Europe's Energy Crisis Is Going to Get Worse. The World Will Bear the Cost

Until blackouts begin or pump prices make driving actually unaffordable, most people generally think no more often of energy than of air. For this reason, Americans have mostly been sheltered from the energy crisis unfolding urgently and in some cases lethally in countries around the world. In many other places, especially Europe, the escalating situation is impossible to ignore, and it’s going to get a lot worse.

To be clear, the energy crisis is already here, and Russia is fully to blame. Natural gas prices topped $3100 per 1000 cubic meters in mid-August, a 610% increase over the same time last year as measured by the Dutch TTF market. At this price, many power stations cannot afford to operate for long. As a consequence of the rising cost of input fuels, benchmark electricity prices in Europe have surged almost 300% in 2022, breaking records. Taken together, energy prices are ten times higher than the five-year average.

Not only do average households struggle to pay for power and heating at such a cost, but governments are coming up short, too. The $279 billion European governments have recently allocated to help small consumers is already not enough. 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 is already suffering rolling blackouts, two hours off for every six hours on. Brown and blackouts are also expected in other European countries.

The worst has yet to come. Russian Security Council Deputy Chairman Dmitry Medvedev threatened on August 28 that gas prices will hit $5000/1000m3 by the end of 2022. The continent is far from ready. In warm weather, cooling equipment consumes electricity, which may be generated by natural gas, wind or solar power, coal, geothermals, biomass, or 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. Like every year, demand for natural gas will thus increase dramatically come winter. With Europe dependent on Russian imports for over 40% of its gas needs, and 46% for coal and 27% for oil, Putin has a lot of leverage. And this year, he is not playing nice.

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. The ensuing difficulties have then been used to encourage fractures in NATO and other western alliances and allegiances. This is not a new tactic, but he is wielding it with unprecedented ferocity.

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. Many experts, the International Monetary Fund among them, now consider a complete cessation of Russian gas exports to Europe a plausible scenario. Many others think it likely, and the evidence is mounting.

In what was clearly, in retrospect, preparation for invading Ukraine, Russia began emptying German gas storages in 2021 while slowing down its gas production. Since March 2022, Gazprom has been inventing excuses to slowly turn off the energy taps. First, after demanding payment for gas in rubles in an effort to crack financial sanctions, Gazprom cut off six buyers that refused, including companies in Finland, Denmark, Germany, and the Netherlands, as well as Poland and Bulgaria entirely.

Over the course of June, Gazprom reduced gas flows below 40% through the 55 billion cubic meter (bcm) Nord Stream 1 natural gas pipeline. It claimed this was due to maintenance issues with Siemens-made gas compressor turbines, which were then sent to Canada for repairs. Under pressure from Russia, Canada granted an exemption from sanctions so the turbines could be returned to Nord Stream 1, a decision for which the Canadian government continues to be grilled by its parliament. As soon as the turbines were returned, Gazprom immediately shut down Nord Stream 1 entirely for ten days’ implausible “maintenance”. This was followed by a July 14 letter to customers invoking force majeure, arguing an Act of God prevents Gazprom from guaranteeing continued gas supplies. Some flows resumed on July 21, but as of July 27 they have been at about 20% of capacity with only one of the six compressors operational. Gazprom claims there are problems with the Siemens compressor turbines’ repairs and paperwork. An additional three-day shutdown has been announced for August 31-Sept. 2. Shenanigans would be a charitable description.

Gazprom is also diverting more of its gas to China instead of Europe. Exports through the Power of Siberia natural gas pipeline, which runs from Siberia to eastern China, are up 61% over 2021 and since July the daily volume is a record breaking 300% above what Russia is contractually required to supply. Gazprom says Europe is to blame.

Meanwhile, natural gas exports via other pipelines to Europe are being stopped 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. As if more proof were needed that Russia is using energy to pummel Europe, Gazprom is now burning off natural gas instead of exporting it to Europe. 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. The IMF calculated in mid-July that for Hungary, Slovakia, and the Czech Republic a full cut off of natural gas from Russia could drop GDPs by up to 6%. Global economic growth would drop by 2.6% in 2022 and another 2% in 2023. On a human level, some people will not have heating, others will have to choose between warmth and food. 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.”

Other than belt tightening, there are no short term solutions. Numerous renewable energy projects have been announced in an effort to replace Russian fuel, as has new LNG terminal construction to allow for more U.S. imports. Countries are scrambling to install new nuclear capacity. The E.U. has been working to find alternate sources of fuel, mainly U.S. liquified natural gas (LNG) and also from Azerbaijan. Some new pipelines are being built. Even with these and other efforts underway in earnest, however, replacing Russian energy will take considerably time. These new projects require a minimum of six months for biomass, up to ten years for nuclear. None will be ready for this winter, leaving reducing consumption the only immediately available tool for Europe.

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. The 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%. Internal Russian government documents, show a projected 38% increase over 2021 in revenues from energy exports, up to $337.5 billion, because although gas exports will have dropped from 205.6 bcm to 170.4 bcm, gas prices are astronomical and oil exports are up.

More likely to help this winter are efforts to reduce consumption. The European Commission is implementing the REPowerEU to reduce natural gas imports from Russia by 100 bcm by the end of 2022. Europe overall is aiming for a 15% gas consumption reduction by March 2023. Individual European countries have their own rationing schemes, and are very likely to have to activate them. Hopes are high that the overall plan will work, and the odds are good that by winter 2023 Europe will be energy secure.

Winter 2022, however, is going to hurt.

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