The energy crisis in Europe will worsen.  The world will bear the cost

UUntil blackouts start or pump prices make driving truly unaffordable, most people don’t usually think about energy more often than air. For this reason, Americans are mostly protected from the energy crisis that is unfolding urgently and in some cases lethally in countries around the world. In many other places, especially in Europe, the escalating situation is impossible to ignore and will get much worse.

To be clear, energy crisis it’s already here and Russia is entirely to blame. Natural gas prices topped $3,100 per 1,000 cubic meters in mid-August, a 610% increase from the same time last year as measured by the Dutch TTF market. At this price, many power plants cannot afford to operate for a long time. As a consequence of the rising cost of fuel inputs, benchmark electricity prices in Europe have jumped almost 300% in 2022, breaking records. Taken together, energy prices are ten times higher than the five-year average.

Not only are average households struggling to pay for electricity and heating at such a price, governments are failing too. The 279 billion dollars European governments have recently allocated to help small consumers, are no longer enough. British charity National Energy Action predicts an increase from 4.5 million households in the UK to as many as 8.5 million facing energy poverty this winter. Kosovo is already suffering eclipses, two hours off for every six hours on. Brownouts and blackouts are also expected in other European countries.

The worst is yet to come. The Deputy Chairman of the Security Council of Russia Dmitry Medvedev endangered on August 28 that gas prices will reach $5000/1000m3 by the end of 2022. The continent is far from ready. In warm weather, cooling equipment consumes electricity, which can be generated from natural gas, wind or solar power, coal, geothermal, biomass, or nuclear power. In contrast, during cold weather – the “heating season” – consumption is mainly based on fossil fuels, especially natural gas and oil, as most heating systems still run on petroleum fuel. As every year, the demand for natural gas will increase dramatically during the winter. With Europe dependent on Russian imports for more 40% of its gas needs and 46% for coal and 27% for oil, Putin has many levers of influence. And this year he is not playing well.

Gazprom, Russia’s state-owned natural gas company, has been gradually curbing gas exports to Europe since 2021 in a bid to weaponize energy against Putin’s opponents, perceived enemies and former Soviet satellite states, including Ukraine. The ensuing difficulties were then used to promote rifts in NATO and other Western alliances and alliances. It’s not a new tactic, but he uses it with unprecedented ferocity.

Now the threat is that Gazprom will cut off gas to Europe entirely to punish the continent for sanctions imposed in response to Putin’s invasion of Ukraine. Hopes that Russia’s dependence on European energy markets – more than $120 billion in revenue over the past ten years – would prevent Putin from taking such a drastic step were clearly misplaced. He is apparently willing to sacrifice the economic well-being of his own country to crack Europe. Many experts International Monetary Fund among them now consider the complete stoppage of Russian gas exports to Europe a plausible scenario. Many others consider it likely, and the evidence is mounting.

In what was apparently, in retrospect, a preparation for an invasion of Ukraine, Russia began emptying German gas storage facilities in 2021 while slowing its gas production. Since March 2022, Gazprom has been making excuses to slowly turn off the energy taps. First, after demanding payment for gas in rubles in an attempt to circumvent financial sanctions, Gazprom cut off six buyers who refused, including companies in Finland, Denmark, Germany and the Netherlands, as well as all of Poland and Bulgaria.

In June, Gazprom cut gas flows below 40% through the 55 billion cubic meter (bcm) Nord Stream 1 pipeline. This was said to be due to maintenance problems with Siemens-made gas compressor turbines, which were then shipped to Canada for repair. Under pressure from Russia, Canada granted an exemption from sanctions so that the turbines could be returned to Nord Stream 1, a decision the Canadian government remains open to. Grilled by its parliament. As soon as the turbines were returned, Gazprom immediately shut down Nord Stream 1 completely for a ten-day implausible “prevention”. This was followed by 14 July a letter of customers who invoke force majeure, arguing that a natural disaster prevents Gazprom from guaranteeing uninterrupted gas supplies. Some flows resumed on July 21, but as of July 27 they were at about 20% of capacity, with only one of six compressors operating. Gazprom claims that it has problems with the repair of Siemens compressor turbines and documentation. An additional three-day suspension 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% from 2021, and as of July, daily volume is a record 300% above what Russia is contractually required to supply . Gazprom says Europe is to blame.

Meanwhile, natural gas exports through other pipelines to Europe have been halted or reduced. Although gas continues to flow from Russia through Ukraine at minimum agreed volumes of 40 billion cubic meters – Gazprom-Naftogaz contract expires at the end of 2024 – the Yamal pipeline has been running in the opposite direction, to the east, for months. From July 21 to August 10, Gazprom suspended supplies to Latvia, accusing the Baltic state of “violating the conditions for gas withdrawal,” without elaborating. No doubt a coincidence, Latvia’s parliament had just before voted to ban Russian gas imports from January 2023. As if more proof was needed that Russia is using energy to beat Europe, Gazprom is now burning natural gas instead of exporting it to Europe . rockets are visible every day from 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 consequences for Europe will be enormous, and the global economic consequences could be tragic. The IMF estimated in mid-July that for Hungary, Slovakia and the Czech Republic, a complete shutdown of natural gas from Russia could reduce GDP by up to 6%. Global economic growth will fall by 2.6% in 2022 and another 2% in 2023. On a human level, some people will have no heating, others will have to choose between heat and food. The economist preemptively called it the “winter of discontent” because of the looming “gas catastrophe”. According to the energy expert Llewellyn Kingthe end of this year for Europe is likely to be “the worst winter since the end of World War II, 1944 to 1945.”

Other than belt-tightening, there are no short-term solutions. Numerous renewable energy projects have been announced in an attempt to replace Russian fuel, as well as the construction of a new LNG terminal to allow more imports from the US. Countries are scrambling to install new nuclear power. The EU is working to find alternative fuel sources, mainly US liquefied natural gas (LNG) and also from Azerbaijan. Some new pipelines are being built. Even with these and other efforts in earnest, however, replacing Russian energy will take considerable 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 consumption reduction the only immediately available tool for Europe.

And regardless of political will, escaping Russia’s energy grid is difficult. Although alternatives are increasing, European imports of Russian diesel have increased by 22% since the beginning of July, a fact that highlights how difficult it is to replace Russian fuel in the short term. The EU paid 85 billion euros of Russia for energy supplies just after the February 24 invasion of Ukraine. This is an increase of 6.6 billion euros per month compared to last year, despite a 15% decrease in Russian energy imports. Internal Russian Government documentsshow a projected increase of 38% in 2021 in energy export earnings, to $337.5 billion, as although gas exports will fall from 205.6 bcm to 170.4 bcm, gas prices are astronomical, and oil exports are increasing.

More likely to help this winter are efforts to reduce consumption. The European Commission applies REPowerEU to reduce natural gas imports from Russia by 100 billion cubic meters by the end of 2022. Europe as a whole aims for a 15% reduction in gas consumption by March 2023. Individual European countries have their own rationing schemes and it is very probably need to activate them. Hopes are high that the overall plan will work and chances are good that by the winter of 2023 Europe will be energy secure.

However, the winter of 2022 will hurt.

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