Russia’s energy weapon fails to fire as required

A Norwegian ship arrives last month at a new liquified natural gas terminal in Lubmin, Germany.
Winter warmth: a Norwegian ship arrives last month at a new liquefied natural gas terminal in Lubmin, Germany. © Getty Images

If 2022 witnessed the weaponisation of energy supplies in support of Vladimir Putin’s invasion of Ukraine, the winners and losers of the ensuing gas price conflict will become clear in 2023. Evidence points to the potency of energy as a weapon, but also to the unforeseen consequences of its use. There is every chance that what appeared to be a European energy crisis will backfire on Russia itself.

Even before the Russian president ordered tanks into Ukraine, he had been squeezing supplies of gas to the EU, which had been reliant on Moscow for 40 per cent of its imports. Soon after February’s invasion, the US and Europe imposed strict economic and financial sanctions on Russia, leading to skirmishes over the currency that EU nations would use to pay for its gas. But the real conflict erupted in the summer, when Russia halted gas supplies through the main direct pipeline to Germany, resulting in an energy crisis across the continent.

With fears of supply shortages over the winter, and IMF warnings of economic downturns as deep as during the Covid crisis in some eastern European countries, the price for European natural gas soared. The cost of a megawatt hour of gas went from €25 to more than 11 times higher — at just over €340 in August.

The seriousness of the crisis was for all to see. According to Berenberg Bank, such is Europe’s dependence on imported gas that, for every sustained €100/MWh increase in the price, EU members would need to pay gas exporters an extra €380bn a year — equivalent to 2.4 per cent of Europe’s GDP or 4.5 per cent of household consumption. Europe’s sanctions appeared to be hurting its own people more than those in Russia.

However, after a hot European summer of energy wars, autumn brought continental relief rather than fear. European governments saw the crisis as a significant threat and most cushioned the blow for households and companies, with plans to spend about 3 per cent of national income on energy subsidies, according to think-tank Bruegel.

More importantly, according to economics professor Ben Moll of the London School of Economics, evidence emerged that higher prices were encouraging households and companies to cut their gas consumption and find alternatives to Russian supply at relatively low costs — showing European economies to be more resilient than feared.

“The demand response was much larger and the economic costs were much smaller than many observers predicted earlier last year, in particular industry CEOs and lobbyists who predicted economic Armageddon if Russian energy were to stop flowing,” Moll says.

According to Carsten Brzeski, global head of macroeconomics at ING bank, “unless the continent gets caught out by a severe winter in the coming months, the risk of an energy supply crisis has become extremely low”.

© REUTERS/Yves Herman

Ursula von der Leyen, president of the European Commission, became confident enough to declare victory in December: “We have managed to withstand Russia’s energy blackmail . . . the result of all this is that we are safe for this winter.”

As 2023 started, European gas storage facilities were roughly 85 per cent full compared with an average of 70 per cent at the same time of year during the past five years.

The European price of natural gas was down by more than 75 per cent from its peak and hovering at around €75 per MWh in the first week of January. That was still three times normal levels and much higher than in the US, but a price that many households and industries would be able to manage.

Still, energy specialists warn against complacency. Chinese liquefied natural gas demand might soar this year as China’s zero Covid policy ends, they point out, accompanied by huge volatility in energy prices.

Fatih Birol, executive director of the International Energy Agency, has cautioned that “many of the circumstances that allowed EU countries to fill their storage sites ahead of this winter may well not be repeated in 2023”.

But the geopolitical outlook for energy appears much more favourable than it did when Russia first invaded Ukraine. Ole Hansen, head of commodity strategy at Saxo Bank, says that, with European gas demand down 10 per cent, “the continent has now ended up in a situation, unthinkable just a couple of months ago, where prices need to stay low in order to divert LNG shipments away from Europe, in order not to overwhelm storage facilities”.

Analysts say there will be further shifts in 2023 away from gas and towards renewable electricity generation, and more reorganisation of industrial processes — thus, increasing the security of Europe’s economy and leaving Russia short of its main gas customer.

Simone Tagliapietra, a senior fellow at Bruegel, envisages continued reductions in European gas demand. “Decarbonisation is being brought forward by years as structural changes are put in place,” he says, and “the effects are already being felt.”