Don't panic. Europe will deal with its gas crisis.
It won't be pretty, but it'll make it through.
I’ve been writing a lot about the future of what I call the “War Economy” in the U.S. But over in Europe, war is already here, and it’s already forcing wrenching and rapid changes in the region’s economies. In an effort to force European countries to end their support for Ukraine’s war effort, Russia is reducing gas supplies to Europe. It’s most recent move was to cut off supply from the Nord Stream pipeline that runs through the Baltic Sea to Germany.
Of course, this move hurts Russia as well, so it may be a bluff — the pipeline has been shut off and turned on again before. But it’s now clear that Russia is a highly unreliable supplier of energy, and the worse the war goes for Putin’s army, the more he can be expected to use gas cutoffs as a weapon. That has already caused Europe’s gas prices — already elevated before the Ukraine war — to almost triple. The newest cutoff only made things worse. Before the pandemic, Europeans could buy natural gas at about 10-15 Euros per megawatt-hour. Right now the price is around 250.
Expensive gas threatens Europe in two basic ways. First, with winter approaching, Europeans will find it difficult to heat their homes (despite global warming, Europe still gets very cold). Second, much of European industry is dependent on cheap electricity. Aluminum output has cratered, chemical plants are closing all over the continent, lots of British manufacturers are saying they could go out of business, steel plants are starting to close, and so on.
The basic problem is that Europe uses a lot of natural gas — it’s about a quarter of the region’s total energy production and more than a fifth of electricity generation — and about 40% of that gas traditionally has come from Russia. In the long run, Europe can and will switch much of this to solar and wind power, and import more liquified natural gas from the U.S. In the short run, that’s just not going to happen.
So what will Europe do in order to sustain its economy and keep from freezing in the short term? Well, there are two basic strategies — price-based demand curbs and rationing — both of which will involve painful tradeoffs. European countries will probably choose a mixture of these. And in the end, Europe will be a little bit poorer, but it will make it through.
Why Europe is out of easy options
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