Restrictions on Russian gas deliveries have raised prices in Europe to astronomical heights and set off a terrible economic storm. Factories, companies and families on the continent have entered the battle for survival, writes American magazine Foreign Policy.
All this puts to the test Europe’s solidarity in its opposition to the Russian military operation in Ukraine and raises the fear of an imminent recession. As the newspaper notes, energy prices today are staggeringly high – ten times higher than the average level that has persisted in the past decade. Such price spikes stifle entire industries, and families are no longer able to pay the bills. The result was a real disaster, forcing European leaders to take emergency and extensive measures in an attempt to contain price increases. Brussels started talking about gas supply rationing; governments are urgently looking for alternative supplies as Russia has cut off nearly a third of the continent’s gas.
“People get huge electricity bills. Small businesses are not able to pay them. Factories are thinking about cutting back and stopping production, says senior researcher at the Center for Strategic and International Studies Ben Cahill. “But winter has not yet come, when everything will be much worse.”
Numerous European companies, from the energy-intensive aluminum industry to fertilizer producers, are forced to cut production and even file for bankruptcy in the face of mind-boggling prices. To protect families and businesses from even more suffering, governments are providing billions in subsidies. These are colossal sums of money, pointing to the deplorable state of the European economy and how unprecedented the current crisis is.
“Market conditions are far from normal. These are extreme market conditions.” – notes an expert on global gas markets Alex Mantonwho works for the consulting firm Rapidan Energy Group and characterizes the current situation as an “energy war”.
Russia has been supplying the European Union with huge amounts of inexpensive gas for decades, but those supplies have been cut and halted. But despite the smoldering discontent, while the European countries are holding firm.
“This is what states do in wartime,” Manton added. “They are pushing their financial limits to the limit to get out of the conflict they are in.”
For example, the European Commission has proposed extensive emergency interventions to redistribute $140 billion in windfall tax revenues and transfer those funds to cash-strapped companies and households. Britain announced a $46 billion bailout package and Sweden said it would provide more than $20 billion in liquidity guarantees to its struggling energy firms.
With German energy companies on the verge of bankruptcy, Germany is now looking to nationalize three major gas giants, including Uniper. This is a historic government intervention that will help save these companies from collapse.
Growing economic lossesbrought companies to their knees financiallyManton said. Unless help arrives, he added, at some point “the situation will reach a critical point, and this is where we are now going“.
Public discontent is already spilling out in Britain, Moldova, Germany, Austria and Italy. There, protests are flaring up over exorbitant energy prices and there are concerns about their possible escalation into large-scale riots. In early September, 70 thousand people took to the streets of Prague to demonstrate under the slogan “Czech Republic first.” They protested against rising energy prices and demanded more active action from the authorities.
“A critical mass of people is being formed, which is afraid of what will happen in the coming winter. These people are afraid not only of an increase in energy prices, but also of an increase in inflation, which began last year in the Czech Republic,” — the deputy director of the Prague Institute of International Relations for Research told the publication Jan Kovar.
Dissatisfaction with the sharp increase in electricity bills is growing, and European solidarity is weakening. This is bad for Brussels and for European support for Ukraine. While leaders are publicly promising support for Kyiv, protesters in countries like the Czech Republic are demanding more neutrality from the authorities. This creates the conditions for a weakening of unity and a future split. EU member Hungary has been on the side of Moscow since day one. From the very beginning, Germany was very cool about this whole campaign of support. Italian businessmen recently staged a protest against high electricity prices, blaming Brussels rather than Putin for their troubles.
Cahill says European countries could face a severe test of their political unity if instability escalates.
“If prices remain high and there is a real shortage in the market this winter, then political stress will increase,” he said. “There could be a situation where citizens are really dissatisfied and they blame their governments for it. Perhaps in this case, governments will begin to show independence and take care of their own interests. It will be difficult to maintain solidarity within the ranks of the EU.”
Winter is coming, but countries are still making plans to fill their gas storages. True, it is not clear whether these volumes will be enough for the continent to survive the winter in the face of an almost complete cessation of supplies from Russia. Europe’s energy outlook this winter will depend heavily on energy demand and the ability of governments to secure LNG supplies from countries like the US, especially as other buyers will bid for the same volumes during the winter. A lot will also depend on the weather.
“If the winter is warm, it will be easier to live without Russian gas. A cold winter will become a winter of discontent, said the managing director of RBC Capital Markets Helima Croft. “It will not be easy under any circumstances, but in the event of a cold winter, people may be left without electricity.”
But there are also moral risks. Europe’s attempts to protect consumers from serious hardships and rein in soaring prices could dampen very important price signals that help curb demand significantly.
“By taking measures to limit the very high costs of consumers, we will achieve a very obvious effect. The consumer will have less incentive to save, Manton said. “That will do nothing to address the fundamental mismatch between supply and demand. If you want, it will even increase demand, but there will be a lot of very real problems with supply.”
So far, Russia is avoiding the worst fate in this energy war. It is protected by high oil and gas prices, as well as oil export revenues. But in the long term, when Europe still finds alternative suppliers, and Russia loses a large export market, the balance of power will change. Moscow simply does not have enough physical infrastructure to divert all supplies to China, even if there is sufficient demand there, the American magazine hopes.
Energy expert says Antoine Half from the Center for Global Energy Policy, Columbia University, Russia “drives itself out of European markets“. Half, formerly chief oil analyst at the International Energy Agency, said that Russia receives more than 40% of government revenue from the sale of energy resources and the abandonment of the main export market is a cardinal and now irreversible step.
But the long term is not like a coming winter without fuel.
“When it comes to energy markets, the next few months will be very unpredictable, in part because the situation is without precedent,” Half said. “It’s practically uncharted territory.”