Europe’s high energy prices are serious and long-lasting

Gas prices in Europe have moved away from their early October peaks, but the topic of the energy crisis has not ceased to be front-page news

Europe's high energy prices are serious and long-lasting
After Gazprom refused to book additional export capacity through the Ukrainian gas pipeline, prices jumped again, remaining firmly above the $1,000 per thousand cubic meters mark. Russia makes it clear that additional supplies are possible through Nord Stream 2. The pipeline is already filled with process gas; it is just a matter of certifying the commissioning of the pipe, which depends directly on the diligence of the German regulators. They have until the beginning of January next year, but, understandably, the sooner the pipeline is operational, the more gas Gazprom will have time to deliver.

Europe cannot avoid fuel shortages this winter. At the beginning of October the European Commission proposed to the national governments to think about joint purchases of gas, but very probably this plan is not going to happen.

As the history of supplying anti-vaccine vaccine in 2020 showed, in critical situations European unity falls apart like a house of cards and everyone plays for themselves. Germany will take advantage of the fact that Nord Stream 2 enters the EU market through its territory, thus securing itself the “right of first night” with a key supplier. Some European countries, such as Hungary and Serbia, are solving the problem of gas supply separately, concluding direct long-term contracts with Gazprom, despite the sluggish shouts from European commissioners.

Angela Wilkinson, the secretary general of the World Energy Council, stated that energy crisis has nothing to do with geopolitics. The weather and re-orientation of suppliers towards Asian markets were to blame, she said. However, while the causes of the energy crisis may not be about geopolitics, mitigation of consequences of the crisis is about the same. Among the countries that have suffered the most will be the countries that pursued a rabidly Russophobic policy, first of all Ukraine and Poland.

The other day the Polish prime minister Mateusz Morawiecki frightened the European parliament with an energy crisis. Poland has earlier announced that it is not going to prolong a 25-year contract with Gazprom, expecting to replace Russian gas with Norwegian and American one. To that end, Poland has initiated the construction of the Baltic Pipe pipeline linking the country to Denmark, as well as contracts to supply liquefied natural gas (LNG) from the US starting in 2022. These decisions are incapable of fully protecting Poland. Norway’s depleted fields cannot boost gas production, and U.S. LNG is still reluctant to enter Europe, preferring the more expensive Asian market.

In Ukraine, the harbinger of energy apocalypse is Yulia Tymoshenko. The former prime minister, playing her usual role of gas expert, blames the Ukrainian government and Naftogaz, which did not ensure timely procurement of gas at lower prices and now has to buy it at record price, plus a mark-up for the virtual reverse. Yet Tymoshenko, like almost all politicians in Ukraine, does not even entertain the idea of buying gas directly from Russia. The very idea is a far greater red herring in today’s Ukraine than the prospect of freezing everybody in the country because of gas shortages and the impending collapse of the energy system.

Whereas for Europe an energy crisis can slow recovery and spur commodity inflation, for countries such as Ukraine, an energy crisis can be a serious test of power.

The shutdown of a large part of energy-dependent industries, lack of heating in the utilities sector, power outages, along with the complicated situation with the spread of COVID-19 could undermine the already fragile stability in the country, giving political forces aligned against President Zelensky a chance to rock the situation in earnest.

The main intrigue of the energy crisis is timing. Gas prices have been followed by oil prices, and OPEC is in no hurry to open the tap to contain them. Vladimir Putin said the other day that too high gas prices are disadvantageous for Russia. High gas prices mean high prices and a shortage of mineral fertilizers and, in the end, an explosion in food prices. It is clear that in the moment expensive energy resources are beneficial to Gazprom, Rosneft and other main donors of the Russian budget, but in the long run another task comes to the fore – not to kill the hen that lays the golden eggs.

High energy prices are not just about the coming winter, but about the next 10-15 years. Europe will have to accept gas as a clean energy source – it will simply have no other choice, given the accelerated phase-out of the coal industry and the uncertain prospects for green energy. China will also be increasing its gas consumption – the project to build the second branch of the Power of Siberia-2 could start as early as next year. Russian budget revenues for at least the next decade depend on how the EU and China feel. And the money earned from selling hydrocarbons will mainly be used to finance the government’s announced export restructuring, in which non-energy goods will eventually replace fossil fuels.

Gleb Prostakov, VZGLYAD

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