Foreign Policy
11/14/2022

An Update on the European Energy Crisis

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This brief explains how recent EU countermeasures, combined with Russian retaliation, has forced Europe to promptly secure alternative forms of energy, especially as winter approaches. However, it also highlights how the EU dependency has ultimately set the stage for the current circumstance, as well as how recent disputes have halted progress to address those circumstances. Finally, it considers the current status of the EU energy crisis and proposes the next steps that the EU should take to efficiently reduce energy consumption in the short term, as well as alternative energy production in the long term.

Introduction

On October 20th, EU leaders met in Brussels for a two-day summit with one thing on the agenda: the energy crisis. 27 heads of government and state debated about a new set of emergency measures for oil and gas consumption, especially as the fuel and gas reserves run low. The energy crisis comes as a result of punitive measures pursued by both Russia and the EU, with the EU leveraging its position as Russia’s largest consumer and Russia leveraging its position as the EU’s largest supplier of fossil fuels and gas. With the ongoing war in Ukraine, tensions continue to escalate between the two blocs, manifesting into an imminent energy crisis. 

Pointed Summary

  • Deficit of fuel and gas for upcoming the upcoming winter 
  • European businesses and consumers in outcry over high gas prices and rising inflation 

Relevance

EU state heads are scrambling to come up with alternatives and mitigating policies in the face of the energy shortage, especially as winter approaches. Without a sufficient amount of energy stored for the upcoming cold months, European nations risk the danger of facing widespread blackouts and the absence of heating available for EU citizens. Furthermore, as the supply of fuel and gas decreases, European civilians are experiencing record inflation for necessary goods such as food, gas, and industrial necessities. Without immediate action, the circumstances for EU civilians are expected to get even worse, an issue that will undoubtedly cause a public outcry among EU nations. 

History

On February 24th, following the Russian invasion of Ukraine by land, air, and naval forces, NATO countries, such as the U.S. and U.K. announced a number of sanctions to target Moscow’s influence on the global economy. The EU soon followed suit. Although these sanctions were originally targeting oil, ban on provision of credits, and travel restrictions, packages of sanctions intensified. One of the most notable was the fifth package of sanctions in April of 2022, which included a ban on Russian coals, a full transactional ban and asset freeze on Russian banks, entry ban on Russian vessels and other fuels.

This was followed by the sixth package of sanctions in June of 2022 that put a complete import ban on all Russian seaborne crude oil and petroleum products which usually covers EU’s 90% of current oil imports from Russia.  Amid these sanctions, the EU also proposed a plan to cut Russian gas imports by two-thirds in order to develop energy independence and at the same time remove reliance on fossil fuels. As a result of these measures, Russia faced isolation from the global market, trade, and access to new and existing infrastructure and technology

As a result of the EU’s intensive countermeasures, Russia initially retaliated by reducing gas supplies to Europe via the Nord Stream 1 pipeline before suspending flows altogether in August, blaming Western sanctions for difficulties in transactions. Furthermore, the plans for the Nord Stream 2 pipeline were scrapped by Germany, although this was before Russia’s invasion in February. Shortly after the loss of Russian energy, inflation peaked at a record 7.5% in food and fuel cost. This was combined with rising oil and gas prices from recoveries in demand post-COVID-19, which altogether yielded record inflation in Europe.

With energy supplies low, EU nations requested civilians to reduce their energy consumption as a means to save up for winter, during which energy consumption is usually at its highest. So far countries have committed to reducing gas demand by 15 percent by March, but each European country’s difference in reliance on Russian gas has proved difficult in devising a cohesive plan. Because Europe’s power prices are set by the costs of the marginal producer, which is often gas-fired, the gas surge has become an electric shock as well, thus forcing EU nations to search for other alternative means of energy production. 

Tried Policy 

Nevertheless, while the Russia-Ukraine War did exacerbate the European energy crisis, the conflict itself was not the sole cause of the current situation. The prime problem for Europe is the continent's grave oil dependency on Russia. As of 2021, Europe receives about 45% of its gas from Russia. The majority of this gas is received via pipelines, like the underground pipelines that run from Russia to Germany Nord Stream 1 and Nord Stream 2.

This dependency gives Russia a leg up on Europe, as it holds the power to install embargoes on the sale of gas to EU states, such as the disputes in 2006 and 2009, in which Gazprom (the Russian state-owned oil company) cut off sales of gas to Ukraine as a result of political tensions. At the time, Europe received about 80% of Russian gas through Ukraine (Nord Stream 1 was not active until 2011), so by cutting off oil sales to Ukraine, Russia was cutting off sales to Europe.

However, this tentative position that Europe held didn’t dissuade many EU countries from pursuing Russian oil. The most egregious example of a Russian oil dependency is easily Germany. As of December 2021, Russian pipeline gas makes up 32% of the German gas supply. Because of this dependency, within two months of the invasion, Germany had imported 8.3 billion Euros worth of gas from Russia. 

This reliance on Russian gas has left the EU scrambling to find new avenues to acquire gas. However, these new avenues have not been able to adequately replace the hole left by Russian gas. The EU is currently on the cutting edge of the mission to decarbonize by 2050 and is known for its climate-change initiatives. However, according to Pete Harrison of the European Climate Foundation, “The data shows that we are off track.” And Harrison is right. The EU is unlikely to hit its 2030 decarbonization goals.

Furthermore, the EU recently tried to classify some gas and nuclear energy as “clean,” which is currently being challenged in court. This classification again delays the decarbonization effort. If Europe is relying on decarbonized industries to serve as the replacement for Russian gas, these delays in reaching decarbonization goals have meant that the hole left by Russian gas has not been fully filled. The lack of action by the EU to replace Russian gas has led to the current EU price spike. This current situation could have been avoided or, at least, mitigated if the EU as a whole invested in autonomous sources of energy sooner and if countries like Germany decreased their reliance on Russian gas. However, these choices were not made, and the EU finds itself in an increasingly intractable position.

Current Stances 

Although the EU has made an effort to distance itself from Russian energy with a 30% drop in fossil fuel imports, the European Union remained the largest importer of Russian fossil fuels in September 2022, spending around 100 billion euros on Russian fossil fuel imports. In early October EU leaders met in Prague and Brussels late on to discuss the Energy Crisis, but the results were less than satisfactory and left many questions unanswered. Some countries want to reimburse civilians for gas payments above a certain price, but the consensus seems to be far and between.

Others want to simply limit the price EU countries could pay for gas purchases, namely a price cap. If no disagreements on how to mitigate the effects of the energy shortage, there seems to also be widespread contention on how to address more long-term alternatives. For example, there was an escalating conflict between Germany and France over the MidCat pipeline, a proposed pipeline that runs between the countries. France has opposed the project, arguing it would take too long to relieve the current crisis and would perpetuate a reliance on fossil fuels. Germany disagrees and argues it could help Europe’s energy crunch.

Despite these disagreements, EU leaders have said they are making progress with joint plans to lower power costs, despite signs that divisions remain over how to deal with the region’s energy crisis.

In response to EU counter-measures, Russia has also taken actions to punish Europe. 

For example, Nord Stream 1, Russia's largest gas pipeline to Europe, has been closed indefinitely after a number of leaks were found in it, and a parallel pipeline, Nord Stream 2. The EU has indirectly accused Russia of deliberately causing the leaks, for which Russia has pointed fingers at the U.S. and the EU has been responsible. It is important to note that directly accusing Russia may only escalate the situation, which is why no actual entity has been held responsible.   

Either way, Russia has stated that the pipeline will remain closed until the EU lifts sanctions to allow for repair. Nevertheless, even without the EU, Russia has found other buyers. 

The emerging markets of India, China, Turkey, and Malaysia have been taking up Russian fuel, with imports rising significantly among the aforementioned nations since the start of the Russia-Ukraine War. Furthermore, the high energy prices have also been advantageous for the Kremlin, despite the loss of demand from the EU.

Policy Questions

Problem

A. Stakeholders 

In order to cut reliance on Russian oil, EU leaders have discussed plans to diversify oil and gas exports, as well as progress in renewable energy development. For instance, the President of the European Council Charles Michel announced that the EU should negotiate energy supply issues with Qatar, United Arab Emirates, Saudi Arabia, and Algeria. Moreover, Commissioner Kadri Simson noted at the East Mediterranean Gas Forum Conference that Cyprus can become a crucial short- or medium-term gas supplier. The Middle East and North Africa (MENA) countries together amounted to 18% of the EU’s crude oil imports and 12.4% of natural gas imports, with Saudi Arabia, Iraq, Algeria, and Qatar contributing the heaviest. Another alternative oil source is the Scandinavian country Norway, which expects to bring in about $109 billion from the petroleum sector this year — an $82 billion increase from 2021. Nevertheless, Norway, along with U.S. companies, has also come under fire for profiting from the EU during the Russia-Ukraine War. Regardless, the EU, in the short term, will have to rely on the Scandinavian region and other nations to make up for its shortage in supplies.

B. Nonpartisan Reasoning

Europe’s insecure energy supply has been a problem ever since the breaking out of the Ukraine war, yet the latest decision by Gazprom would dramatically reduce supplies, with the northwest region’s supply nearing zero. The cost of electricity has subsequently skyrocketed, inflating the basic goods like food and nonindustrial goods by 10%. The Baltic countries have especially been suffering, with Estonia experiencing the highest levels of inflation in the Eurozone. This has directly hit European consumers financially and is expected to worsen with greater energy consumption in the coming months. As such, as prices rise and the supply of gas remains low, the circumstance does not bode well for EU citizens. 

Policy Options

As winter approaches, it remains to be seen how, when, and if Putin’s war in Ukraine will come to a close. While some politicians push for negotiations and others demand stronger armament, the reverberating consequences of the ongoing conflict will continue to present policy challenges to European governments. Ultimately, dealing with the coming weeks, months, and years of conflict requires European leaders to take two steps to minimize the harms of its present energy crisis: 1) engage in import diversification paired with demand-reduction strategies, and 2) pursue alternative energy investments, chiefly in the renewable and nuclear sectors.

Import Diversification and Demand-Reduction

Import diversification was the first strategy pursued by European governments in the wake of the sanctions placed on Moscow. Being a preeminent strategy early on, diversification provided an immediate relief valve to increasing energy prices with minimal political repercussions. But this strategy is also inherently short-term, as there is a severe diminishing returns problem. With diversification as a sole pursuit, governments will be led to partner with nations that are not just inefficient energy producers, but ones that are actively committing human rights atrocities — complicity coming at the cost of energy. 

As the list of potential (and reasonable) partners becomes shorter, the fact will be that European governments will have to reduce their domestic demand for energy, a task that will only become more challenging as the winter months approach. Such a strategy is already in development with the EU passing a resolution that commits all members to a 15% demand reduction, but cuts will have to be more extreme if Europe wants to avoid a crisis. Stronger enforcement mechanisms would also be required; the EU cannot simply rely on requests for state-level cooperation because cuts to energy consumption, such as mandatory teleworking or heavy taxes on gas consumption, are deeply politically unpopular. 

The demand-reduction strategy should thus prioritize: 1) efficiency solutions and 2) country-level required cuts. Efficiency solutions can cut consumption up to 30% within the decade, and investments from the EU and other multilateral institutions into high-efficiency firms and ground-level energy efficiency R&D can hasten the transition. Secondly, the non-binding, political commitment made by EU members in July should be institutionalized. Cuts will have to be made at some point and mandating reductions now (and giving countries some flexibility in how this is accomplished) reduces the risk of hard rations and power outages come winter. 

Alternative Energy Investments 

Furthermore, the growing trend toward renewable sources of energy in Europe seems to come too late. Now, countries risk sacrificing long-term climate gains in order to avoid a disaster in the winter.

It is not clear that even the strongest investment regime into renewable energy would provide immediate relief to the energy crisis, but it may help provide the incentive for oil-consuming firms to adopt greener, more energy-efficient practices, and consumers to wane off fossil fuel energy consumption. 

Nuclear energy revival, however, does present a more immediate — though admittedly more politically difficult — answer to the crisis. Before the war, waves of nuclear facility shutdowns and phasing outs were in process. There was some hope early on among nuclear-energy-proponents that the restriction in supply from Russia would encourage a sort of nuclear renaissance, but this has not been the case

The refusal by European governments to revive nuclear energy infrastructure was a mistake: within the proper regulatory framework, investments in nuclear energy by Europe and the restarting of currently inactive facilities might both lessen the burden this winter and help avoid similar crises for years to come. Some countries — most notably Germany, which has delayed the phase-out of two plants to ensure energy security through winter — have hopped on the broader trend of holding off on nuclear phase-outs for the time being. This new effort, combined with pushes to revive currently inactive but still functional plants, will provide Europe with some energy-supply cushion over the coming months.

Conclusion

European policymakers and governments have done a lot to make the transition away from Russian gas and continue to uphold the strong international response to Putin’s aggression. Now, Europe is projected to consume 26% less natural gas over the next decade than it was prior to post-invasion policies. But the immediate future of this winter will rely on making some progressively increasingly difficult demand cuts. While long-term success relies on Europe’s decision to commit itself to alternative forms of energy that institutionalize a shift away from Russian supplies — and fossil fuels at large — its short-term success is reliant on bold, decisive action to cut demand and shift investments.

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