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Tuesday, January 31, 2023

How Russia’s gas blockade will impact Europe?

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Russia is Europe’s single largest source of gas. It depends on Russian natural gas supplies as it is economical and convenient, mainly carried by the vital undersea pipeline Nord Stream 1 connecting Russian gas to Europe through Germany. But recently, Russia has choked off the supplies of cheap natural gas that the continent depended on for years to run factories, generate electricity, and heat homes. That has made European governments scramble for new provisions and ways to blunt the impact as economic growth slows and household utility bills rise. Russia’s gas blockade of Europe has a long-term impact on its economy and stability.

Europe’s energy reliance on Russia

Russia has the world’s largest natural gas reserves and is the leading supplier of gas, oil, and coal to Europe. Europe imports about 40% of its gas from Russia before the Russian invasion of Ukraine. As the EU’s largest economy, Germany is Russia’s leading customer, paying Russia’s state-owned gas company 200 million euros. Nearly 25% of the EU’s energy consumption comes from natural gas, Oil, and petroleum (32%). Biofuels, renewable energy (18%), and solid fossil fuels (11%) make up the rest. That dependency on natural gas means reliance on Russia. Currently, the EU is the largest distributor of natural gas in the world, with a significant part of its gas coming from Russia (41%), Norway (24%), and Algeria (11%).

As Russian gas was easy to transport and almost always accessible been attractive to Europe, Its significance grew in recent years as several countries moved to end coal and nuclear power generation and production from their gas fields deteriorated. Gazprom, a Russian state-controlled company, was supplying about a third of all gas consumed in Europe till the war in Ukraine disrupted supplies and highlighted the risk of over-dependence on one energy supplier.  This shows that Europe would be heavily affected by Russia’s gas blockade; it has an adverse economic effect.

Challenges and impact on Europe

Russia’s gas blockade has already impacted Europe. Inflation hits record high, energy prices soar high, and gas prices are 10 times high than usual. This has provoked anxiety in Europe. The majority of homes in Europe utilize natural gas to heat their homes. It is a dominant source of energy for Europe. The challenge is that if we look at it from one viewpoint and say Europe is a bit more prepared, there are dual problems.

One is that the distribution of gas storage is not constant. Countries like Germany tend to have a higher share of storage. And Finland, for instance, have almost no storage; the United Kingdom also has almost no storage. These are historical alternatives, thus, even when taken together as a region, there is more excellent storage, and some countries are more vulnerable.

A further challenge is happening, especially in Germany and the Low Countries, and it’s that this lower consumption means that high power-intensive sectors, whether it’s fertilizer producers or a whole range of business trades, are looking at the expenses and are consuming, not as much of, which means output is decreasing.

In March, The EU intended to reduce gas imports from Russia by two-thirds in a year, but it has exposed difficulty in getting arrangements on further measures such as an absolute import ban. Germany depends on Russia for almost half of its gas supply. It has recently had to limit gas use in electricity production and appeal to citizens to conserve energy after Moscow cut some supplies. The supply disruption is also compelling Germany to use more coal-fired power plants. The UK is increasing its gas exports to continental Europe to support filling storage sites throughout the winter. The EU is also planning for longer-term energy freedom.

Economic Impact of Gas Blockade

By March 2023, the euro-area economy will probably shrink by more than 2%, with GDP in Italy and Germany falling as much as 4% and 3%, respectively. If physical constraints obstruct gas flows, the uneven market approach suggests that the negative impact on economic output would be particularly significant, as much as 6 percent for some countries in Eastern and central Europe where the intensity of Russian gas use is high and alternative supplies are scarce, particularly Hungary, the Slovak Republic, and the Czech Republic. Italy would also face significant effects due to its reliance on gas in electricity production.

The increased demand for natural gas and the shortage in supply from Russia have caused an increase in energy prices. For countries like Italy and Germany. Suppose Europe doesn’t get sufficient Russian gas. In that case, it could be challenging. While Italy has been looking for alternate energy sources, Germany doesn’t have as many alternatives.

We estimate it could mean a 65% industry curtailment in Germany if flows stopped coming entirely. It’s fundamentally hard to pivot away from piped gas. Gas pipelines cost billions of dollars, take years to install, and physically connect production and customer, making them long-term commitments in contrast to oil and coal, which may be diverted. That was the origin of Germany’s dependence on Russian gas, which only deepened over time. Today, dependence is getting in the way as the world attempts to punish Russia over sanctions.

WHAT IS EUROPE DOING TO EASE THE CRISIS?

Energy ministers from the European Union are meeting in Brussels to explore strategies for halting the rise in gas and electricity costs. They are under pressure to protect businesses and consumers.  European governments are increasingly concerned rising prices could lead to social unrest and political instability. Europe has aligned all the alternate gas supplies it could. For instance, Consignments of liquefied natural gas, or LNG, that emanate by ship from the United States and more pipeline gas from Azerbaijan and Norway. LNG is far more costly than pipeline gas, though.

Germany is keeping coal plants in a process that it was going to close to reduce greenhouse gas emissions. It also supports the alternative of re-energizing two nuclear plants set to shut down. The 27-nation EU has agreed on a plan to lessen gas use by 15% by next March. This is roughly the amount experts say will need to compensate for the loss of Russian gas. These conservation methods are currently restricted in member nations, nevertheless.

Regardless of the EU’s consistent emphasis on renewable energy, the crisis forces governments to reluctantly return to using fossil fuels. By 2030 Germany had planned to phase out coal entirely but is now forced to defer the project and immediately legislate to revive coal-fired power facilities as a temporary fix. The Dutch administration has reopened coal-fired power plants at total capacity to save natural gas. Otherwise, that would be used to produce energy.

A frigid future

Russia’s invasion of Ukraine has further darkened the international growth outlook. The European economy faced a grim setback, given trade, investment, and financial links with the opposing countries. Now, Europe is enduring a partial cutoff of natural gas exports from Russia, its biggest energy supplier.

The EU’s economic driving force depended on Russia’s gas for more than half and about a third of its oil. By the summer, the dependence declined to 26% for gas and 12% for crude. The standoff with Moscow led Germany to twice down on renewables and capitalize on LNG import facilities. But it will take years for those other sources to come online. In the meantime, the management was bracing heavily polluting coal plants. It subsidized alternative energy suppliers’ purchases to counterbalance the sharp fall in Russian gas imports.

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