Worst of Europe’s Energy Crisis May Be Yet To Come

Worst of Europe’s Energy Crisis May Be Yet To Come 1

Yves here. To recap the progression of worry about European energy in light of sanctions against Russia. Initially, the concern was that Europe would not get through the winter without blackouts and other hardship. Then with scrounging for LNG plus conservation measures, the new only mildly optimistic forecast was that Europe would scrape through winter if it were not too cold. But even that scenario didn’t solve Europe’s continuing shortfalls for 2023, which could become acute even before the next winter.

As we’ve indicated before, the problem has been remedied only via damage to Europe’s economy, as in cutbacks in energy-intensive industries. So the lack of an energy crisis this winter due to warm weather should not be mistaken for absence of economic harm., as in demand destruction.

You’d think the US would be worried at a fall in actual or potential economic activity from a major trade partner. But first, as Macron has complained specifically in the context of the Inflation Reduction Act, the US hopes chronically high energy costs in Europe will allow the US to steal some production capacity. Second, the US is delighted to sell its high price LNG to Europe in place of cheap Russian gas, bugger the harm to Europe. Third, China exports in 2021 to Europe were close to exactly twice as high as those from the US. So other things being equal, China will suffer more from shrinkage of European demand than the US.

By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice

  • Mild weather has kept Europe’s gas storage units from draining.
  • European storage units are filling again after a week of cold weather.
  • Europe’s gas crisis isn’t over yet as much of the demand reduction was a direct result of demand destruction.

In December, the International Energy Agency warned that Europe could face a gas shortage this year despite its successful efforts to fill up storage for winter 2022-23. Now, more voices are joining the warnings as reality sets in, and it is not a reality that one can easily brush aside. For starters, much of Europe’s success in keeping the lights on so far this winter has been the result of milder-than-usual weather. October and half of November were particularly warm, which made reducing gas consumption across the European Union—a mandatory directive—much easier than it would have been otherwise.

Yet the moment the weather got colder in late November, consumption jumped, so in early December, Germany’s head of energy market regulations had to warn Germans to take it easy on the heating as they were not hitting the country’s gas savings target of 20 percent of total consumption.

That warning gave everyone a taste of just how precarious the situation is. Storage units are full, and there’s more LNG coming into European terminals all the time, thanks to the weather.

Reuters’ John Kemp reported that the level of gas in storage in Europe at the end of December 2022 was at the second highest for that time of year for the past ten years and set to remain comfortable until the end of the heating season, according to traders.

Many were quick to celebrate the end of the crisis, but those celebrations may have been premature. To begin with, winter is far from over, and there is still a considerable likelihood of much colder weather in January and February. Besides, the end of winter does not automatically mean an abundance of natural gas.

Last year, European countries managed to stock up on gas in time and in abundance, in no small part thanks to the fact that Russia sent most of its regular volumes of gas during the first half of the year. Except for the cutoff of Bulgaria and Poland for their refusal to pay in rubles, gas supply from Europe’s then-largest supplier remained largely steady.

This helped a lot along with the record intake of U.S. liquefied natural gas. This year, however, there will be no regular Russian gas volumes. Indeed, Moscow, in the face of Deputy Prime Minister Alexander Novak, said it is ready to resume flows along the Yamal-Europe pipeline, which, he said, remains closed for political reasons.

Yet the European Union has repeatedly stated it does not want to increase its imports of Russian gas. Instead, it wants to cut them to zero eventually. And this means it will need to seriously increase its imports of LNG from not only the United States but all other suppliers with uncontracted volumes. And because these still-available volumes are not exactly unlimited, experts are beginning to warm their audience up for another difficult year.

The availability of gas would be the biggest reason why the year would likely be difficult for Europe. But even if winter continues to be mild and ends mild, the gas crisis will not be over. Because LNG is more expensive than pipeline gas, and this is a fact that does not stand to change. And this fact means that even if there is enough LNG to refill Europe’s storage—which is questionable, as the IEA warned—the bill will be huge for a second year in a row.

A high gas import bill is problematic for European economies, especially the ones that have a well-developed heavy industry, which tends to be also heavy gas users. The first red flags appeared last year: much of the gas consumption decline in Germany that was praised by politicians actually came from demand destruction among industrial users because of prohibitive prices.

In other words, gas demand in much of Europe last year fell because it was destroyed and not so much because everyone suddenly became conscientious with their gas use. But demand destruction is not good for the economy. It means shutdowns of factories and layoffs. And this means that this year Europe will be walking a tightrope between keeping its economy going and securing its gas supply for the next heating season. It will be a risky walk.

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