November 9, 2022
John Sirabella
Europe’s natural gas relationship with Russia began in 1981 to keep the peace during the Cold War. Germany believed that establishing an economic partnership would deescalate the tension, and Europe would be seen as an ally instead of a threat (Tabuchi, 2022). With the end of the Cold War, Europe and Russia’s relationship strengthened. However, conflict resumed in 2014 when Russia invaded and annexed the Crimean Peninsula from Ukraine. At the time, Germany attempted to impose sanctions on Russia for its aggression, and as a result, Russia retaliated and threatened to cut gas to Europe. Currently in 2022, Russia is again using gas as a geopolitical weapon in retaliation for European sanctions following the Russian invasion of Ukraine. Russia has slowed gas exports to Europe to 20% of its normal production, raising the issue that Europe must look for a new energy source (Glover, 2022). Russia’s actions could be the catalyst that accelerates Europe’s push for clean energy or cause a partnership with Northern Africa for gas. However, with a shortened supply, prices will continue to inflate to the point where gas is unaffordable or no longer available. With the rising Russian tensions, Europe must quickly transition to a new energy source for the wellbeing of Europeans and to stop Russia’s leverage over Europe.
Europe’s objective is to quickly find a new energy source as the winter approaches to keep families warm and the economy running. Europe is investing €5 trillion ($5.015 trillion) in renewable sources to make a long-term switch; however, these investments will not be ready to deal with the short-term crisis at-hand (Masterson, 2022). European officials have been meeting with leaders from Algeria, Norway, and Qatar to establish new energy deals (Adamson, 2022). Europe is also contemplating reviving old coal power plants to combat the shortage. Failure to find new sources before the winter could result in fuel rationing, closed factories, and millions out of work (Jamali, 2022). Energy is already at dangerously low levels with many big companies looking for alternatives. For example, Uwe Braun, CEO of Arcelor Mittal Hamburg (AMH), said in an interview, “Natural gas costs so much that we cannot afford to operate in the usual way” (Hautmann, 2021). Production and plant cutbacks like AMH’s are already widespread across Europe and having devastating economic impacts. Europe must act fast as the crisis will only get worse with the coming winter.
One outcome of the energy crisis is that Europe is taking the move to clean energy more seriously and is working with smaller countries whose economies will greatly benefit from a European partnership. Europe plans to spend €3.877 trillion ($3.8 trillion) on wind and solar projects and €1.531 trillion ($1.5 trillion) on green hydrogen developments (Marques, 2022). Europe plans to diversify and decarbonize the energy system and has set a new 2030 climate target plan (Nytorv, 2022). Additionally, Europe is partnering with different countries which is a great way to diversify its energy sources. For example, Algeria supplies natural gas to Europe and in return receives funds to promote economic efficiency, governance, and diversification (Reynolds, 2021).
However, the conflict can hurt consumers and businesses if energy costs are not lowered. Currently, Europe plans to establish an emergency price cap on natural gas (Sor, 2022). This plan sounds promising although it could decrease supplies to Europe as suppliers can sell gas to other countries offering higher prices. For gas-exporting countries, it is not economical to sell to Europe if they can get more money elsewhere. The plan could ultimately backfire and leave Europe powerless with the dangers of an approaching winter. German Chancellor, Olaf Scholz, gave an alternative recommendation of countering the rising gas costs by “negotiating with large natural gas suppliers on the spot market,” which is the live price at which commodities are bought and sold. (Sor, 2022). His suggestion would give both sides a voice to negotiate a better deal and lock in rates for the upcoming year. Establishing a cap can anger sellers as Europe indirectly takes their voice away. Scholz’s idea could benefit consumers, businesses, and natural gas suppliers.
Europe and Russia’s economic partnership has now become a geopolitical weapon forcing Europe to diversify its energy sources to protect its citizens and businesses. The situation is pushing Europe to take green energy more seriously with an aggressive 2030 climate target plan (Nytorv, 2022). Also, it is allowing smaller countries, like Algeria, to form partnerships with Europe that greatly boost its economy and GDP. However, if the situation is mishandled it can increase prices even higher or cause Europe to be powerless during the winter. To conclude, Europe must act swiftly yet cautiously to diversify its gas sources to protect its citizens and prevent Russia from gaining leverage over them.
Further Reading
- Summary of the Russia-Ukraine Conflict
- Europe’s Gas Supply
- Europe Relies Primarily on Imports to Meet its Natural Gas Needs –
- Natural Gas Supply Statistics
Reference List
Adamson, Thomas. (2022). European Leaders Ink Energy Deals in Bid to Sidestep Russia. AP News. https://apnews.com/article/russia-ukraine-africa-italy-algiers-d248b68f6d17714ee8cebcdba2e39dec
Glover, George. (2022). Russia has slowed flows of gas to Europe to a trickle – and the energy crisis could drag on until 2025. Business Insider. https://www.businessinsider.in/stock-market/news/russia-has-slowed-flows-of-gas-to-europe-to-a-trickle-and-the-energy-crisis-could-drag-on-until-2025-goldman-sachs-says/articleshow/93190752.cms
Hautmann, Daniel. (2021). Future Hamburg Talk Meets … Dr Uwe Braun, CEO of ArcelorMittal. Hamburg News. https://hamburg-news.hamburg/en/congresses-events/future-hamburg-talk-meets-dr-uwe-braun-ceo-arcelormittal
Jamali, Lily. (2022). Coal Makes a Comeback as Europe Tries to Avoid an Energy Emergency. Marketplace. https://www.marketplace.org/2022/10/19/coal-comeback-europe-avoid-energy-emergency/
Marques, Clara. (2022). Europe’s Path to Clean Energy: A $5.3 Trillion Investment Opportunity. Bloomberg NEF. https://about.bnef.com/blog/europes-path-to-clean-energy-a-5-3-trillion-investment-opportunity/
Masterson, Victoria. (2022). How much will it cost Europe to switch to clean energy by 2050? World Economic Forum. https://www.weforum.org/agenda/2022/04/bnef-european-energy-transition-2022/
Nytorv, Kongens. (2022). 2030 Climate Target Plan. European Environment Agency.
Reynolds, Michael. (2021). The European Union and Algeria. Europa.
Sonnichsen, N. (2022). Natural Gas Stockpile Supply in Europe 2021, by Source and Region.
Statista. https://ec.europa.eu/info/departments/agriculture-and-rural-development_en
Sor, Jennifer. (2022). A price cap on natural gas could swipe supplies away from energy-strapped Europe, German chancellor warns. Yahoo Business Insider. https://news.yahoo.com/price-cap-natural-gas-could-134859915.html
Tabuchi, Hiroko. (2022). How Europe Got Hooked on Russian Gas Despite Reagan’s Warnings. New York Times. https://www.nytimes.com/2022/03/23/climate/europe-russia-gas-reagan.html#:~:text=In%201981%2C%20Reagan%20imposed%20sanctions%20to%20try%20to,of%20fuel%20to%20America%E2%80%99s%20critical%20allies%20in%20Europe.