European ‘perfect storm’: Impacts of energy crisis

In late August, I spoke with Gridnews about the risks to the energy, economic and political risks associated with the energy price spikes in Europe and the globe exacerbated by the conflict with Russia. While Europe has many more policy levers to cushion their populations than poorer countries, the costs will mount, economically and politically. While it may weaken some resolves about imposing greater costs on Russia now, the willingness to cut off supplies, suggests EU countries will be reluctant to rely on Russian in the future even for economic not just political reasons.

Some excerpts of my discussion with Tom Nagorski and Nikhil Kumar.

Rachel… there was a goal, and Germany has surpassed it, as it’s up to 82 percent of gas storage. What is the norm? How unusual is this?

RZ: It’s a good thing that the gas storage targets are ahead of schedule. Particularly since one of the earliest warning signs, of larger crisis, was that last year, the storage was less filled than normal.

Gas tends to have higher seasonal demand in the winter not only because of greater use and power generation, but also because it’s used as a heating fuel. Typically, the summer and into the fall is when storage refills, and then it’s available to be used in the winter as well as the ongoing incremental supply that’s coming through pipelines.

It’s a good thing that the storage is here. There are measures that are being taken. There’s two problems. One is that gas storage is not evenly distributed. There are countries, Germany included, that tend to have a higher share of storage. Places like Finland, for example, have almost no storage; the United Kingdom, for example, has almost no storage. These are choices that were made in the past that mean that even if in aggregate as a region, there is more storage, some countries are more exposed.

The other challenge is happening specifically in Germany and in the Low Countries, and it’s that this lower consumption means that high power intensive sectors, whether it’s fertilizer producers or a whole range of manufacturing industries, are looking at the costs and are consuming less, which means economic output is falling, trade is weakening etc.

You want people to be able to keep the lights on and the like, but the degree of crisis — I hesitate to keep using that word — also has put an even greater impetus around thinking about what are the drivers of competitiveness. Some of these smaller, medium and larger companies already faced challenges from Asian competitors. Some of them had really settled in that way. There’s a whole different set of short-term crisis responses, but also longer-term economic reshaping that people are only just starting to grapple with. Those effects will be felt beyond Europe, as well as within it.

If: Vladimir Putin does use the energy lever, how prepared do you think the continent is for those worst-case scenarios, weather-wise and Moscow-wise?

I mentioned earlier that countries vary their storage capacities. Even those that buy fuel from Russia vary in how they get it and how they pay for it, including their willingness recently to use rubles and to use various financial engineering techniques through pathways that are still open to pay for the fuel.

Hungary, which has long been closer to Moscow than many of its peers, signed a new contract to increase the amount of natural gas that they’re buying. There are different stories within the geography.

Ultimately, we’ve seen this shutdown of Nord Stream. We’ve also seen, even before that, lower volumes coming through it. Paradoxically, for quite some time during the context of the war, there’s been more natural gas flowing in the pipeline through Ukraine, which Russia wanted to avoid.

The more that Putin continues to use these weapons, it really has very damaging medium- and long-term implications for Russia. Some of the additional supplies that are coming online that don’t come to market in the next year, but will over the next coming years, will really reinforce a desire to move away from Russian supplies in Europe due to their unreliable status.

It’s really hard to talk about medium- and long-term impacts when you’re thinking about what the next several months and years might bring, but I do think those are factors. That suggests that he’s unlikely to keep things offline for an extended period. But never say never.

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