I don’t think many Americans appreciate just how tense and tenuous, how very touch and go the energy situation in Europe is right now.
For months, as news of the Ukraine war receded a bit, it was possible to follow the energy story unfolding across the Atlantic and still assume an uncomfortable but familiar-enough winter in Europe, characterized primarily by high prices.
In recent weeks, the prospects have begun to look darker. In early August the European Union approved a request that member states reduce gas consumption by 15 percent — quite a large request and one that several initially balked at. In Spain, facing record-breaking heat wave after record-breaking heat wave at the height of the country’s tourist season, the government announced restrictions on commercial air-conditioning, which may not be set below 27 degrees Celsius, or about 80 degrees Fahrenheit. In France, an Associated Press article said, “urban guerrillas” are taking to the streets, shutting off storefront lights to reduce energy consumption. In the Netherlands a campaign called Flip the Switch is asking residents to limit showers to five minutes and to drop air-conditioning and clothes dryers entirely. Belgium has reversed plans to retire nuclear power plants, and Germany, having ruled out the possibility of such a turnabout in June, is now considering it as well.
These are all fast-twitch responses, primarily designed to allow a continent panicked about keeping its people and homes warm and its economy humming through the winter to store a little bit more of the gas it has already acquired for use when the crunch really comes. It was only at the end of April that Russia cut gas supplies to Poland and Bulgaria, the first two victims of its energy-pressure campaign. But overall gas shipments are at less than one-third the level they were just a year ago. In mid-June, shipments through Nord Stream 1 were cut by 75 percent; in July, they were cut again.
“It is wartime,” Tatiana Mitrova, a research fellow at Columbia, told her colleague Jason Bordoff, a former adviser to Barack Obama, on an eye-opening recent episode of the podcast “Columbia Energy Exchange.”
“This is something that European politicians and consumers didn’t want to admit for quite a long time. It sounds terrible, but that’s the reality. In wartime the economy is mobilized. The decisions are made by the governments, not by the free market. This is the case for Europe this winter,” she said, adding that we may see forced rationing, price controls, the suspension of energy markets and shutdowns of whole industrial sectors. “We are not actually talking about extremely high prices, but we are talking about physical absence of energy resources in certain parts of Europe.”
In May, I spoke with Bordoff and his frequent co-author Meghan O’Sullivan, who worked in George W. Bush’s administration and now teaches at Harvard Kennedy School, to try to contextualize the conflict in Ukraine in the bumpy geopolitics of the energy transition. In early August, with anxiety about the winter growing in Europe, I spoke with Bordoff again, this time about what to expect in the months ahead. This conversation has been edited and condensed.
When we last talked, Europe was working to address a possible energy crisis with supply-side measures — importing liquid natural gas, for instance, and refiring some coal plants, even if that meant more carbon emissions in the short term. Since then, there’s been a lot more attention on demand reductions, as you and Meghan called for in June, and a lot more planning for the possibility of much deeper government interventions in the energy economy. What’s changed?
I think there’s been a gradual and growing recognition that we are headed into the worst global energy crisis at least since the 1970s and perhaps longer than that.
It’s increasingly clear that Vladimir Putin is using gas as a weapon and trying to supply just enough gas to Europe to keep Europe in a perpetual state of panic about its ability to weather the coming winter. Europe has been finding all the supplies that it can, but governments are realizing that’s not going to be sufficient. There are going to have to be efforts taken to curb demand as well and to prepare for the possibility of really severe energy rationing this winter.
I think now you’re seeing — in terms of the efforts toward efficiency and rationing — some countries are more willing than others. If things become really severe this winter, I fear that you could see European countries start to look out for themselves rather than one another.
What would that mean, functionally?
It could lead countries to turn against each other in terms of whether energy is allowed to flow across borders. If you’re a country like Germany — which not only consumes a lot of gas but is also a transit country through which gas flows to other European countries — why would you allow gas to flow through your country when you’re shutting down your energy-intensive industries, while your economy is suffering? I think we could start to see governments saying, “Well, we’re going to restrict exports. We’re going to keep our energy at home.” Everyone starts to just look out for themselves, which I think would be exactly what Putin would hope for.
How much farther will he go, do you think?
I think it would be wise to assume that Russia will use every opportunity it can to turn the screws on Europe. Every time there is a proposed action to penalize or deter Putin, the question is: What will he do in response, and how might he retaliate?
Walk me through that worst case. How would we get to that kind of crisis?
I think you would see Russia continue to restrict gas exports and maybe cut them off completely to Europe — and a very cold winter. I think a combination of those two things would mean sky-high energy prices. But there’s a lot of other sources of uncertainty and risk. It’s not just high prices. There comes a certain point where there’s just not enough molecules to do all the work that gas needs to do. And governments will have to ration energy supplies and decide what’s important.
Can that be avoided, even if Russia does cut off all gas? The E.U. plan for a 15 percent reduction — if that’s fulfilled, would it be enough?
A 15 percent reduction in total gas use — that’s a pretty big number. It would take a lot of collective action to get there. But I think even if they were to do this collectively, there’s still the possibility for a pretty bad winter ahead.
“Rationing” is not all that comfortable or familiar a word these days.
Since Russia invaded Ukraine and maybe until very recently, I’ve had the sense that the European public and the public beyond Europe, as well as policymakers, have been a little bit sleepwalking into a looming crisis.
There was a sense early on that we could do without Russian gas. Lots of people published plans for what you would have to do.
Even before the European Union proposed 15 percent cuts in demand, the European Commission released a plan to reduce dependency on Russian gas by two-thirds by the end of the year. The International Energy Agency outlined a 10-point plan to reduce dependency by one-third.
The problem is, it was technically possible to do those things but incredibly difficult and not likely. One of the points in the 10-point plan was to overcome the permitting barriers to scaling renewable deployment more quickly. It’s really hard to permit new solar and wind and transmission lines, as we know in the United States.
And then you’d have to build them.
Yeah. So I think there was some unrealistic optimism about how quickly Europe could do without Russian gas. And we took too long to confront seriously just how bad the numbers would look if the worst came to pass.
People almost didn’t want to think about it.
I think there was continued skepticism that Putin would really cut the gas supply. “It might be declining. It might be a little bit lower,” people thought. “But he’s not really going to shut off the supply.” And I think now everyone’s recognizing that’s a real possibility.
And again, we’re still just talking about gas, not oil. Putin has the ability to do a lot of damage to the global economy — and himself, to be sure — if he cuts oil exports as well.
Those markets are even tighter.
There’s no extra oil supply in the world at all, as OPEC Plus reminded everyone by saying: No, we’re not going to be increasing production much, and we can’t even if we wanted to.
This was right after President Biden’s in-person appeals.
For all the talk about high gasoline prices and the rhetoric of Putin’s energy price hike, Russia’s oil exports have not fallen very much. If that were to happen — either because the U.S. and Europe forced oil to come off the market to put economic pressure on Putin or because he takes the oil off the market to hurt all of us — oil prices go up enormously.
To, like, $200 a barrel, right?
I mean, it depends how much he takes off the market. We don’t know exactly. If Russia were to cut its oil exports completely, the prices would just skyrocket — to hundreds of dollars a barrel, I think.
That’s because there’s just no extra supply out there today at all. There’s a very little extra supply that the Saudis and the Emiratis can put on the market. And that’s about it. We’ve used the strategic petroleum reserve, and that’s coming to an end in the next several months. There’s just no extra cushion in the oil market right now.
That all starts to look even darker.
We’re heading into a winter where markets might simply not be able to work anymore as the instrument by which you determine supply and demand. Typically you have a market, and prices go to a certain level, and that’s how the markets allocate supply. But if prices just soar to uncontrollable levels, markets are not going to work anymore. You’re going to need governments to step in and decide who gets the scarce energy supplies — how much goes to heating homes, how much goes to industry. There’s going to be a pecking order of different industries, where some industries are deemed more important to the economy than others. And a lot of governments in Europe are putting in place those kinds of emergency plans right now.
Let’s talk about those plans. If Russia really does cut all of Europe off, what does that look like for the people of Europe? What does that shortfall mean on the ground?
It is hard to predict because it depends entirely on government policy. Governments cannot allow people to freeze in their homes or be bankrupted by their energy bills. So if the worst comes to pass, governments will, by necessity, step in to say: Homes get the natural gas, and parts of industry get dumped. Probably they would set price caps on energy or massively subsidize it. So it’s going to be very painful.
For some uses, it’s possible to look to substitute forms of energy. But fuel switching isn’t an option for the many European households that rely on gas to heat their homes. If Russia were to cut off natural gas supplies this winter, cutbacks will be necessary in other areas to keep people warm. Worryingly for the European economy, this may mean that factories that can’t switch fuels will go dormant.
What kinds of prices are we talking about?
We’re seeing already today in Europe incredibly high energy prices that have risen hundreds of percent from last year or more. Today, before winter comes, gas prices in Europe are around $60 per million British thermal units. That compares to around $7 to $8 here in the United States. That’s having a real impact on people’s pocketbooks. But if the worst comes to pass, the market, as a mechanism, simply won’t work. The market will break. The prices will go too high. There’s just not enough energy for the market to balance at a certain price.
That is possible — that the trading markets for natural gas in Europe might be suspended this winter. I don’t think that’s likely, but it is possible. And don’t forget, the amount of liquid natural gas that Europe is importing today — Asia is competing for those shipments. What happens if the Asia winter is very bad? What happens if China and others are willing to pay very high prices for it? Everyone’s going to be competing for scarce energy supplies. I think that’s what it could look like.
That seems quite important — that while these dynamics are focused in Europe, the impacts are global.
I think we’re in a multiyear potential energy crisis. But I think one thing that hasn’t gotten enough attention and that I worry most about is the impact this is having on emerging markets and the developing economies, because it is an interconnected market. When Europe is competing to buy L.N.G. at very high prices, not to mention Asia, that means if you’re in Pakistan or Bangladesh or lower-income countries, you’re really struggling to afford it. You’re just priced out of the market for natural gas — and coal. Coal is incredibly expensive now, too. In part because gas is so expensive, people are bidding up coal prices. The energy minister of Bangladesh just a few days ago said that that country is facing several years of rolling power cuts because they can’t afford energy anymore.
If you multiply that across other emerging market countries and some of the poorest countries in Africa, I think that that is a real potential humanitarian crisis, as a ripple effect of what’s happening in Europe right now.
When it comes to gas, one interesting dynamic is that, to a certain degree, both sides are moving in the same direction — applying more pressure rather than less.
Europe had said: We are going to escalate the pressure on Russia. But originally they left energy off the table. That was not a sustainable position. You couldn’t continue to buy that much energy from Russia — just because it was too painful for all of us to pay higher energy prices — when you saw such horrific images of abuse and loss of life in Ukraine. And indeed, in the sixth sanctions package, Europe said: We’re now going after energy. We are going to ban the import of Russian oil and ban the import of Russian gasoline and diesel and put a ban on shipping insurance.
But right now, the price of gas in Europe is about four times what it was last year. Russia has cut flows to Europe by two-thirds but is earning the same revenue as it did last year. So Putin is not being hurt by the loss of gas exports to Europe. Europe’s being hurt by that.
That’s not exactly an encouraging sign of what’s to come.
The outlook for this winter is not certain to be a true energy crisis. But there’s a frighteningly high probability that we could see that. And not only this coming winter. I mean, this situation could last for several years.
How likely is it that these dynamics change? Could the energy crisis bring about a change of heart, in which European countries withdraw some of their support or even begin to pressure Ukraine to negotiate a settlement? Is it possible that could even happen in advance of this winter?
It’s so hard to predict at this point. I do think that the U.S. administration and the Europeans and some other countries have been incredibly strong and consistent in their defense of Ukraine. I expect that will continue. At the same time, you would imagine that, over time, when you don’t see Ukraine on the front page each and every day, eventually people’s attention wanes a bit and at a certain point the economic pain of high energy prices or other economic harms from the conflict reach a point where support may start to fracture a bit.
Whether that reaches a point where you start to see the West put pressure on Ukraine to capitulate, I think we’re pretty far away from that now, because everyone recognizes how outrageous and unacceptable Putin’s conduct is. But I think Putin believes that he can withstand the pain of this aggression longer than some other Western countries can. We’ll see whether there may be some truth to that in the months and years ahead.