Europe is facing an unprecedented gas crisis.
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Europe is facing an unprecedented energy crisis that is pushing the economy closer to recession and raising serious questions about the region’s climate change ambitions.
CNBC takes a look at how Russia, led by President Vladimir Putin, is cutting gas supplies to Europe and what this means for the future.
Russia cuts supplies
Russia has significantly reduced natural gas flows to Europe since Western nations imposed harsh sanctions on the Kremlin following its unprovoked invasion of Ukraine on February 24.
Moscow denies it is using gas as a weapon, but Europeans complain that Gazprom, Russia’s state energy company, is no longer a reliable supplier. Reduced gas supplies from Russia are a problem for EU nations given that it used to import about 40% of its gas stocks from the country.
Data from Nord Stream, the operator in charge of an oil pipeline [Nord Stream 1] linking Russia with Germany, confirm that there are fewer volumes of gas to the west.
Last week alone, supplies via Nord Stream 1 were down 40% to 20% with Gazprom citing maintenance issues.
German Economics Minister Robert Habeck said that Gazprom’s technical excuse was one “farceSupplies stopped briefly before the latest drawdown, and maintenance work was completed between July 11 and 21.
According to the European Commission, the EU’s executive arm, 12 member states are already suffering from reduced gas flows and a handful of others have been completely cut off.
Senior EU officials say Russia is “blackmailing” Europe and “weaponizing” its gas supplies. Moscow has repeatedly denied the allegations.
“We have to be prepared, there could be a total outage in the vicinity.” [the] future, and that means we need to have a plan in place,” Kadri Simson, Europe’s energy commissioner, told CNBC last week.
European leaders are concerned about a total shutdown of suppliesparticularly since many industries use the product as a raw material in their manufacturing process.
In this context, efforts have been made to search for alternative suppliers and different sources of energy. However, this transition is a difficult task that is impossible to accomplish in a short period of time.
The commission has asked EU nations to have a minimum storage target of 80% by November. In June, gas filling levels were just over 56%, according to the same institution.
Natural gas prices skyrocket
Natural gas prices have increased dramatically following the Russian invasion of Ukraine and even in advance when Russia began to restrict flows.
There are renewed price pressures every time Russia cuts its supplies to Europe given the importance of the raw material for various sectors and given the lack of alternatives to Russian fossil fuels.
Salomon Fiedler, an economist at Berenberg, noted that natural gas prices in Europe are “exorbitantly more expensive” now compared to the average price of 2015-2019.
“In a normal year, the EU can use about 4.3 billion megawatt hours (MWh) of natural gas. So if prices are higher by €100 per MWh for a year and the EU had to pay these Instead of benefiting from some long-term fixed-price contracts, costs would rise by around €430 billion ($437 billion), equivalent to 3% of EU GDP in 2021,” it said.
The higher prices then naturally trickle down to the energy bills of businesses and individuals across the block.
“European benchmark prices for natural gas at the Dutch Title Transfer Facility (TTF) soared 15% to nearly €200 per megawatt-hour as utilities bid for alternative supplies, raising concerns that consumers and industry will struggle to pay their energy bills and that there will be a winter recession,” analysts at consultancy group Eurasia said in a research note on Tuesday.
Shattered growth expectations
With tight supplies and higher prices, the gas crisis is shaking up Europe’s economic prospects.
The latest growth reading for the euro zone, released on Friday, showed GDP at 0.7% in the second quarter, above market expectations. But more and more economists are pricing in a recession by 2023.
The European Commission said earlier this month that the economy would grow 2.7% this year and 1.5% next. However, the institution also said that a complete shutdown in Russia’s gas supply could trigger a recession later in 2022.
“Higher gasoline prices drive up costs for businesses and squeeze consumers’ budgets, leaving them with less money to spend on other goods and services. As a result, we expect the eurozone to enter a recession this fall with still high inflation,” Fiedler said. .