Is Europe’s energy crisis just getting started? The latest inflation data suggests a winter of pain ahead
Europe has been coping with an energy crisis ever since the Ukraine war began in February. The invasion started just after European nations decided to rapidly shift to clean energy and shutter nuclear power plants, which left them vulnerable to an inflationary shock when Russia cut off natural gas supplies this year. Energy prices have hit all-time highs in 2022, especially as a consequence of Russia’s unjustified invasion of Ukraine and its use of gas supplies as a weapon of war. The wholesale price of electricity in the EU’s internal market is directly linked to the price of gas – which is mostly imported. The deliberate reduction of gas supplies by Russia is the main cause of the recent skyrocketing gas prices in the EU, which have impacted the price of electricity produced in gas-fired power plants and affected electricity prices overall. The price of energy is expected to continue to remain high in the EU in the coming months, as it takes time to replace Russian gas supplies with supplies from EU sources. EU countries have therefore adopted an emergency regulation to address high energy prices and help citizens and businesses that are most affected by the energy crisis.
The new rules were swiftly adopted by EU energy ministers in the Council. The regulation will apply from 1 December 2022 to 31 March 2023. It complements existing EU initiatives and legislation, adopted in the last couple of months to secure the EU’s energy supplies, such as a gas storage regulation, a gas demand reduction regulation, the creation of an EU energy platform and outreach initiatives for the diversification of supply sources.
Primary Cause
The primary cause: Russia has choked off the supplies of cheap natural gas that the continent depended on for years to run factories, generate electricity and heat homes. That has pushed European governments into a desperate scramble for new supplies and for ways to blunt the impact as economic growth slows and household utility bills rise.The crisis deepened when Russia’s state-owned exporter Gazprom said the main pipeline carrying gas to Germany would stay closed, blaming an oil leak and claiming the problems could not be fixed because of sanctions barring many dealings with Russia. European officials say it’s energy blackmail, aimed at pressuring and dividing the European Union as it supports Ukraine against Russia’s invasion.
WHY IS RUSSIAN GAS SO IMPORTANT?
High energy prices are already threatening to cause a recession this winter through record inflation, with consumers having less to spend as costs rise for food, fuel and utilities. A complete cutoff could deal an even heavier blow to an already troubled economy. Besides heating homes and generating electricity, gas is used to fire a range of industrial processes that most people never think much about — forging steel to go into cars, making glass bottles and pasteurizing milk and cheese. Companies warn that they often can’t switch overnight to other energy sources such as fuel oil or electricity to produce heat. And, with everyone searching for alternate supplies, fuel oil and coal have also risen in price. In some cases, equipment that holds molten metal or glass is ruined if the heat is turned off, and over the longer term, energy-intensive businesses may simply give up on Europe.
WHAT IS EUROPE DOING TO EASE THE CRISIS?
Europe has lined up all the alternative gas supplies it could: shipments of liquefied natural gas, or LNG, that come by ship from the United States and more pipeline gas from Norway and Azerbaijan. LNG is much more expensive than pipeline gas, however.
Germany is keeping coal plants in operation that it was going to shutter to reduce greenhouse gas emissions. It also is keeping the option of reactivating two nuclear plants it’s set to shut down. The 27-nation EU has approved a plan to reduce gas use by 15% by next March, roughly the amount experts say will need to make up for the loss of Russian gas. Yet those conservation measures are voluntary in member countries for now.
National governments have approved a raft of measures: bailouts for utilities forced to pay exorbitant prices for Russian gas, cash for hard-hit households and tax breaks.
For example, Germany has approved a third support package with 65 billion euros ($64.3 billion) in aid for consumers. That kind of spending will add to national deficits but also soften the downturn that economists are predicting for the end of this year and beginning of next year. More steps are coming. The president of the EU’s executive Commission, Ursula von der Leyen, says a new proposal will include a price cap on natural gas and measures that could decouple the price of electricity from gas. Perhaps most important in the short term, Europe has managed to fill 85% of its storage for winter with the help of LNG and diminished consumption because of high prices. Storage levels have kept rising even after the Nord Stream 1 cutoff. Partly as result, gas prices have fallen to their pre-cutoff level, although they are still painfully high (Sourced: PBS Hours, David McHugh, Associated Press).
What kind of pressure is this fuel shortage hurting the European nation...to be continued?
By Sunny Wadhwani
December 11th, 2022
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