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Europe’s energy crisis is very far from over – The Economist – 30.10.22

We war game what will happen next .

IN MID-OCTOBER, OFF the Spanish coast, a number of slow-moving metallic domes emerged on the skyline. They were tankers, pregnant with superchilled liquefied natural gas (LNG) and waiting for delivery at busy “regasification” terminals, where their liquid fuel is turned to gas before being transferred across the continent. Iberia has the biggest facilities in Europe, but congestion is building elsewhere, too.

The amount of LNG off European shores has hit 1.2m tonnes, according to Kpler, a data firm, up from 140,000 in August. At least the crews have balmy weather to enjoy. Across Europe, temperatures are unseasonably warm: southern Spain is still seeing 30°C days. This combination of plentiful gas and warm weather, which reduces demand for the stuff, is a nightmare for Vladimir Putin, and has led some optimists to declare that the end of Europe’s energy crisis is in sight.

For months Russia has sought to sow division in Europe and undermine support for Ukraine: first by demanding payment for gas in roubles; then by slashing flows through Nord Stream, its main pipeline to Europe; and then, in September, by shutting the conduit indefinitely. By paying over the odds, Europe has nevertheless managed to fill its storage facilities. As a result, gas prices have sunk to $32 per million British thermal units, from $100 in August. Meanwhile, Brent crude, the global oil benchmark, sits at $96 per barrel, well below the $139 peak it hit in March.

Yet Europe is a long way from the end of its energy crisis. Prices will rise when cold spells hit and other LNG buyers, particularly in Asia, compete for cargoes. Russia, faced with military setbacks, could further crank up the pressure. Mr Putin’s options include stopping all gas deliveries to Europe or vandalising infrastructure. Such measures—or the use of a tactical nuclear weapon—would trigger another wave of sanctions from the West. To understand how the energy war might develop, The Economist has worked with modellers at Rystad Energy, a consultancy. Our analysis suggests that complacency is dangerous. Things could get very bad, very fast.

Spanners in the spigots

We have simulated three scenarios. Even the first, under which relations do not deteriorate, is far from pleasant. It assumes that the Nord Stream pipeline remains shut. It also assumes that Europe follows plans to implement an embargo on Russian crude and prohibit local insurance firms, which have 90% of the global shipping market, from covering vessels carrying Russian oil—albeit with a big exemption. Non-Western buyers that agree to pay a capped price for Russia’s oil, set by America and the EU, are due to be allowed to purchase European insurance.

For Europe this scenario triggers a crisis but not a catastrophe. Supply cuts mean that by the end of 2022 the continent will have missed out on 84bn cubic metres (bcm) of Russian gas, equivalent to 17% of its normal annual consumption. Higher LNG imports have already plugged part of this hole, a smaller chunk is filled by greater piped flows from Azerbaijan and Norway, and another by painful but voluntary consumption cuts. Our simulation suggests that—even if the winter turns frigid, boosting demand by 25 bcm—Europe’s storage will allow it to get through the summer of 2023, by which point LNG imports may start to ramp up further.

Under this scenario, governments will not have to ration gas. Europe will, though, have to pay dearly for it. As Namit Sharma of McKinsey, another consultancy, notes, high prices have already led to shutdowns in energy-hungry industries, such as aluminium and ammonia. If Nord Stream remains shut for the whole of next year, Europe’s energy deficit will widen, requiring even bigger cuts in consumption. Gavekal, a research firm, estimates that a 1% drop in energy consumption in Germany or Italy reduces GDP by 0.5-1%.

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Europe’s energy crisis is very far from over – The Economist – 30.10.22
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