Energy crisis in Europe

Energy crisis in Europe

Share it

The European Union will have to pay more for its energy, pollute more and ration.

Engaging in an economic war with a country on which we depend to cover our energy needs, particularly gas, is the unique situation in which the European Union finds itself.

Sources of supply before the war

We must first measure the degree of energy dependence of the EU vis-à-vis Russia. In 2019, this country was the main supplier of oil to the EU with a market share of 31%. The distribution by major areas was then fairly balanced: 18% for the Middle East, of which nearly half for Arabia, 17% for Africa, 13% for Europe, 10% for North America and 10% for Central Asia. Unsurprisingly, geography partly dictates the choice of providers. Russia’s weight was close to 80% in certain Eastern countries, less than 20% for Western countries, which are more dependent on African and Middle Eastern oil. Regarding gas, Russia was also the EU’s main supplier, with a market share exceeding 40%, ahead of Norway 25%, the rest coming from North Africa or liquefied gas (LNG). The gas market is highly segmented as most trading takes place through pipelines. Then, the dependence also depends on the geography. Russia was in a quasi-monopoly for the supply of Eastern countries. Its market share was around 50% in Germany and Italy, less than 15% in France and Spain.

The war changed supplies

It is easier to find substitute suppliers for crude oil than for gas because of the importance of the oil trade by ship rather than by pipeline. However, this is not without some political contortions. As part of the latest round of sanctions, the EU also plans to stop all purchases of crude oil from Russia by sea by the end of 2022.

From the summer of 2021, Russian gas deliveries had been reduced under the pretext of maintenance work, surely to put pressure on to speed up the commissioning of the Nordstream gas pipeline. So there were already tensions in terms of energy, but nothing comparable to today. In response to the invasion of Ukraine, now an EU candidate country, Europe sanctions Russia. In retaliation, Russia reduced its gas deliveries. By the end of 2021, Russian gas imports had fallen to 70-80% of normal. In March 2022, just after the invasion, deliveries had rebounded, either as a token of appeasement to the Europeans, or because Russian stocks were in excess. The relapse has since resumed. For the EU, Russian gas imports are at 40% of normal, giving a boost to gas prices. This is one of the main causes of the inflation shock suffered by Europeans.

In the event of a further drop in Russian deliveries or a complete shutdown, it will no doubt be necessary to go through administered supply management, supplemented by aid mechanisms to prevent the exorbitant costs of energy lead companies to bankruptcy. Various countries are already working on contingency plans of this type in order to determine which criteria would make it possible to distribute rationing between types of economic agents or between sectors and to limit its cost.

The impact of rationing for Europe

Since the beginning of the war in Ukraine, there has been a lively debate between experts to estimate the economic cost of a cut in Russian gas supplies. A collective study published in Germany estimated that GDP would fall between 0.5 and 3 points compared to the base scenario without rationing. This range is so wide that it covers very different scenarios, ranging from stagnation to a severe recession. In its own study, the Bundesbank envisaged a contraction in GDP at the upper end of this range. In France, the Conseil d’Analyse Economique resulted in a minimal fall, of the order of 0.15 and 0.3 point of GDP. These calculations are crucially based on the elasticity of production to the quantity of energy available and the whole debate centers on the estimation of this elasticity. These models are useful for giving orders of magnitude, but no one has a relevant point of comparison to accurately assess the macro repercussions of the current energy crisis. No one can say either how long or how severe any rationing would be. In any event, production would be disrupted since certain branches of activity would simply be shut down. As in the case of the pandemic, the response should be direct intervention by States in the conduct of economic affairs, either to prioritize priority sectors for access to gas or to compensate for losses.

#Energy #crisis #Europe

Share it