Russia and the European Energy Crisis

Since Russia invaded Ukraine in February of this year, all eyes have been turned towards the conflict and its lasting political and economic effects, with energy prices being on the minds of many. In 2021, Russia supplied the European Union with 40% of its natural gas, meaning Moscow has the ability to severely cripple European economies if it chooses to withhold the resource, a possibility that becomes more alarming as the high-consumption months of winter approach.

The energy monopoly Gazprom, which operates the infamous Nord Stream natural gas pipeline to Germany, has declared a three-day shut off due to upcoming maintenance. This pause comes at a crucial time when deliveries are already severely handicapped to 20% of capacity, and creates further tension between the governments of the EU and their energy supplier. These tensions are likely not going to be resolved anytime soon; think tank senior fellow Simone Tagliapietra predicts that Russia will intermittently halt gas supplies in order to maintain an upper hand and keep prices high. As a result, Tagliapietra proposes that EU countries should emphasize actions to reduce current gas usage and save up stocks for winter in case the temporary pause turns into a long-term cessation.

One strategy for reducing consumption of natural gas is to switch to alternative energy sources, including historic methods such as coal or oil. This method has been employed by major companies across Germany in recent months, as the country has implemented a natural gas consumption reduction target of 20% which outpaces the EU’s general 15% goal.

In the long-term, the EU is looking to restructure their electricity market so that changes in the prices of Russian energy will not have such strong impacts on the rest of the market. At present, electricity prices are determined by overall energy supply and demand such that high natural gas prices are driving up electricity prices across the board regardless of the source. The European Commission is currently working on a proposal to change this amidst fears that high energy prices could stretch for years to come.

Other sources of energy, such as LNG from foreign markets, provide their own unique challenges. Many European countries are reluctant to sign the long-term contracts that LNG companies are asking for because of a general desire to reduce fossil fuel consumption in favor of renewable energy. Additionally, efforts to stockpile LNG by other countries including Japan and South Korea create a lot of competition in the market, and experts estimate that the EU will be unable to receive adequate levels of gas in the next few years. As summarized by Belgian prime minister Alexander de Croo, Europe is looking at five to ten years of hardship in the energy sector.