Europe's Energy Crisis Begins with a $1 Trillion Bill

The European economy has been greatly impacted by the estimated $1 trillion in increased energy costs due to the conflict in Ukraine. This is the most severe economic crisis the continent has faced in decades, and it is only expected to worsen.

Following the winter season, the area will need to replenish its gas supplies with minimal shipments from Russia, leading to a heightened rivalry for tankers of the fuel. Despite the fact that more facilities to import liquefied natural gas are being established, the market is anticipated to stay tight until 2026 when extra production capacity from the US to Qatar is accessible. This implies that there will be no relief from high prices.

Governments have provided more than $700 billion in aid to help companies and consumers cope with the economic crisis, as reported by the Brussels-based think tank Bruegel. However, the emergency situation could persist for years, as interest rates continue to rise and economies are likely already in recession. This support that has been a relief for many households and businesses is becoming increasingly difficult to sustain.

Martin Devenish, a director at consultancy S-RM, noted that the total of bailouts and subsidies is an exorbitant amount of money. He further commented that it will be difficult for governments to manage the crisis in the coming year.

By the end of November, Europe had spent more than €700 billion in order to ensure their energy supplies and protect their citizens from sudden price increases.

The financial resources of governments are already stretched to their limits. Approximately half of the countries in the European Union have debt levels that exceed the 60% of gross domestic product limit set by the bloc.

Bloomberg has estimated that the total cost of increased energy prices for consumers and companies is around $1 trillion. This figure does not include any aid packages that may have been used to offset the cost. Bruegel, an international economic think tank, has also estimated the cost of increased energy prices, which was published in a report by the International Monetary Fund this month.

The effort to fill storage last summer, even with near-record prices, has provided some relief to the supply shortage for the time being. However, the cold weather is now presenting Europe's energy system with its first true challenge this winter. Last week, Germany's network regulator cautioned that not enough gas is being stored and two out of five indicators, including the amount of consumption, have become critical.

In order to reduce usage, businesses and consumers have been asked to cut back. The European Union has been successful in decreasing gas consumption by 50 billion cubic meters in 2021, however, the International Energy Agency predicts that there could be a 27 billion cubic meter deficit in 2023. This is based on the assumption that Russian supplies will be eliminated and Chinese LNG imports will return to the levels seen in 2021.For more information on Europe's energy crisis, readers can visit Bloomberg's blog.

According to Bjarne Schieldrop, chief commodities analyst at SEB AB, the need for gas is unavoidable and it is likely that Europeans will begin to stockpile it. He believes that this will create a "seller's market" for the next year and that people will be competing to fill their natural gas inventories before the winter season.

In the latter part of 2020, Europe's gas consumption increased significantly, with weather-adjusted demand 19% lower than the average for November.

Nord Stream, the primary source of pipeline gas from Russia to Western Europe, was damaged in an act of sabotage in September. Although the region is still receiving a limited amount of Russian supplies through Ukraine, the Kremlin's shelling of energy infrastructure puts this route in jeopardy. Without this gas line, it will be difficult to replenish storage.

In order to prevent a shortage, the European Commission has established minimum inventory levels. By February 1st, reservoirs should be at least 45% full to prevent depletion by the end of the heating season. If the winter is mild, the goal is to have storage levels at 55% by that time.

Imports of LNG into Europe have reached unprecedented heights, and new floating terminals have been established in Germany to receive the fuel. Government-backed purchases have enabled Europe to draw cargoes away from China, however, the colder weather in Asia and a potential strong economic rebound after Beijing lifted Covid-19 restrictions could make this more challenging.

China National Offshore Oil Corp.'s Energy Economics Institute has predicted that Chinese gas imports will increase by 7% in 2023 compared to the current year. The state-owned company has already begun to secure LNG supplies for the following year, which puts it in direct competition with Europe for any extra shipments. This year, China's decrease in demand was equivalent to approximately 5% of the world's total supply.

China is not the only issue that Europe is facing. Other Asian nations are also taking steps to acquire more gas. Japan, which is the leading importer of LNG in the world this year, is thinking about creating a strategic reserve and the government is looking into subsidizing purchases.

The average price of European gas futures this year has been around €135 per megawatt-hour, with a peak of €345 in July. Jamie Rush, chief European economist at Bloomberg Economics, has warned that if prices go back up to €210, import costs could reach 5% of GDP, potentially pushing the shallow recession being forecast into a deep downturn. This could lead to governments having to scale back their programs in response.

Piet Christiansen, chief strategist at Danske Bank A/S, stated that the type of assistance provided will shift from a comprehensive, immediate approach to more specific measures. He added that the amount of aid will be reduced, but it will still be available during this transition.

This year, German households may be faced with the possibility of paying double the amount for energy.

An appraisal based on suggestions from Germany's Gas Commission has been made.

Germany, which relies on cost-effective energy to manufacture items ranging from cars to chemicals, is at a disadvantage when it comes to competing with the US and China due to high energy costs. This puts pressure on Chancellor Olaf Scholz's government to continue providing economic assistance.

Isabella Weber, an economist from the University of Massachusetts Amherst and the creator of Germany's gas price break, has stated that due to the potential political and social effects of the energy cost surge and its impact on the German economy, it is essential for the German government to intervene.

Maintaining a balance between providing energy to factories and homes in the present and investing in renewable energy sources for the future is a difficult task. Renewable energy is seen as the most viable solution to the energy crisis.

Veronika Grimm, an economic adviser to the German government, emphasized the importance of making the energy transition happen in order to overcome the crisis. She stated that a major expansion of renewable energy sources is necessary.