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Prof. ST Hsieh

Director, US-China Energy Industry Forum

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The European Energy Crisis Was Inevitable

Editor OilPrice.com Fri, February 11, 2022, 3:00 PM

Short Comments by ST Hsieh: This editorial makes sense with the following key points.

  1. Don’t Blame Putin for Europe’s Energy Crisis! While untold numbers of think pieces have been quick to point the finger at Putin for exacerbating Europe’s energy crunch, scapegoating Russia distracts from the European energy policies that put the continent in such a precarious position in the first place.
  2. Over the past 20 years, Europe has steadily deregulated its gas sector and invested heavily in the expansion of pipelines and LNG facilities with the intention of allowing for a more free-market approach. STH: However, the reality is that global oil and gas markets are not free, OPEC+ has a great influence on crude oil productions. Russian energy industry is highly controlled by the government. The US congress is proposing that the US should stop export LNG. The global energy markets are under the influence of geopolitics all the time.
  3. STH: EU is the global leader in combating climate changes, and it is devoted to fast-pacing energy transition phasing out fossil energy. It will take great leadership and coordination within EU, even so near term energy shortages causing local inflations are inevitable.
  4. STH: Nord Stream II pipeline is “a piece of work” showcasing internal contradictions within in EU and external contradiction with the USA. US being the largest LNG exporter in the world after 2022 is a factor that should not be overlooked. Under the current Ukraine crisis, the US has actively coordinated with China, Japan, and South Korea to share their LNG with EU.

Europe is in the midst of an energy crisis that is about to get much, much worse if war breaks out between Russia and Ukraine. Russia is the continent’s single-biggest provider of liquefied natural gas, while Ukraine is a critical part of the shipping route to transport all that fuel from Russia to the European Union. A conflict between these two essential parts of the European energy supply chain would pose a serious threat to Europe’s already floundering energy security.

As Europe’s energy deficit has become increasingly desperate, so too has the continent’s dependence on the Kremlin to keep supply lines open and ramp up natural gas shipments. In just the last year, supply chain snags and fuel shortages led to a stunning 330% surge in gas prices across Europe, pummeling consumers at the same time that the global economy is attempting to recover from and adapt to the ongoing Covid-19 pandemic. European governments have had to impose pricey stop-gap measures to mitigate economic fallout from the energy supply crunch, and have so far “spent tens of billions of euros trying to shield consumers from record-high energy prices, and themselves from voters’ wrath” according to recent reporting and analysis by Reuters.

Furthermore, despite the European Union’s best efforts, the Kremlin has not only declined to open its taps enough to quell Europe’s energy crisis, but it has actually decreased exports to Europe just when the continent needs them most. The EU’s freshly exposed dependence on Russia has given Putin newfound leverage to try to push through some of his own interests, most notably the Nord Stream 2 pipeline, which would allow Russia to pump liquefied natural gas directly to Germany (which gets 50% of its natural gas from Russia) by way of the Baltic Sea, bypassing Ukraine entirely. This pipeline, while already constructed, has been unable to get the final green light to come online due to stark opposition in the West, with leaders including Joe Biden arguing that the move would give far too much bargaining power to the Kremlin, thereby further reducing the continent’s energy security and geopolitical stability.

While untold numbers of think pieces have been quick to point the finger at Putin for exacerbating Europe’s energy crunch, scapegoating Russia distracts from the European energy policies that put the continent in such a precarious position in the first place. Over the past 20 years, Europe has steadily deregulated its gas sector and invested heavily in the expansion of pipelines and LNG facilities with the intention of allowing for a more free-market approach. In doing so, they abandoned the previous system of tying long-term gas prices to oil prices and let the price of gas be ruled by supply and demand. It became clear back in 2021 that while this system allowed for lower gas prices in the short term, Europe was in for major sticker shock as gas stockpiles began to dwindle during the pandemic.

Don’t Blame Putin for Europe’s Energy Crisis,” proclaims a recent analysis from Foreign Policy. “No matter what happens in Ukraine, this winter is not an aberration,” writes Columbia Climate School co-founder Jason Bordoff. “Even if Russian gas continues to flow, Europe will be increasingly exposed to the volatile price of imported gas in the years to come unless its leaders take steps to reduce the risk of energy price spikes and prepare for inevitable and unpredictable swings in energy supply and use.”

These price swings have led to significant political unrest in Europe and have sent leaders scrambling to slap a bandaid on the issue by way of removing VAT taxes on home energy bills and sending relief directly to impoverished households, among other emergency measures. Those efforts are going to fall far short of what is needed to protect European consumers, however, and the problem is only going to get worse. “BofA analysts estimate the average western European households spent around 1,200 euros ($1,370) a year on gas and electricity in 2020,” Reuters wrote last month. “Based on current wholesale prices, they estimate this will rise by 54% to 1,850 euros.”

To be certain, Putin’s recent actions have done nothing to assuage Europe’s energy crisis, and the conflict brewing on the Ukrainian border stands to make matters much, much worse. It is not the Kremlin’s fault, however, that Europe’s energy landscape is as vulnerable as it is to these final few straws on the camel’s back. To resolve the energy crisis, European leaders will need to stop deflecting the blame and take a serious assessment of their own energy policies. Creating price stability and energy security will only grow more essential in the coming decades as the world begins to decarbonize in earnest, a sweeping energy reform and economic experiment which is sure to have plenty more ups and downs in store for energy markets.

By Haley Zaremba for Oilprice.com

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