Even six months ago, it was almost inconceivable that Moscow would cut off gas supplies to Berlin. Now this scenario is probably the favourite.
Germany on Thursday raised its gas emergency to its second highest level. The change was not unexpected – Russian gas giant Gazprom cut flows last week along the important Nord Stream 1 pipeline – but nonetheless indicated Berlin’s growing fears. European LNG and energy prices, which rose last week, made further gains.
After decades of reliable gas supply, regardless of the political climate, Russian President Vladimir Putin now appears ready to use his energy weapon almost openly against his longtime European patron. Moscow cut off Poland and Bulgaria earlier this year, but it was largely symbolic as their contracts were expiring soon. Germany has fewer alternatives to Russian gas. Reducing its flows is audacious, even if it is done indirectly – Moscow blamed Canada for blocking an air compressor that underwent maintenance on its territory.
Berlin is concerned that Mr. Putin may go further. He’ll have a chance: Gazprom will soon decommission Nord Stream 1 for annual maintenance. Its reopening can be postponed or even postponed indefinitely.
As a cheap and relatively clean fossil fuel, natural gas is becoming increasingly important in power generation, heating, and industry. But pipeline gas is a powerful geopolitical weapon because pipelines cannot be moved easily and it takes years to build new pipelines. Inflexibility punishes buyers and sellers when flows stop, unless they have ready alternatives. LNG creates some flexibility, but it remains a limited market. Germany, which previously backed another Nord Stream pipeline, is now seeking to get the LNG facilities in place.
Last winter, Europe was worried about running out of gas after Gazprom allowed storage in the area to run unusually low. It turned out to be a taste of things to come. If Nord Stream flows continue at 45% of capacity, European storage levels will be at 69% at the beginning of November, while a complete halt will leave stocks at around 60%, Wood Mackenzie estimates. “In both cases, we will run out of storage throughout the winter, unless other measures of demand or supply are taken,” says Katerina Filippenko, an analyst at the consultancy.
The European Union has a plan. It has been buying gas from elsewhere, and more pressure will drive up LNG prices again, particularly as China lifts its pandemic-related lockdowns. Europe is also building more renewable energy sources and installing energy-efficient appliances, but these take time. At the other end of the green spectrum, many countries are reopening or extending the life of coal-fired power plants. There are hints that Germany may even consider keeping its nuclear facilities open for a longer period. The problem was exacerbated by major outages in the French nuclear fleet.
While each European country has its own contingency plan, Germany’s approach is particularly important to the region’s economy. The last step means ‘gas companies don’t have to sell old-fashioned’ [contracted] Prices, says Sam Ari, an analyst at UBS. This is good news for gas suppliers but punishing for many users. These can choose to reduce or try to exceed the increase, which leads to increased inflation.
If the flow of gas in the pipeline stops, it will be rationed, prioritizing households and critical infrastructure. Many industrial users will face higher costs and supply cuts, while some may shut down completely. More inflation seems certain. Job losses and recession are very likely. George Zachmann of think tank Bruegel warns that in general in Germany “there is essentially brinkmanship, rather than the implementation of a well-designed plan. Given how little time we have before winter, the level of panic is actually surprisingly low.”
Berlin once saw little danger that Russia would turn off the taps. Those possibilities have changed rapidly and dramatically. Unfortunately, Europe’s energy options have not.
write to Rochelle Toplensky at firstname.lastname@example.org
Copyright © 2022 Dow Jones & Company, Inc. all rights are save. 87990cbe856818d5eddac44c7b1cdeb8