Europe’s $1.36 trillion energy bill only marks the beginning of the crisis

FRANKFURT – Europe has been hit by US$1 trillion (US$1.36 billion) in rising energy costs as a result of Russia’s war in Ukraine, and the deepest crisis in decades is just beginning.

After this winter, the region will have to replenish gas reserves with little to no supplies from Russia, increasing competition for fuel tankers. Even with additional LNG import facilities coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. This means there is no respite from high prices.

While governments have been able to help companies and consumers absorb much of the blow with more than $700 billion in aid, according to the Brussels think tank, an emergency could last for years. With interest rates rising and economies likely already in recession, the support that tied the blow to millions of households and businesses looks increasingly unattainable.

“Once you add everything up – bailouts, subsidies – it’s a ridiculously large amount of money,” said Mr. Martin Devnish, a director at the consulting firm S-RM. “It will be much harder for governments to manage this crisis next year.”

The government’s fiscal capacity is already strained. About half of the EU member states have debt that exceeds the bloc’s limit of 60% of gross domestic product.

Roughly $1 trillion, calculated by Bloomberg from market data, is a broad summation of more expensive energy for consumers and companies — some, but not all, of which has been offset with aid packages. Bruegel has a similar estimate that looks at demand and price increases, published in this month’s International Monetary Fund report.

A rush to fill storage last summer, despite near-record prices, eased the supply crunch for now, but the freezing weather is giving Europe’s energy system its first real test this winter. Last week, Germany’s grid regulator warned that not enough gas was being saved and two out of five indicators, including consumption levels, had become critical.

With limited supply, businesses and consumers were asked to reduce usage. The EU managed to curb gas demand by 50 billion cubic meters this year, but the region still faces a potential gap of 27 billion cubic meters in 2023, according to the International Energy Agency. This is on the assumption that Russian supplies will drop to zero and Chinese LNG imports will return to 2021 levels.

“Getting gas is an absolute necessity and we will likely see extensive European stockpiling,” said Mr. Bjarne Schildrup, chief commodity analyst at Swedish bank SEB, and a “seller’s market” contract for at least the next 12 months. “The race is on to fill the EU’s natural gas stocks” before next winter.

The main source of gas in the pipeline from Russia to Western Europe was Nord Stream, which was damaged in a sabotage operation in September. The region still receives a small amount of Russian supplies through Ukraine, but heavy shelling of energy infrastructure by the Kremlin endangers the route. Without this gas line, filling storage would be challenging.

To avoid shortages, the European Commission has set minimum stock targets. By February 1, the reservoirs should be at least 45% full to avoid depletion by the end of the heating season. If the winter is mild, the goal is to keep storage levels at 55% until then.

LNG imports to Europe are at record levels and new floating terminals are opening in Germany to receive the fuel. Government-backed buying has helped Europe attract cargo away from China, but colder weather in Asia and a strong economic recovery after Beijing eased Covid restrictions could make that more difficult.

Chinese gas imports are expected to be 7% higher in 2023 than this year, according to China National Offshore Oil Corp.’s Institute of Energy Economics. The state-owned company has begun securing LNG supplies for next year, putting it in direct competition with Europe for spare shipments. China’s historic drop in demand this year was equivalent to about 5% of global supply.

China is not Europe’s only problem. Other Asian countries are moving to purchase more gas. Japan, the world’s top LNG importer this year, is even considering establishing a strategic reserve, with the government also interested in subsidizing purchases.

Gas futures in Europe have averaged around €135 per megawatt-hour this year, after reaching a peak of €345 in July. If prices rise back to €210, import costs could reach 5% of GDP, according to Jamie Rush, chief European economist at Bloomberg Economics. The plans in response.

“The nature of the support will change from an urgent and comprehensive approach to more targeted measures,” said Mr Pate Christiansen, chief strategist at Danska Bank. “The numbers will be smaller – but they will still be there during this transition.”

For the likes of Germany, which relies on affordable energy to make products from cars to chemicals, high costs mean a loss of competitiveness to the US and China. That puts pressure on Chancellor Olaf Schulz’s administration to keep the economy propped up.

“Given the potential for huge political and social consequences of the explosion in energy prices and the shock to the backbone of the German economy, it is important for the German government to intervene,” said Ms Isabella Weber, an economist at the University of Massachusetts Amherst. , who is known as the inventor of Germany’s gas price freeze.

The challenge is to find the balance between keeping factories active and homes heated in the near term, without stifling the incentives to invest in renewable energy – which is often considered a sustainable way out of the energy crisis.

“The biggest task out of the crisis is to make the energy transition happen,” said Ms. Veronica Grimm, an economic adviser to the German government. “We must massively expand renewable energy.” Bloomberg