The European Energy politics’ suicide

Natural gas prices in Europe rose sharply last week as supply cuts from Russia slowed the pace of filling storage sites, threatening not to reach the levels required to get through next winter. Flows via North Stream, the main gas pipeline supplying northern Europe, saw flows cut by 60% at the start of the month. Inventory levels are currently half-full, but still below the five-year average. Boosting them could prove difficult if Nord Stream does not return to full capacity after a scheduled maintenance shutdown this month.

Blissful Europeans seem to discover a problem, while they have aligned themselves with an American position without really measuring the economic and potentially political consequences of their actions. Indeed, European companies have boosted liquefied natural gas imports and won longer-term supply contracts from US suppliers. However, these additional purchases are expected to reach 80 to 100 billion cubic meters by 2026, or about 60% of the volume imported from Russia in 2021.

Germany has warned against rationing, while EU Energy Commissioner Kadri Simson has warned there may not be enough supply around the world to replace the Russian gas. An obviousness that was known to all.

The threat of a scenario where gas could be rationed is taking shape, inevitably leading to a serious economic crisis in Germany and Europe. High gas prices are forcing manufacturers to reduce demand and putting further pressure on the European economy, which is already struggling with runaway inflation and weak growth. An escalation of the crisis could test European unity and threaten political coalitions in Germany or Italy.

Calls to reduce consumption are increasing to avoid such a situation. The Chief executives of French energy companies have urged consumers to save electricity, gas, and oil. The German government has already unveiled a package of measures, including incentives for the industry to reduce demand.

Gas rationing may still be a distant prospect, but the crisis is already here. The price impact on industrial activity occurred well before the interruption in gas supply. For example, an aluminum smelter today loses about $200 million at current forward electricity and carbon dioxide prices anticipated for the following year, despite the high prices of metals on the markets. Aluminum may be an extreme example, but it represents well the pressures faced by manufacturers.?

Privately, European leaders have already decided on factory closures. The industries affected will be those that consume the most energy: fertilizers, base metals including steel, chemicals, ceramics, glass, and paper. But increasingly so will food production. The greenhouses and chicken farms face astronomical energy bills. Earlier this month CF Industries Holdings, the US fertilizer producer, announced it would permanently close one of its UK plants due to high energy costs. The future of Slovalco, an aluminum smelter in Slovakia in which Norsk Hydro has a majority stake, looks bleak, with the plant likely to close in 2023.?

Other operational issues arise. In Germany, some industrial furnaces have been operating continuously for decades. If they cool suddenly, the molten materials harden, and the system breaks. Wiegand Glas has eleven glass melting furnaces that have been in operation around the clock for more than a decade. Even if the group stopped production, the kilns would need 75% of normal gas consumption to prevent the molten glass inside from seizing up and destroying the kiln. A stratospheric cost for a company that would have stopped producing and would no longer collect revenue.?

The situation is serious enough that Economy Minister Robert Habeck drew a parallel between the gas crisis and Lehman Brothers' role in triggering the 2008 financial crisis. accumulating losses by being forced to cover missing Russian supplies at high prices, there is a risk of a wider collapse. German economic institutes warned in April that an immediate halt to Russian oil and natural gas imports would lead to a 220 billion euro drop in production over the next two years.

The risks extend beyond a recession, a cold winter, and closed factories. For decades, Germany prospered on cheap Russian gas. Today, it is the whole model of German industry that is threatened, because even if solutions are found to replace Russian gas in the long term, this will be done at an exorbitant cost which will penalize the competitiveness of the first European economy. Companies will likely move production to where there is competitively priced energy, and it won't be Germany. The consequences on employment could be disastrous and result in a rise of political extremes, already historically high in Europe. The crisis has already spread far beyond Germany, with twelve European Union member states affected and ten issuing an early warning under gas safety regulations. Europe's increased demand for liquefied natural gas will also hit the world's poorest countries as they struggle to access cheap gas as well.

Decisions made on the noble principles of freedom and support for an invaded country could a fortiori lead to the opposite of the desired goal.