When Russia cut off natural gas supply to Europe overnight this fall, politicians and business leaders predicted a devastating energy crisis which would spark a massive recession. Europe was already contending with runaway energy prices as the continent struggled to recover from Covid-related supply chain and market hiccups while also sanctioning the Kremlin to condemn Putin’s illegal invasion of Ukraine. Slapping energy sanctions on Russia was no easy feat for Europe. To outright cut off trade with the energy titan would be a pyrrhic strategy for Europe, which had become heavily reliant on Russian fossil fuels to keep the lights on. Germany alone was importing more than half of its natural gas from Russia, largely through the Nord Stream 1 pipeline. The European Union had already been scrambling to diversify its energy mix in order to work its way toward meaningful energy sanctions on the Kremlin when Russian energy company Gazprom completely and indefinitely stopped the flow of natural gas to the bloc overnight, citing suspiciously timed infrastructural issues. The announcement occurred just hours after G7 countries announced that they would be imposing a price cap on Russian oil.
Europe was nowhere near ready. The outlook was grim, to say the least, as the continent scrambled to secure alternative supplies before what is certain to be a long and painful winter. But so far, the resulting spike in energy prices has been much less dire than expected. To be certain, prices are still painfully high for most consumers. But the current natural gas spot price of about €50/MWh, while double the “normal” pre-shock rate, is a drastic improvement from the record prices of over €300/MWh seen towards the end of August.
In fact, in a market fluke last week, the wholesale spot price of European natural gas even briefly went negative on the Dutch benchmark. “For an hour, suppliers were willing to pay almost €16 to someone able to suck up a megawatt hour of gas, about the equivalent of an average UK household’s monthly consumption,” reports the Financial Times. As of now, month-ahead prices for November are €100/MWh, less than a third of the peak rates, and future prices projected for November 2023 are also down from almost €300/MWh to around €140. To be sure, this is still a painfully high price that is certain to hit consumers where it hurts, but it is far, far better than the worst case scenarios that, until recently, seemed likely to come to pass.
In fact, the op-ed in the Financial Times argues that Europe’s energy crisis is nearly over, as a combination of increased supply (largely from solar power) and decreased demand in response to high prices has helped runaway energy prices to level off. As part of the effort to pivot away from Russian energy imports, two-thirds of countries in the European Union – 18 out of 27 – set new records for solar power generation between May and August of 2022, and projections from Statkraft show that European solar capacity will see an average increase of between 45GW and 52GW each year leading up to 2030 – a massive increase over last year’s pre-invasion projections.
While the story on the supply side of the curve is a happy one, however, the demand side is a bit more grim. Much of the dip in demand for natural gas in the European Union came from the collapse of the fertilizer industry, which requires large quantities of gas to produce ammonia. When the cost of operating fertilizer plant became non-viable, most major companies ceased operations, leading to a significant fertilizer shortage, which will eventually lead to a considerable grain shortage. The reality is that while the energy crisis may be easing in Europe, it is just beginning for the rest of the world. And in the poorest developing countries, it won’t just be an energy crisis, but a food crisis as well.
By Haley Zaremba for Oilprice.com
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