-Penned by Varnika Gupta
With the world stepping out of the shadows of Covid-19, day-to-day activities are returning to normal. However, happenings in Europe are a far cry from normal. With TV channels airing the war between Ukraine and Russia, the looming energy crisis in Europe has taken a backseat, as the world focus has shifted to this conflict and the possibility of the upcoming World War 3. There is a fear of upending nascent economic recovery in Europe post Covid in short term and posing structural changes to global stability in the long term, due to rising inflation. This Macroscan, let us explore how Europe found itself in a soup over the Energy crisis and what the author’s take is on the future.
Background: How we got here
While demand for oil, gas, and coal has continuously increased over the previous five years, private-sector production has not kept pace. The fossil fuels business has been underinvested for several years around the world. Institutional investors, concerned about the environmental and social repercussions of supporting polluting enterprises, choose to invest in new clean technologies such as wind and solar, as well as batteries and hydrogen. Germany, European Powerhouse took the lead to transform its energy production pattern by shifting more towards renewable energy sources and phasing atomic plants operation for generating electricity. European Unions’ heavy focus on decarbonization also led to coal plants being shut down. It increased the share of renewables in the generation mix at the same time. Nuclear and coal power plants typically produce “baseload” power 24 hours a day, seven days a week, but renewable energy is very weather-dependent. Gas is a comparatively “clean” fuel on which baseload power and winter heating have become increasingly reliant.
It is a hydrocarbon that is imported by pipelines or LNG carriers into Europe. It has a huge energy deficit and relies on imports from the United States, Russia, Australia, and Qatar, among others. While LNG provides some flexibility to the global energy market, its price has been mostly determined by where Asia, the major customer, is ready to pay for the cargos.
Over the last few years, Russia has leveraged its position as the world’s largest supplier of energy, and currently provides 41% or 60% of Europe’s gas and coal demands. This energy shift has led to a major change in prices with a small change in supply. Russia’s energy suppliers steadily lowered pipeline flows and coal availability while meeting contractual obligations. The European benchmark gas contract increased elevenfold between early 2021 and now, while coal prices increased eightfold. The new Nord Stream 2 pipeline, which connects Russia and Europe, was supposed to relieve the market, but Germany postponed its approval due to price manipulation allegations. This led to a surge in Energy prices, lowering consumers’ disposable income, putting pressure on central banks, and jeopardizing Europe’s economic recovery. Europe’s energy crisis intensified as the risk of war pushed up gas prices, power – plant halts were extended and the French government asked its biggest utility to take a $8.8 billion hit to protect consumers.
The current situation in the backdrop of Ukraine Russia Conflict
With Russia attacking Ukraine and Europe largely dependent on Russia for its energy needs, there will be a huge setback to Europe’s green energy push amidst rising inflation, with huge volumes of demands being unmet. A gas supply cutoff might be used to counter any coordinated military action by the West against Russia. This might cause a spike in European inflation and widespread civil upheaval.
However, looking from US’s lens, this might be an opportune time for US to establish itself as a large supplier of energy, aligning its long term commercial and strategic goals. Following a slew of sanctions imposed in response to Russia’s interference in Ukraine, the United States backed the cancellation of Nord Stream 2. Meanwhile, Russia has exchanged windfall riches from oil and gas sales – which represented for about half of the country’s total $489.8 billion in exports in 2021 – for attaining greater geopolitical goals in the region, according to President Putin.
Developed economies are waking up to the fact that natural resource security is critical. Russia produces 13% of the world’s oil and 14% of the world’s gas, respectively. It also has a stronghold in a variety of metals and even agricultural items. Many of the metals are required for sustainable energy technologies such as solar panels, wind turbines, batteries and production of various other semiconductor devices. Significant policy developments have resulted from the problem of reducing Russian imports while managing inflation. Germany recently opted to extend the lives of many coal and nuclear power facilities, to designate nuclear energy and gas as “green,” and to commit to the construction of new LNG ports.
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