Europe is facing an unprecedented gas crisis.
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Europe is facing an unprecedented energy crisis that is pushing the economy closer to recession and posing serious questions about the region’s climate ambitions.
CNBC looks at how Russia, led by President Vladimir Putin, is putting pressure on gas supplies to Europe and what this means for the future.
Russia cuts deliveries
Russia has significantly reduced the flow of natural gas to Europe since Western countries imposed severe sanctions on the Kremlin after the unprovoked invasion of Ukraine on February 24.
Moscow denies that it uses gas as a weapon, but Europeans complain that Gazprom, the Russian state energy company, is no longer a reliable supplier. Reduced gas supplies from Russia are a problem for EU countries, as it used to import about 40% of its gas supplies from the country.
Data from Nord Stream, the operator of a pipeline (Nord Stream 1) connecting Russia to Germany, confirms that less gas volumes are going west.
Just last week, deliveries through Nord Stream 1 were cut from 40% to 20%, with Gazprom citing maintenance issues
German Economy Minister Robert Habeck said Gazprom’s technical excuse was a “farce”. Supply was halted shortly before the last reduction, and maintenance work was completed between 11 July and 21 July.
According to the European Commission, the executive branch of the EU, 12 Member States are already affected by the reduced gas flows and a handful of others are completely cut off.
Top EU officials say Russia is “blackmailing” Europe and “arming” its gas supplies. Moscow has repeatedly denied the allegations.
“We have to be ready, there could be complete disruption in the near future” [the] future, and that means we have to have a plan,” Kadri Simson, Europe’s energy commissioner, told CNBC last week.
European leaders are concerned about a complete shutdown of supplies, especially as many industries use the raw material as a raw material in their production process.
In this regard, attempts have been made to seek alternative suppliers and other energy sources. However, this transition is a difficult task that cannot possibly be done in a short period of time.
The committee has asked EU countries to have a storage target of at least 80% by November. In June, according to the same institution, the gas level was just over 56%.
Natural gas prices rising
Natural gas prices have risen dramatically in the wake of the Russian invasion of Ukraine and even before that as Russia began to cut flows.
Every time Russia cuts its supplies to Europe, price pressures are mounting again, given the importance of the raw material for various sectors and given the lack of alternatives to Russian fossil fuels.
Salomon Fiedler, an economist at Berenberg, noted that natural gas prices in Europe are now “exorbitantly more expensive” compared to the 2015-2019 price average.
“In a normal year, the EU can use about 4.3 billion megawatts per hour (MWh) of natural gas. So if prices are 100 euros per MWh higher for a year and the EU has to pay these prices instead of taking advantage of some long-term fixed-price contracts, costs would increase by about €430 billion ($437 billion) – equivalent to 3% of EU GDP for 2021,” he said.
Higher prices then naturally seep through to the energy bills of companies and individuals throughout the block.
“European benchmark natural gas prices at the Dutch Title Transfer Facility (TTF) rose 15% to nearly EUR 200 per megawatt hour as utilities bid for alternative supplies, raising concerns that consumers and industry will struggle to pay their utility bills. and that there will be a winter recession,” analysts from the consultancy Eurasia Group said in a research note on Tuesday.
Growth expectations shattered
With inventories declining and prices rising, the gas crisis is shaking Europe’s economic prospects.
The latest Eurozone growth metric, released Friday, showed GDP in the second quarter at 0.7% – above market expectations. But more and more economists are pricing in a recession for 2023.
The European Commission said earlier this month that the economy would grow by 2.7% this year and 1.5% next year. However, the institution also said that a complete cessation of gas supplies from Russia could lead to a recession later in 2022.
“Higher gas prices are driving up companies’ costs and pushing consumers’ budgets, leaving them with less money to spend on other goods and services. As a result, we expect the eurozone to enter recession this fall with a still high inflation,” Fiedler said. .