How the “Energy Crisis” could hinder European economic recovery

Europe is undergoing an energy crisis as a result of supply-side issues and a dependence on unreliable imports. The key commodity in question is natural gas, heavily utilised by many European countries as they work to reduce their reliance on coal and thus reduce their carbon emissions. However, prices for gas in the UK have increased four-fold over the past year and continue to break record trading prices. Many stakeholders in the UK and continental Europe stand to face significant losses in during the post-pandemic recovery as a result of this energy crisis. Households could face unprecedented gas bills as winter approaches, firms could see an enormous rise in operating costs while governments risk large budgetary strains as they seek to assist at-risk individuals and households while maintaining the operational integrity of their economies. All this, while the post-pandemic recovery continues to flounder around the world.  

The emergence of the current energy crisis has its roots both abroad and within Europe. The rapidly increasing demand for liquefied natural gas (LNG) by Asian economies is an important contributing factor to the current crisis. Asian demand for LNG has increased by 50% over the past decade, and o​​ver the last couple of months, Asian buyers have been outbidding their European counterparts for spot supplies of American natural gas. More acutely, China’s post-pandemic economic boom has caused a spike in gas consumption. Every year, about fifteen million homes in China join the national gas grid. This increase in Asian demand for LNG has coincided with intra-European gas infrastructure deficiencies. 

Europe has experienced one of its coldest winters to date, which has critically depleted existing gas storages throughout the EU and the UK. This is exacerbated by the long-term strategies of many European countries to switch to renewable energies, which have left traditional fossil fuel storage infrastructures largely neglected. For example, Europe’s largest gas field in Groningen, Netherlands, has had its capacity reduced by 25 percent over the past three years. The UK’s situation is particularly dire, given that it has one of the lowest gas storage capacities in Europe despite the fact that 50 percent of its power plants are fueled by gas. What makes this short-term supply shortage of gas so critical is that the UK is unable to satiate energy demand by drawing from other forms of energy. Whilst other countries can mitigate these impacts by either ramping up renewable energy production or reactivating coal plants, the UK’s strict timeline to phase out the use of coal by 2024 in combination with the shortcomings of its wind turbines​​— which have experienced the least windy months since 1961— has meant no relief for the sector. 

To add another dimension to this crisis, one of Europe’s largest gas suppliers, Russia, has been accused of playing “gas games” by maintaining artificially high gas prices. Many EU countries have accused Russia of leveraging European dependence on its gas for political gain, for instance, to speed up the approval of the Nord Stream 2 pipeline by the German government. Although Russia maintains that it is simply looking out for its own domestic gas market, the implications for Europe remain the same. 

Households will be particularly adversely affected this winter by the soaring gas prices as the government has increased the energy price cap. In the UK, 40% of gas consumption goes to heating homes, with most of this demand concentrated into a period of 5-6 months. In fact, Ofgem, the UK’s energy regulator, has warned that energy bills may increase at least by 139 Pounds for around 15 million households. Due to this dramatic increase in household bills, former PM Gordon Brown warned that 3.5 million homes are now on the brink of fuel poverty, exclaiming that 2021 was arguably the “worst time to be poor”. 

For now, energy suppliers are bearing the brunt of the current increase in gas prices. Since the privatisation of the energy sector in the late 80s and 90s, the number of national energy suppliers in the UK increased from 6 to 70 in 2021. This saturated sector and its aggressive competition with already thin margins have spelt disaster for smaller energy suppliers. In the past six weeks alone, already 14 energy suppliers have declared insolvency, with many more predicted to go under before 2022. The reduction in choice for households likely means that the increase in energy prices will consolidate itself past the acute crisis.

Manufacturers and the industrial sector are forecasted to be the hardest hit by the energy crisis. Diverse sectors including fertiliser manufacturers, which rely heavily on natural gas, have already reported a stark increase in their input costs, with significant overspill into the agricultural sector, which usually has a direct impact on consumer food prices. Similarly, the steel sector, which is highly dependent on low heating costs to compete with foreign imports, is equally alarmed. Stace, head of UK Steel, cautioned that “the energy crisis of today will fast become the steel industry crisis of tomorrow.”

Unlike households, firms and manufacturers can and are pressuring the government to introduce bailout schemes. UK Chancellor Rishi Sunak has been reported to already be in the process of drafting a rescue plan for the energy sector to overcome the daunting winter. However, in contrast to the preferences of energy suppliers, support would most likely be in the form of loans similarly to those provided during the pandemic rather than grants. The long-term risks for the economy are not negligible, and depending on the severity of the winter and efficacy of the government schemes, rising production and consumption costs could lead to a recalculation of the UK’s forecasted inflation targets. This will undoubtedly impact the Bank of England’s decision whether or not to increase interest rates later this year, with pessimistic implications for the pace of the UK’s post-pandemic economic recovery. 

Finally, the energy crisis presents an inflection point for many European states’ environmental and renewable energy policies. There has been a debate on what lessons are to be learned from this crisis. The reality is that European gas infrastructure is inadequate for increasing global demand for energy, with two distinct policy proposals aimed to remedy this issue. EU economists insist that the long-term solution to this issue is to accelerate Europe’s carbon neutrality and push towards complete renewable energy reliance. This would render the gas question obsolete. On the other hand, some UK economists believe that the energy crisis has reaffirmed the reliance on gas and unveiled the “costs of decarbonisation”, and that the UK must improve its gas storage infrastructure.

By David Vergara Schleich and Sayed Taqi Shah

David is a German-Colombian, third-year International Relations student. He is particularly interested in international financial institutions, developmental economics, and the relationship between domestic national security and the international political economy. He is also interested in the politicisation of trade regimes and how global trade patterns today reflect the underlying relations between major political powers.
Sayed is from Nepal and was raised in Singapore. He is a second-year International Relations student, and is intrigued by a range of issues to do with Business & Economics. For instance, he is particularly interested in exploring how different policies shape global markets and vice versa, while emphasising the effects they have on people and societies. Further in the year ahead, he aims to explore topics such as the green boom and labour migration in the context of the COVID-19 pandemic. 

References

https://www.theguardian.com/business/2021/sep/21/what-caused-the-uks-energy-crisis

https://www.bloomberg.com/news/articles/2021-10-26/u-k-energy-market-failures-will-cost-every-single-household

https://www.independent.co.uk/news/business/news/energy-crisis-uk-china-why-b1930676.html

https://www.ft.com/content/9fc43961-6cdd-40b9-b42f-a1610e697a5a

https://www.euronews.com/2021/10/26/europe-s-energy-crisis-eu-countries-dismiss-spain-s-calls-for-market-intervention

https://www.politico.eu/article/vladimir-putin-nord-stream-2-pipeline-eu-gas-prices-germany-russia/

https://on.ft.com/3vV268N

https://on.ft.com/3pJg4K0

https://on.ft.com/3ls6317

https://on.ft.com/3uOQDqP

https://www.theguardian.com/society/2021/oct/03/gordon-brown-warns-35m-households-face-fuel-poverty-this-winter

https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2021-full-report.pdf

https://group.met.com/fyouture/natural-gas-environmental-impact/64

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