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The economic and political impact of surging gas prices in Europe

David Thomas / Oct 2021

Image: Shutterstock

Surging gas prices are threatening Europe’s economic recovery and fuelling political turmoil.

Energy policy in the EU has thus far been a preserve of national policy making, but in the wake of the gas (LNG) price crisis, politicians in Spain, France, Greece, Czechia and Romania are pushing for the EU to get involved.

The steep rise in prices could stall Europe’s economic recovery from Covid and potentially fuel inflation, although EU finance ministers, reassured by forecasters at the European Central Bank, are insisting that the rises are likely to prove temporary.

But a meeting of finance ministers in Luxembourg on October 4 revealed growing concerns.

Spain – one of the hardest hit by the price rises – urged the creation of an EU strategic gas reserve to protect EU countries from energy price fluctuations. France is calling for EU-level energy procurement in order to strengthen the leverage of member states in negotiations with global energy suppliers, such as Russia’s Gazprom.

All of this is reviving existing tensions between fiscally hawkish and dovish countries, and also fomenting new ones.

As one finance minister, who was present at a recent EU discussion of the situation, said: “It was very scary. Some countries really don’t seem to have made intellectual progress since the early 1970s … for some, price controls and fiscal expansion are the solution to everything.”

While price controls look unlikely, the EU Commission is likely to attempt to calm the storm by setting out a so-called “toolbox”, consisting mainly of national measures – steps, which member state governments can take themselves in the short term and which would conform with state aid and competition laws, to soften the impact of higher energy costs on households and SMEs.

The Commission is also likely to issue a set of ‘reflections’ on longer-term energy policy issues, such as some of the more radical ones proposed by Spain, France and others, which may be given more concrete shape in the next EU Energy Package, due to be published by the end of the year.

What support there will be for such far-reaching measures, as an EU reserve or EU energy procurement, is hard to gauge, national energy mixes vary widely from country to country, with some countries more dependent on gas than others. Although the move out of dirty coal and into cleaner gas, as countries respond to new and tougher climate goals, has been a major element of the price rises.

In the case of Germany, the crisis and the outcome of the recent general election has reopened the bitter controversy over the Nord Stream 2 pipeline, which directly connects Germany to Russia via the Baltic Sea. The row had seemingly been laid to rest by U.S. President Joe Biden’s consent to the pipeline, which was in contrast to Donald Trump, a vigorous opponent of the project on security grounds.

Nord Stream 2 is currently waiting for approval from BNetzA, Germany’s Federal Network Regulator, after which the EU Commission must check the decision.

But it seems that there has been little progress by Russia’s Gazprom in disentangling its ownership of the pipeline from its status as the supplier of gas, as required by recent amendments to the EU’s Gas Directive, amendments which were designed to address concerns about Germany becoming overly reliant on Russian energy supplies.

Instead, Gazprom has mounted a legal challenge to those amendments in Germany’s courts.

A rapid resolution of these disputes has been made less likely by the electoral gains of Germany’s Greens and the free-market FDP, both of which look set to become members of the new governing coalition, along with the SPD, by the time negotiations conclude later this year. The former are opposed to the pipeline on environmental and ideological grounds, while the FDP puts its emphasis on the threat Nord Stream 2 poses to German security.

Forty MEPs have already written to the Commission, urging it to investigate whether there has been market manipulation by the Russian energy giant. Some of them suspect that Russian President Vladimir Putin, while not responsible for high gas prices, is at least exploiting the situation to put pressure on German Chancellor Angela Merkel to speed up the necessary authorisations, while she is still in office and is in a position to do so.

Others, such as the Economics Affairs Minister of Saxony-Anhalt Sven Schulze, in an op-ed in the October 7 edition of the FAZ, are urging immediate approval of the pipeline.

Schulze calls in his article for an “…an end to detached, foreign policy intrigues in Brussels and Berlin to further prevent the commissioning of the pipeline." 

The EU Commission, which is characteristically staying out of this fight, says it has so far found no evidence of Russian market manipulation and notes that Gazprom has fulfilled its long-term contracts. Although, the same spokesperson also told journalists that it is not doing any “extra”.

As the EU’s Agency for Cooperation of Energy Regulators said in a recent analysis of the gas price rises:

“Pipeline imports have kept steady, not responding to surging demand.”

The same report acknowledges that Russian production is facing “certain physical constraints” (i.e. maintenance shutdowns and accidents), but also makes a cryptic aside, about “possible tactical considerations”, which is unlikely to calm speculation that the Bear is up to his old tricks.

All of this puts Germany and Europe on the horns of a terrible dilemma.

Making Nord Stream 2 operational would indeed make a decisive contribution to bringing the crisis to an end. The EU’s energy regulators made that much very clear in a meeting with EU finance ministers in Luxembourg on October 4.

The presentation by ACER, cited above, points out that current market forecasts of a sharp fall back in LNG prices by Spring of 2022 are predicated on the expected opening of the pipeline. Other major factors in that forecast include an easing of global LNG supply constraints, a decrease in global demand and a pick-up in renewable energy production.

For the moment, a bitter European winter seems unavoidable.

As the same report from ACER forecasts, should LNG and pipeline imports not increase, current storage stocks will be tight in the face of a winter, similar to that of 2020-21, and will fall short in their ‘worst scenario’.

 

David Thomas

David Thomas

October 2021

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