A war in Ukraine means an energy crisis in Europe

As the Ukraine crisis continues to escalate, the question on the minds of many Europeans is where they will get their energy from. 

Russia’s aggression in the past few weeks has not only strained its political standing, but also many of the country’s economic relationships. Russia is an energy superpower — the world’s third-largest producer of oil and the second-largest producer of natural gas. Fossil fuels contribute to 14% of the country’s economic output and more than 40% of the federal budget is dedicated towards the development of fossil fuels. 

The majority of Russia’s energy goes to Europe, and in recent years, Moscow has been employing various strategies to satisfy this demand. For instance, Russia used Soviet-era pipelines that pass through Ukraine and other former Soviet countries, along with building new ones like the controversial Nord Stream 2 project to Germany and a new gas pipeline to China, to expand to Asian markets.  

Russia and Europe have a mutual dependence on each other: Russia’s largest energy market is Europe and Europe relies on Russia to fuel practically everything. But escalating tensions and tougher sanctions on Russia pose a significant impact on the global energy industry.

They say hindsight is 20/20, but Russia’s actions in Ukraine are not entirely to blame for Europe’s current energy problems. In fact, by summer 2021, it was clear to many experts that with such low gas storage levels, an energy crisis was inevitable. Heading into winter, prices rose to new heights, and many firms resorted to shutting down production. As reported by Foreign Policy, European natural gas “topped $60 per million Btu, equivalent to an oil price of an astonishing $350 per barrel (Brent crude sells for around $90 a barrel, and the comparable U.S. gas price is around $4).” Bank of America similarly finds that European household energy bills will “rise another 50 percent this year.” 

So far, Europe’s strategies to address this crisis have all been geared towards the short-term. Many countries, like Denmark, Norway and France, have subsidized energy costs and sent household checks to offset rising costs. Energy prices have decreased in recent weeks, but that has been primarily due to warmer weather.

The reality is that these unusually high energy prices are the result, not the failure, of the gas market reform program that Europe has pursued for the past decade. Through deregulation, Europeans promoted a plan aimed at letting the market control the gas sector and have encouraged investments into natural gas pipelines, notably in Russia. The EU also pushed to make fuel more readily movable across borders — increasing competition and creating gas trading hubs. 

Leaving everything up to the market may create a short-term gain, however, it only makes the gas market more and more unstable. De-regulating and negotiating out of long-term contracts manifests into lower prices when there is ample supply. But in times with limited supply, as we are seeing now, prices need to be high enough to promote production or curb demand. Any savings from low market prices come at the cost of greater unpredictable spikes, in an already volatile industry where gas use fluctuates more than oil does. 

As the system they have relied on crumbles before their eyes, where does Europe turn? Europe’s current crisis presents the opportunity for Europe to reassess its energy priorities and craft new long-term goals, while also setting the stage for new energy leaders to emerge in Russia’s place.

In broad terms, Europe must adopt a strategy of greater integration. They should work together on their domestic initiatives and larger EU policies to manage natural gas and facilitate the energy transition. First, they should focus on strengthening gas storage requirements to ensure more supply security and flexibility. This could be through minimum storage requirements for the private sector or gas reserves where needed, as the United States and others created after the 1973 Arab Oil Embargo. This should be in conjunction with efforts to curb demand by making home heating systems more efficient and creating new pricing systems and technologies to shift the timings of gas demand. 

This crisis, fueled by over-dependence on natural gas, should be Europe’s catalyst to commit to energy transition and renewable investment. However, they should not act rashly. Realistically, they should continue investing in nuclear, hydropower and biogas, until newer sources are well-established enough to be sustainable. For example, Germany’s retirement of several nuclear reactors during the crisis, as part of its long-standing nuclear phase-out program, has only exacerbated its effects.

Although the EU is committed to renewable energy, a complete energy transition is not a viable goal in the current moment, especially in this time of crisis. As they start to shore up internal investments, Europe should turn to others to supply the gas previously provided to them by Russia. 

The past decade has seen the United States’ rise as a key stakeholder in the global energy sector, recently surpassing Saudi Arabia as the world’s largest oil producer. The United States has also become the largest gas producer, supplying 50% more natural gas than Russia. 

They also made great strides in exporting liquefied natural gas (LNG), and this year will become the world’s largest exporter of the product. However, compared to pipeline gas, LNG is significantly more expensive and requires large investments to construct and maintain the necessary equipment and facilities. 

Additionally, the United States’ ability to promote greater use of LNG was hindered under the Trump administration. Although initially voicing support for its use, natural-gas-industry leaders told The Atlantic that “it actually took longer to get favorable decisions out of the Trump administration than out of the greener Obama administration, in great part because Trump did not fill all five seats on the Federal Energy Regulatory Commission until after the November 2020 election.” 

This was only worsened by President Trump firing the commission’s chairman, in response to his support of carbon pricing, and as an act of revenge against one of the chairman’s sponsors, former Senate Majority Leader Mitch McConnell. 

Natural gas has also been restricted in both the United States and Europe due to the pervading belief that it is “un-green.” While natural gas does emit greenhouse gases, David Frum of The Atlantic argues that “[r]enewables alone simply will not get us there in time. Under current technology, renewables alone probably cannot get us there at all.”

It is most certainly not enough to address Europe’s current energy crisis, and experts feel this might be the time for the United States to step up to the plate and take on the challenge of fueling Europe. But they cannot do it alone. There are a few other contenders — Canada is on a similar trajectory to becoming an energy superpower, with its rich natural resources, however, they falter in terms of technology and human capital. 

The most interesting option is Qatar, a powerful Gulf state and strong ally and trading partner to the West. Qatar is one of the largest exporters of LNG — producing ⅕ of the global supply “safely, reliably, and at a low cost.” Although this is a possible solution, Qatar is working at its highest potential with much of its supply linked to long-term contracts. Even allocating all of its uncontracted supply would not be sufficient enough to fuel Europe unilaterally.

Qatar made this abundantly clear in meetings with both the Biden administration and EU leadership. However, they are willing to partner with the West, as they have in the past. This requires Europe to commit to long-term supply contracts with Qatar, while also working with the United States and possibly Canada, to avoid forming a dependency on any one source. 

The energy crisis is not reflective of the failure of Europe’s energy system. On the contrary, Europe’s reforms to liberalize European gas have been successful, they are just incomplete. These regulators, while opening up to market forces, failed to address the market’s inherently extreme volatility. As the greater region grows more unstable, Europe must provide stability in its industries — supporting their successful gas reform with effective tools to combat price volatility. And during their long-term shift to renewables, Europe can turn to other energy powers, like the United States, Canada, or even Qatar, to support them and wrangle them from the hands of Russian gas dependency. 

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