In Europe, mild temperatures, more diversified supplies and efforts to cut consumption have eased much of the pressure unleashed when Russia attacked its neighbour almost a year ago.
If Russia intended to paralyse Europe’s energy system by slashing exports of gas to the continent, it hasn’t worked for now. Gas inventories are far higher than the last five years’ average and prices have recently traded below pre-war levels.
Russia has been one of the world’s biggest exporters of gas, and Europe was its top customer. Russian gas used to be attractive to Europe because it was usually cheaper, easy to transport and almost always available.
As coal and nuclear plants across the bloc were shuttered in recent years, Germany and some other countries became even more reliant on the giant pipelines carrying gas from Siberia.
In fact, even before Russia launched its invasion of Ukraine in February 2022, Europe’s energy system was under strain. Demand for power had soared as economies bounced back from pandemic lockdowns and a long, harsh winter boosted demand for heating.
The result: power prices more than tripled in the second half of 2021. By September 2022, Russia had halted all supplies through a key pipeline to Germany. The euro tumbled as investors priced in the expected hit to Europe’s economy.
How did, then, Europe avoid an energy breakdown?
Firstly, by consuming less. As electricity and gas prices rose to at least four times above historical norms, home and business owners cut their energy use to make bills affordable.
The crisis entrenched what French officials called “energy sobriety,” with Morgan Stanley forecasting that Europe’s gas usage would be about 16% below its five-year average throughout 2023.
Norway supplanted Russia as the region’s biggest gas supplier, with exports gaining 8% in 2022.
Looking ahead, the more favourable energy situation is making economists more bullish.
Goldman Sachs and Bank of America recently dropped expectations that the eurozone will suffer a winter recession, saying lower gas prices will probably quicken the retreat in inflation.
Such views were bolstered by data last week showing that Germany’s economy probably avoided a contraction in the final three months of 2022.
Despite all the positive cues, the crisis may not be coming to an end.
Europe got hit by roughly $1tn (calculated by Bloomberg from market data) from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started.
After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel.
Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available.
The European Union will have to reduce its energy needs to avoid running out of gas next winter, according to the International Energy Agency.
IEA executive director Fatih Birol said that while the EU has made “significant” progress on reducing its reliance on Russian gas, “it is not yet out of danger”.
European officials have for long talked about the need to reduce this dependency. But since both sides benefited, and gas delivered by pipeline was often cheaper than other energy sources, little action was taken.
As a matter of fact, Europe’s energy policies for long have taken cheap Russian gas for granted. If anything, Europe should learn from its experiences to shape a sustainable energy security policy.
