INSIGHTS
2022 Russian-Ukrainian Conflict, European Energy Crisis and Resource Diversification Agenda
İhsan Onur Yiğit
03.11.2022
The global upheaval following the Russian military operation against Ukraine in 2022 seems to constitute an unprecedented kinetic dimension. Russia’s weapon of choice against the EU and NATO economies in specific – and the global economy in general – is primarily that of withdrawal in energy supply. The grand majority of reliable sources appears to imply that the currently inextricable dependence of EU countries on Russia for stable natural gas supply is set to render the 2022-2023 winter and beyond extremely difficult to handle.
The number of catastrophic scenarios drawn up by credible authorities in the field is alarming. Although the harshest hits of the winter is yet to arrive, the global economy and energy market have already been suffering from dazzling volatility and uncertainty for months due to transnational problems that sprang up with Russia’s military move in February 2022. Be that as it may, there are paradigm-shifting opportunities for conscientious economic growth along with severe dangers in relation to this state of affairs.
It goes without saying that enterprises and organizations should maintain prudent standards so as to strictly refrain from evaluating a humanitarian crisis on opportunistic terms. It would be direly out of tune with modern business standards and best practices to hold a stance that is primarily oriented towards economic and financial gain. At any rate, this particular conjuncture fueled by the self-isolation of Russia is no exception. It would not only be the most resolute but also the smartest choice to defend a primarily sustainability-oriented approach; if merely to the end of achieving long-term sustainable advantage, let alone an ideal of collective value creation.
The strongest impact on current energy prices comes from natural gas, currently accounting for around 25% of Europe’s energy supply and the prices of which have skyrocketed in 2022. Prior to the Russo-Ukrainian conflict, up to 40% of natural gas was imported from Russia. Following the invasion, Russia started to incrementally reduce its supply as a counter-measure to the sanctions placed by the EU and NATO, taking advantage of European dependence as well as high prices that compensated for lower export volumes. As the primary natural gas importer from Russia, Germany now has to turn towards other suppliers such as Norway. However, if Norway supplies more natural gas to Germany, it will start to run out for other customers such as the UK, which is especially vulnerable to such disruptions since it produces 42% of its domestic energy using natural gas. It is currently estimated that the average price of natural gas could shoot up to 7,700 GBP in 2023.
Natural gas is the main mover of electricity prices in Europe, which is also made worse by problems with other energy sources. Many rivers in Europe are at record-low levels, adding to a downturn in the efficiency of Europe’s network of nuclear power plants with particular regard to France, which is the greater European nuclear energy producer. In addition, Norway has warned that it will limit energy transfers to Europe, in case water levels in its hydroelectric plants remain low. This would prove problematic for German inland shipping as well, where around one-third of coal, oil and natural gas are shipped along the Rhine. The aftermath would be gravely costly on ordinary consumers, who are increasingly affected by unrelenting inflation in Europe, where natural gas prices reach up to ten times higher than in the USA, illustrating the significance of alternative infrastructure and source diversification for resistance to energy extortion.
As one of the first energy maneuvers after the invasion, Russia paused shipments through the Yamal pipeline. Eventually, they also started to cut supplies through Nord Stream 1 by curtailing deliveries to 40% and 20% of capacity respectively, due to alleged turbine malfunction. Germany had to take a series of actions for sending the turbines to Canada for repair, circumventing existing sanctions. Nonetheless, it all amounted to a mere ‘wait-and-see policy’ since it was declared in September that Russia’s state-owned energy corporation Gazprom is halting Nord Stream 1 natural gas shipments until further notice. All in all, it is more than evident that Europe needs to prepare for receiving little to no natural gas from Russia.
The IMF estimated in July 2022 that for Czechia, Hungary and Slovakia, discontinuation of natural gas from Russia might diminish GDP by up to 6%. In correspondence, global economic growth might fall by 2.6% in 2022 and an additional 2% in 2023. In conjunction with their tour de force with regard to their energy hegemony over Europe, Russians are burning their excess natural gas that is approximately worth around 8.4 million GBP each day, which amounts to 0.5% of European daily demand. This is also a deeply concerning environmental issue that adversely impacts the climate near the Arctic Circle. In due retaliation, Germany has raised energy prices by nearly EUR 500 and is now preparing an aid package of a colossal EUR 65 billion.
German Economy Minister Robert Habeck stated “The alternative would have been the collapse of the German energy market, and with it, large parts of the European energy market.” Nonetheless, Germany is determined to maintain the policy of moving away from nuclear power as the cleanest and most efficient source of energy, which they actually have at their full disposal in case of need. Although Germany will keep two nuclear power plants ready until the third quarter of 2023, their decision to eliminate the use of nuclear energy as a reaction to Japan’s Fukushima nuclear disaster remains unswerving. Nonetheless, Japan itself is counterintuitively returning to nuclear energy, announcing large-scale investments aimed to mitigate their domestic energy issues.
In 2021, Germany was producing 12% of its electricity using nuclear energy. In 2022, this portion has declined to 6%. At this juncture, Germany is vigorously investing in temporary LNG [Liquefied Natural Gas] terminals to the end of importing LNG from Qatar and the USA, along with other energy partners. Concurrently, German citizens remain vigilant and are gathering wood in preparation for a presumably notorious winter. German Chancellor Olaf Schultz reassured the public and indicated that they will survive this winter, adding that Russia is no longer to be considered a reliable energy partner. In addition, the European Commission has revealed that they are working on long-term structural reform of the electricity market. All implications are that the EU is considering to intercede so as to enforce a limit on the price of natural gas and electricity.
Will imposing ceilings on the prices be sufficient to salvage energy supply issues in European countries? A ceiling on natural gas has already been enforced in Portugal and Spain, while France has done so for electricity. Portugal and Spain now pay natural gas suppliers the difference between the market price and the ceiling set at EUR 40/MWh. This path has been criticized since such an arrangement might prove to be a long-term subsidy in practice. This can even have the ceilings increase the demand for energy. This happened with Spain, where the ceiling on the price led to a 42% increase in production using natural gas. This is why it seems smarter not to interfere with the supply-demand dynamic in the market while providing support to those susceptible to price disturbances. Additionally, political reports indicate that the EU is considering tariffs on excessive profits of energy companies generating electricity from sources other than natural gas and taking advantage of the status quo.
It is not a matter of debate whether there is a complex crisis to be reckoned with. The menace of a large-scale recession is looming over the entire globe. Kickstarted by war complications that led to bilateral sanctions and insufficient natural gas supply, European countries who are deeply dependent on Russia for energy does not seem to have a chance in 2022 winter and beyond. Does this stand to reason as accurately as it has been promulgated? In order to address this problematique, it would be useful to view the problem from another aspect and look back in history at the 1973-1974 oil crisis, during which Europe went through severe troubles with the supply of oil, the prices of which were momentously escalating, similar to those of natural gas today. In 1972, Europe’s dependence on oil was dire and western countries relied on it to produce around 60% of their electricity, which is far more than the reliance on natural gas today. Virtually all the oil was imported from North Africa and the Persian Gulf. In 1973, Egypt and Syria organized an attack on Israel, which prompted a string of events that resulted in a decline in oil production and the price of crude oil quadrupled in a matter of six months.
In 1973, oil from the Arabian Peninsula amounted to 72% of all western European consumption. Abruptly, up to 20% of the crude oil was set to run out, which led to tremendous inflation and a deep recession in 1974. Still, the worst predictions of the time never came true and the winter passed with little to no blackouts. After the fact, European countries started to take actions for energy source diversification. The UK hastily developed its North Sea oil exploration projects and France expedited its nuclear program. Although the USA depended heavily on imports for its energy for long, it has been steadily advancing towards energy independence and has become a standalone energy powerhouse in recent years, exporting more energy than it consumed for the first time in seventy years in 2019.
The 2022 energy crisis and beyond might prove to be acutely troubling for many in the short run. However, it may prove to be counterintuitively beneficial in the long run as the stimulus for EU countries to accelerate their endeavors to the end of becoming energy independent. The scale of the 1973-1974 oil crisis was even larger than the current one and it stands to reason that the 2022 energy crisis can be overcome with nowhere near the anticipated level of catastrophe. Regardless of the anti-nuclear attitude in Europe, there is now more confidence in pro-nuclear policies. The UK, France, Finland and Slovakia are in the course of putting up new nuclear power plants; while the Czech Republic, Poland, Hungary, Romania and Slovenia are in the planning phase for building new ones. In case there is no bet on nuclear energy, considerable pressure will be put on renewable energy sources. The current crisis provides enough motivation for alternative energy sources, especially with regard to renewable energy. Within the context of contemporary movements towards sustainability and ESG [Environmental Social Governance] in global business, energy diversification through renewable sources continually proves a matter to be taken seriously.
REFERENCES
https://foreignpolicy.com/2022/08/26/europe-energy-crisis-natural-gas-economy-winter/
https://www.reuters.com/business/energy/why-russia-drives-european-british-gas-prices-2022-09-02/
http://dw.com/en/germany-stockpiling-wood-in-fear-of-gas-shortage/a-62601419
https://foreignpolicy.com/2022/08/30/europe-energy-crisis-bad-winter-russia-ukraine-gas/
https://history.state.gov/historicaldocuments/frus1969-76v36/d223
https://www.ft.com/content/ff5a4824-3dfb-4668-9ad7-b0367e57b6bc
