Running out of Gas? How the European Natural Gas Shortage is Affecting the Global Energy Markets
Since Russia’s war in Ukraine began in February 2022, the world has watched Ukraine’s economy and infrastructure crumble under the pressure of Russia’s advance. Russia has made a point of destroying its adversary’s critical energy assets, but Ukraine isn’t the only country that’s seen its access to energy wane in recent months.
Because of Russia’s critical role in global energy production, the conflict in Ukraine has had far-reaching ripple effects on the global energy economy. One of Russia’s most striking moves was to halt natural gas deliveries to Germany via the Nord Stream 1 pipeline on August 31.
Despite Russia claiming that Nord Stream 1 has maintenance issues, it’s clear to the 27-nation bloc that Putin seeks to weaponize energy access for the European Union by restricting natural gas imports. The Union’s dependence on Russian natural gas has exposed a significant vulnerability and caused EU leaders to seriously consider the possibility of running out of gas this winter.
Europe is at a critical crossroads where diplomatic duty, economic well-being, human rights, and environmental protection intersect. But where does it lead?
So far, the measures taken by Europe to prepare for natural gas shortages have shown promising results in the short term, but what does the lack of Russian natural gas mean in the long term?
Before Russia’s conflict in Ukraine, Russia was one of Europe's largest suppliers of liquefied natural gas. In 2021, Europe imported 40% of its natural gas from Russia. Today, EU countries import barely half that amount.
The most significant supply decrease came toward the summer's end when Russia turned off the Nord Stream 1 liquified natural gas pipeline, the largest serving Europe. Hungary depends on those imports more than any other country in the bloc, with Austria and Slovakia as the second and third largest consumers.
Belgium, the Czech Republic, Germany, Italy, Latvia, and the Netherlands are also hugely affected, although the drastic decrease in natural gas access impacts nearly every European nation. Before the Nord Stream 1 shutdown, Russia had already ceased natural gas deliveries to Poland, Bulgaria, the Netherlands, and Finland.
It Doesn’t Hurt… Yet
The low supply of Russian natural gas has barely impacted the European economy. Since gas became more scarce in the summer, Europe saw a 0.2% reduction in economic activity in the first half of this year. And Europe’s GDP is on the rise. Recent data suggests the bloc’s GDP increased by 0.7% in the second quarter—exceeding market expectations.
But winter is coming.
Most countries are creating policies and projections based on having no access to Russian natural gas this year. And if that happens, the International Monetary Fund suggests that the European economy could contract by as much as 6%. Notably, the economy shrunk by 5% in 2020 due to the COVID-19 pandemic.
The economic setbacks would weigh heavily on countries like Hungary, the Slovak Republic, the Czech Republic, and Italy, where reliance on Russian natural gas is high. A lower gas supply will also increase prices, exacerbating the global inflation crisis.
The question of a possible recession isn’t if; it’s when. And with the natural gas shortage affecting everything from consumer goods to industrial manufacturing, the outlook isn’t great. At 10%, the EU is facing record inflation primarily due to the natural gas shortage. In the last year, the wholesale price of natural gas has increased four-fold.
Inflation is rampant in economies worldwide, but paired with the sharp increase in prices and reduction in economic activity, a European recession is a virtual certainty.
Dual Demand Dilemma
One of the most interesting outcomes of the Russian natural gas shortage is the way it’s changed the demand for liquified natural gas. Demand has increased in some parts of the world, but in others, the lack of Russian natural gas has ramped up conservation efforts, decreasing demand.
Countries are competing for natural gas supplies like never before, and poorer nations with higher dependence on natural gas are feeling the pinch. For example, Bangladesh and Pakistan are both experiencing rolling blackouts and reduced working hours to conserve energy.
But in Europe, efforts are underway to conserve natural gas, effectively lowering demand. In the first quarter of this year, European gas consumption was down by 9%, thanks to government controls on the minimum and maximum levels for heating and cooling and the REPowerEU public information campaign (unveiled in May).
Stockpiles, Subsidies, and Stress Tests
But conservation efforts can only go so far. With cold weather fast approaching, the International Energy Agency estimates that Europe will need to reduce gas use by 13% to account for the loss of Russian supplies.
One of the strategies Europe is using to curb the effects of the Russian natural gas shortage is stockpiling. Although these measures could arguably increase demand and prices in other parts of the world, Europe has filled its storage tanks to 90%. However, experts agree this is only a one-year fix, as winter heating needs will completely exhaust these reserves.
Germany has taken further precautions to subsidize household energy bills. Earlier this month, the government pledged $12.8 billion to offset usage fees charged by the four high-voltage transmission grid companies. Subsidies like these and stockpiles will soften the blow this winter, but the real solution lies in creating a new energy economy without Russia.
Government officials in Germany are already preparing for a scenario without Russian gas. They’ve instructed their energy providers to conduct stress tests on the energy grid to assess the agility of their existing supplies. The outcomes of these tests will determine Germany’s path forward and could include recommissioning nuclear power plants.
Despite these and other European Union countries' efforts, the facts of this energy disruption remain unchanged. The war in Ukraine rages on, and as long as it does, Russia cannot be a reliable source of natural gas. As a result, prices and inflation are increasing rapidly, setting the stage for a recession. And as the weather gets colder, demand for a scarce commodity—natural gas—will increase across the globe.
As 2022 comes to a close, the 27-member EU is in uncharted territory. They’ve done what they can to prepare by encouraging and, in some cases demanding conservation, stockpiling natural gas reserves, and subsidizing costs for vulnerable populations. But will it be enough to stay warm this winter– and solvent?
The economic forces at play are like an unstoppable tidal wave aimed squarely at the heart of Europe. Sinking can’t be an option, but is swimming possible? Time will tell.