Europe's Energy Crisis: Non-Crisis Or Existential Threat?
Europe remains in a very odd place as far as energy is concerned.
At present, Europe is anticipating a return to economic expansion and growth by mid 2023, with inflation receding on about the same timeline. That is the prediction of Paolo Gentiloni, European Commissioner for the economy.
"According to our forecast, we could start the recovery already in mid-2023 and we could have inflation decreasing in the second half of 2023," Gentiloni told Euronews on Tuesday afternoon.
"At the same time, of course, we know that if we are not able to bring the (Ukraine) war to an end, the risks on energy next winter, not this one, but next winter could be even worse than those that we are facing now."
It is therefore odd for Gentiloni to be speaking of an energy “crisis” in Europe, for while the prices for energy (fossil fuel) commodities are up year to date, the trend since the summer has been that of falling prices.
That has been the trend for natural gas, where the price is up 70% year to date despite falling 62% from its summer peak.
Even forward contracts on natural gas extending through April of next year have only recently begun their seasonal uptick in price, as winter settles in on the continent.
That has been the trend for Brent crude oil, where the price is up 14% year to date, despite falling 25% from its summer peak.
Thus, while energy is overall more costly now than at the beginning of the year, the overarching trend is towards lower energy prices. Falling energy prices makes for a distinctly odd sort of crisis.
Energy prices are down because energy demand is down—the usual reason for declining prices, a lack of demand relative to supply. This is worrisome for Europe because, particularly with regards to natural gas, Europe essentially has no supply, having exiled Russia from the community of nations over its invasion of Ukraine.
This is, as I have detailed previously, the “crisis of change” Europe is facing as it moves forward into 2023.
The challenge within that change is for Europe to sustain its economic and industrial models while it finds new sources of energy to replace Russian oil and Russian natural gas.
As Qatar’s recent multi-decade natural gas contract with China demonstrates, Europe is not having an abundance of success in securing those alternative sources.
While the broader geopolitical significance of that deal remains the reality that China is not making such arrangements with Russia, despite the many professions of a “no limits” friendship, that Qatar is making such deals with China and not with Europe means that Europe remains in a very precarious position with regards to energy.
Today energy costs in Europe, while high, are declining. There is no predicting what will happen to energy costs in Europe tomorrow, because as of now there are no complete replacements to Russian energy commodities.
Indeed, much of the reason why natural gas and oil commodity prices are on the decline in Europe is because Europe has reduced demand in large measure by simply shuttering a growing portion of its industrial plant.
Europe’s recession is at grave risk of becoming a severe economic depression, as industry overall simply….stops.
Without a stable energy outlook for the future—which Commissioner Gentiloni has conceded does not yet exist in Europe—that depression could entail an even more severe and more permanent consequence: de-industrialization.
Depending on how mild or severe the coming winter is for Europe, 2023 may yet allow a return to growth even as Europe continues its search for new stable energy sources. Even so, there is no denying that Europe’s easiest and cheapest energy sources come from Russia.
Should the Russo-Ukrainian War finally come to a conclusion, regardless of who wins, Europe can look forward to Russia’s return to the community of nations, and a resumption, on some basis, of Russia exporting energy to Europe. If the war ends with Russia having to abandon its terroritorial and geopolitical ambitions in Ukraine (a Russian defeat, in other words), Europe might even find itself in a strong position to secure improved trading terms for Russia’s energy commodities.
If the war does not come to a conclusion, however, Europe is stuck—it does not dare abandon the sanctions regime while Russia is prosecuting its war in Ukraine, as to do so would mean demolishing any pretense of geopolitical power for the EU itself. As humiliating as a defeat on the ground in Ukraine would be for Russia, abandoning the sanctions regime while Russia remains at war with Ukraine would be an equally humiliating defeat for the EU.
Yet that defeat is looming large for the EU. The brutal reality of the sanctions regime is that the EU imposed it without being properly prepared to weather its full consequences. Thus, even as Russia is engaged in a grinding—and ultimately self-defeating—war of attrition in Ukraine, something NATO is happy to encourage and enable, the EU is locked in an equally damaging war of economic attrition with sanctions. And it may yet lose that war, even as Russia loses the war in Ukraine.
Commissioner Gentiloni is merely saying the quiet part out loud: The Russo-Ukrainian War is costly to everyone. It is costing Ukraine dearly, particularly in human lives lost. It is costing Russia, both militarily and economically. And it is costing Europe its economy.
Russia’s war with Ukraine is becoming an unwinnable war on all sides. The economic devastation in Europe is already significant, and will become extreme and even catastrophic the longer the war drags on. The surest route back to prosperity for all concerned—Russia, Ukraine, and Europe—is for hostilities to cease and peace to prevail.
Until there is peace, the economy of Europe is set to simply implode everywhere, from London and Paris all the way to Moscow.
Which makes Europe’s “crisis of change” an existential crisis, and even an existential threat.
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