“Gas Shock” irreversibly changes realities in EU energy markets

What happens now on European gas markets in many ways mirrors the 1973/79 oil shocks.

First, natural gas prices and volatility levels in Europe have reached unprecedented levels: prices grew by over a factor ten, from below EUR 20/bcm levels a year ago to above EUR 200/bcm. The first oil shock that followed an OPEC embargo after the Yom Kippur War led to oil prices tripling, then tripling again after the second shock.

Second, trust in reliability of supply from Russia has been irreversibly undermined. Even during cold war times there were no doubts about reliability of Russian gas. The practical win-win from a pragmatic producer consumer relationship has always dominated temptation to use it as a political weapon. This is different now.

With this, the role of natural gas as a “bridging technology” – eliminate coal, increase renewables, and use gas to fill the gap and provide electricity peak functionality – is seriously compromised, at least in Europe.

The 1973/79 oil shocks ultimately initiated the decoupling of energy from GDP growth. Consumer countries massively invested in decreasing exposure from concentrated supply dependency through energy efficiency programmes, diversification of supply origins and the creation of emergency oil stocks. After the 1979 shock OPEC oil production collapsed to about half of its pre-1973 levels.

Today, mitigation against a 40% dependency from Russian gas is an imperative. Vulnerability against extortion aimed at undermining its very values cannot be an option and calls for drastic and rapid change. Such change never comes for free and ambition to mitigate must be measured against ability to decarbonize. If less natural gas means more lignite or coal in the short term, this must be offset by accelerated milestones on the carbon-free electricity generation.

IEA’s 10 point proposal, calling for supply increases from other origins, fast-tracking and accelerating of renewable and energy efficiency programs, and incentifised gas storage obligations, indicates that more than a third of Russian gas imports could be replaced within few years. In alignment with climate objectives. Europe’s Environment Commissioner Frans Timmermans goes further and suggests a two thirds reduction within one year.

The gas shock is real and trust in unconditional reliability of Russian gas is a luxury of the past. Rather than paying the price of extortion and uncertainty Europe will be better off investing in accelerated change now.