Geopolitical disturbances increase the risk of an energy crisis in Europe
In early 2020, the spread of Covid-19 caused the worst global recession since the period immediately following World War II. This year, with the start of the Russian-Ukrainian conflict, the world is facing the most significant military event in Europe since World War II. The damaging shock created by the Russian-Ukrainian conflict will accelerate “stagflationary” trends (low growth accompanied by high inflation) and risk reversing some of the economic gains generated by the extraordinary stimulus measures that followed the Covid-19 shock. 19. The European Union (EU) is particularly vulnerable in this new environment. This article describes in detail how an energy crisis is approaching the EU.
EU energy mix
(% of total, 2019)
Sources: European Commission, QNB analysis
The economic measures that followed the outbreak of hostilities in Eastern Europe are already creating significant disturbances in the commodity markets. Even before the start of the war, the price of several commodities was already at an all-time high, and stocks were at an all-time low. Energy markets are an important part of this tension. Russian exports have accounted for 13% and 26% of global oil and gas trade, respectively, over the past two years. While the EU has excluded the energy sector from its sanctions against Russia, maritime flows of crude oil have already been disrupted due to military activities in the Black Sea and trade and logistics restrictions provided by shipping companies, commodity traders and bankers. On the other hand, the flow of Russian gas to the EU, which is crucial for the continent’s energy security, is still ongoing. Any disruption of these flows could create a major energy crisis for the EU.
Current discussions about the currency to be used to pay for Russian gas exports suggest that Moscow does not want to accumulate trade surpluses in USD or EUR, which are subject to sanctions. Russia recently asked to be paid for its gas exports in its national currency, the Russian ruble. Some fear that this discussion will lead to a disruption of the gas trade.
Three key facts underline the scale of the gas problem for the EU.
Immediately, 61% of the EU’s energy consumption is imported, making it particularly vulnerable to painful supply shocks in the global energy complex. It is important to note that natural gas is an important energy source for the EU, representing almost 25% of its total consumption. About 90% of this natural gas is imported, of which more than 40% traditionally comes from Russia, in the form of pipelines and liquefied natural gas (LNG). Therefore, Russian gas volumes are currently needed to maintain the normal functioning of the EU energy system.
Share of gas supply from Russia
(% of total gas imports, 2020)
Sources: Statistics, QNB analysis
Secondly, some EU countries are more vulnerable than others to a sudden halt to Russian gas flows. Northern European countries, including Germany, but also Austria and Italy, are particularly dependent on Russian gas transported in pipelines. Greater dependency would require greater efforts to establish alternative sources of supply to these EU countries.
Ultimately, the major gas and LNG exporters, such as Australia, Qatar and the United States, will not be able to immediately replace Russian gas to the EU with LNG in the short term. This is due to a lack of necessary energy infrastructure in EU consumer countries. The EU electricity grid is not integrated and LNG regasification plants are limited in number and almost not distributed across the continent. In addition, LNG supply flows are largely tied to long-term contractual obligations, which cannot be easily changed without significant costs. It will take time and significant financial resources to integrate the EU electricity grid, build new regasification plants, renovate old energy plants and rebuild energy imports. According to German Foreign Minister Annalena Baerbock, her country is ready to “pay a very, very high economic price” in this crisis, which risks seeing “the light go out” in Germany or in Europe. Energy conversion plans to move away from conventional fuels have also been temporarily suspended and reformed, with energy security becoming a priority. Coal and other energy sources, seen as “fossil non-green conversion”, could help bridge the energy gap until the alternatives created by new investment are realized.
Overall, the Russian-Ukrainian conflict poses a major threat to EU energy security. Natural gas is essential in the EU’s energy mix, and Russia is a major gas supplier to Europe. Gas flows can be disrupted both by military activity and by economic measures against Russia, such as sanctions, embargoes and export bans. Northern European countries are particularly vulnerable to the crisis due to their greater dependence on Russian gas.