching from natural gas to a new system in millions of individual homes—and that can’t happen quickly. There are plenty of good reasons for Europe to get away from Russian natural gas, but they can’t just stop using it immediately without losing these important functions that gas serves for their people and their economy.
Unless you want people to be cold and industry to stop running, you can’t just stop using gas. It’s that simple.
More from Samantha Gross at The Signal:
Unusually high natural-gas prices present a strong economic headwind. The problem in energy markets usually isn’t shortages; it’s this—high prices. But the growing concern is that Europeans may face an actual shortage of gas this winter, and rationing may be needed; the Commission proposal still needs to be approved, and governments will still have to make decisions about who does and doesn’t receive gas. You’ll see encouragement for consumers to turn down their thermostats or put on a sweater. There’s even the possibility that some industries may have to shut down in order to use scarce gas for keeping people’s homes warm, if the winter is particularly cold. That could have a horrendous impact on jobs and the economy overall.”
Europeans will have to think about their infrastructure for the long term. Some may be dual-purpose, designed to carry natural gas or hydrogen. But they’re not going to try to replace Russian gas only with other gas. Because of the energy transition, they’ll try to speed up investments in electric home heating and in renewables to replace gas in electricity generation. They’ll try to replace Russian gas with renewables or perhaps green hydrogen over time—and build just enough natural-gas infrastructure to get by in the meantime. Figuring out how to do that is tricky. The level of difficulty of Europe’s energy transition just went up. Some countries were looking at natural gas as a bridge fuel between coal and renewables—and cheap Russian gas made that possible. That’s not looking like such a great option anymore.”
If there’s a cold winter, or if the supply cutoffs get worse, then you’ll see gas rationing, as the Commission has proposed. European governments will make decisions about how much gas should go to the residential market and how much should go to the industrial market. Those would be tough decisions, economically; you don’t want people to be cold, but you also don’t want job losses or other negative economic effects. That’s the last thing a government wants. They’d like to get through the winter by way of conservation and building up storage now, but if the winter is particularly cold, or the Russian cutoffs are especially bad, rationing will be the last resort. The weather is a huge wild card in this. Another is Putin’s actions—and he may be even more unpredictable.”

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