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1.0 Introduction

It is no exaggeration to say that energy laid the foundations for mankind to transition into the modern era, thus making it possible to leverage various energy sources to make significant advancements in our society. The primary reason European countries have become themselves as a manufacturing powerhouse and a high welfare state is due to the cheap energy sourced from Russia (Pozsar, 2022). Russia has been ingrained as Europe’s major supplier of natural gas, oil, and coal (Di Bella et al., 2022). After petroleum-based goods, natural gas is the eurozone’s second most important energy resource. It is the most significant source of energy in the manufacturing sector, and it accounts for more than 90% of the gas consumed in the eurozone (Gunnella et al., 2022). 

Figure 1: Energy Mix within the European Union

Source: Eurostat 

The eurozone is significantly reliant on imports of petroleum-based energy supplies as well as natural gas (Gunnella et al., 2022). According to the EU’s Directorate-General for Energy, the EU is the world’s largest importer of natural gas, with Russia accounting for the lion’s share (41%) of that import (Clifford, 2022). In 2021, Russia supplied two-fifths of the gas consumed in Europe (Edmond, 2022). Furthermore, Russia accounts for more than a quarter of the EU’s imported crude oil. The escalation of the war between Ukraine and Russia has created unprecedented severity in European countries, inciting an energy crisis. This also represents the root cause of inflation, hence the ECB’s and the Bank of England’s precautionary efforts to increase interest rates to curb inflation. To re-establish the points discussed, Russia bears sole responsibility for initiating the energy crisis.

To make matters worse, critical energy transportation links (Nord Stream 1 and 2) between Western Europe and Russia had been damaged. The pipeline had previously been able to supply more than half of Germany’s annual consumption and still pass some along to its neighbours (Reed, 2022). The accident was deemed as apparent sabotage. Furthermore, in response to a drop in demand (and oil prices) and the G7’s intention to restrict prices on Russia’s oil exports, the OPEC+ group decided to reduce output by 2 million barrels per day on paper, the largest reduction in production since the start of the COVID-19 pandemic in 2020 (Gramer, Rathi and Lu, 2022). The rise in crude oil price will constitute another knockout on the European countries.

Why is Europe so dependent on Russia for gas? 

After 2010, Europe’s natural gas output began to fall rapidly (Clifford, 2022; Corbeau, 2022). Natural gas output in Europe fell when the North Sea gas fields, which were particularly major sources of natural gas production from the United Kingdom and the Netherlands, were exhausted (Clifford, 2022; Corbeau, 2022). Later, the Netherlands declared the shutting down of their Groningen gas resources due to earthquakes (Clifford, 2022; Corbeau, 2022). Over the same period with  environmental and political concerns, the EU has been reducing its dependence on coal and nuclear energy (Clifford, 2022). The EU has prioritised the development of renewable energy sources. However, the buildout is not proceeding quickly enough to remove foreign dependency (Clifford, 2022). Furthermore, alternative supplies such as liquified natural gas (LNG) have failed to close the growing import gap (Corbeau, 2022).

“In terms of foreign suppliers, Russian gas was just the cheapest. Rather than diversifying suppliers, routes to import Russian gas were diversified,” Schittekatte told CNBC.

2.0 Causes

The Russia-Ukraine War

Before the war and the COVID-19 pandemic, Europe was importing 40% of its natural gas from Russia. Ever since Gazprom halted the operation of Nord Stream 1, the Russian gas supply fell 89% from a year ago. This reduction in supply and the heavy reliance of European countries on Russian gas has caused energy prices to increase exponentially. (McHugh, 2022). European gas prices increased tenfold compared to their average historical values. (Kwan, 2022

Nord Stream 1, the pipeline owned by Russia’s state-owned company, Gazprom, has been partially shut down as a result of the ongoing war between Russia and Ukraine. The shutdown was claimed to be due to the maintenance of the pipeline. But, recently Gazprom postponed the reopening of the pipeline, blaming the delay in repairs on the sanctions on Russia. (Reed, 2022)

COVID-19 and the Global Economy

As the global economy slowly recovered from the COVID-19 pandemic, demand for energy and power skyrocketed. As a result, power generators which had been stagnant during the pandemic could not keep up with the sudden surge in demand for energy, hence the shortage of energy. (Kwan, 2022)

The recovery of economies was boosted by big government spending on stimulus packages. This facilitated the swift reopening of economies, thus increasing energy demand substantially. International Energy Agency (IEA) data shows that in the second quarter of 2021 in the EU, gas consumption rose by 25% (the largest year-on-year quarterly increase since 1985). The strong competition in the scarce energy market has forced prices to hike in accordance with the increasing demand. (Popkostova, 2022)

Extreme weather

The winter season at the start of 2022 was severely cold, causing households in Europe to demand more energy to heat up their homes. Supply chains of energy were also hindered as pipelines and energy infrastructure struggled to transport LNG to Europe under freezing cold weather. (Euronews, 2022). On top of that, countries with significant reliance on wind energy, such as Germany and the Netherlands were struck by suboptimal wind conditions. The lack of energy generated by wind turbines induced an increase in demand for gas and coal (Popkostova, 2022).

3.0 The Impacts 

Short Term

As retaliation for Western sanctions on Russia, Moscow halted deliveries of natural gas and petroleum goods, which the continent has relied on for years. On October 11th, the IMF reduced its eurozone growth prediction for 2023 to 0.5%, down from 2.5% at the start of the year and forecasted a 0.3% increase in the British GDP (The Economist, 2022). Not only the European implications would be immense, but they would also produce drastic effects on a global scale. Global economic growth would be 2.6% lower in 2022 and 2% lower in 2023 (Jayanti, 2022).

Figure 2: Severeness of gas shortages in the Europe continent

Source: The Economist

According to the Dutch TTF market, natural gas prices surpassed $3100 per 1000 cubic metres in mid-August, representing a 610% rise over the same period last year (Jayanti, 2022). Many power plants cannot afford to run for long at this pricing (Jayanti, 2022). As a result of growing fuel costs, baseline power rates in Europe have risen by about 300% in 2022, smashing previous records. Energy costs are already ten times higher than the five-year average (Jayanti, 2022). 

Energy is widely relevant in our livelihood, transportation, food supply, and employment welfare. (Melimopoulos, 2022). (Melimopoulos, 2022). Therefore, potential gas and electricity shortages may cause energy-intensive businesses, such as chemical factories and heavy industries, to shut down temporarily (The Economist, 2022). In addition, millions of Europeans are already spending an unprecedented proportion of their income on energy. Analysts believe that in current circumstances, if power costs continue to grow, along with rising unemployment rates and slowing economic growth, protests and social imbalances will ensue(Melimopoulos, 2022). Countries with limited liquefied natural gas import capacity, such as Germany, and landlocked countries that formerly relied on pipeline gas from Russia, such as the Czech Republic and Slovakia, will be severely hurt (The Economist, 2022). Countries that are relying on imports to satisfy their electrical needs may be in danger if power shortages spread across borders (The Economist, 2022).

Long Term

The peripheral impact of a limited energy supply will exacerbate the long-term pain. Global gas supplies are predicted to be limited until 2024 (The Economist, 2022). This will seriously impact household income and subsequently, demand in the economy. Businesses may opt to limit output to lower energy prices, which will subsequently extend to other industries and nations through supply chains. The downturn in Germany, Europe’s industrial core, for example, will be felt by its suppliers in central and eastern Europe as well (The Economist, 2022). Many industry watchers have warned that the prolonged energy crisis might undermine Europe’s manufacturing sector in the long run. The shutdown and migration of European enterprises have heightened concerns about the continent’s potential deindustrialisation (Rapoza, 2022). Current shutdowns of energy-related industries will contribute to the hollowing out that has already been taking place (Rapoza, 2022). In the face of rising energy prices, European firms have been forced to restrict or cease production and relocate investments to the United States. (Rapoza, 2022)

4.0 Conclusion and recent development 

To compensate for the gap in Russian fossil fuels, the European Union has been filling its gas storage for months by increasing imports from Norway and Algeria as well as imports of LNG from the United States (Cooban, 2022a). Europe is now well on track to meeting its goal of weaning itself off Russian fossil fuels by 2027. According to Gas Infrastructure Europe data, stores are now nearly 94% full (Cooban, 2022b). This is significantly higher than the 80% target set by the EU for countries to achieve by November (Cooban, 2022b). Because of reduced shipments and abundant gas storage in Europe, the spot price of natural gas in west Texas has fallen below zero (McCormick, 2022). Furthermore, experts predict that Europe’s winter will be milder than usual (Mills, 2022). The La Nina effect may be beneficial to Europe as a whole because it brings warm, wet westerly winter winds, which boost renewable output and replenish parched reservoirs and rivers (Mills, 2022). Continuous news has indicated that the European continent is ready for the upcoming winter, partly through the efforts of the legislative body and partly because of favourable natural conditions. However, this does not mean that the energy crisis is being solved.he drop in the spot price of natural gas is simply an indicator that there is no incremental demand and storage capacity. Policymakers in Europe should continue to monitor the situation and be on high alert for unexpected events that might incite another crisis in the near future.

 

References

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Prepared by: Jia Xin, Czyn Jien, & Eidid

Reviewed by: Nasir Ali & Muhammad Bahari

Edited by: Wee Marcus

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