Has Europe brought its current energy crisis onto itself?
Has Europe brought its current energy crisis onto itself? This is a question that I’ve been asking myself since the summer of 2021 when the SPOT price of European natural gas began to spike significantly higher than it ever had before, to a record 118 Euros a megawatt hour. This historical spike was just a sign of things to come as the price would spike to over 200 euros a megawatt hour in mid March 2022 after Russia’s initial invasion of Ukraine and hitting a record high of 339 euros a megawatt hour in august of 2022. To put this into perspective, the peak SPOT price for European Natural gas is
equivalent to nearly 600 Euros per barrel of oil, over five times the current oil price as of October 2022. Below is a graph of the European natural gas SPOT price taken from tradingeconomic.com. This graph highlights the severity of recent price increases. Now you’re probably asking yourself, “How could anybody let energy prices get this out of control?
These stratospheric prices are primarily due to Germany’s heavy reliance on importing natural gas using the Russian pipelines, Nord Stream 1 and 2. Following the Fukushima nuclear disaster, many politicians around the world began to look for alternative sources of energy as this incident was reminiscent of the Chernobyl meltdowns. The chart below highlights how Germany’s nuclear energy production began to decrease following 2011, the year the Fukushima incident took place whilst the neighboring nation of France held steady and continued
relying on the clean, carbon free source of baseload energy. Following the decommissioning of its nuclear power plants German leadership began, the construction of the Nord Stream 2 pipeline which promised to link the natural gas deposits of Russia with the industrial powerhouses of western Europe began. Throughout the 2010’s natural gas was viewed as a bridge between the heavier polluting coal and oil powered due to the relatively low amount of emissions associated with burning the fuel and its low costs. The primary producers of natural gas for the European continent as of 2022 are Russia (40%), Norway (22%), Algeria (18%) and Azerbaijan ( 9%)., with Russia supplying around 55% of Germany’s demand for natural gas. This heavy reliance on Russian gas is partially why Germany and western European countries did not have a strong response to Russia’s annexation of Crimea in 2014, amidst the chaos of Ukraine’s Maidan revolution. Interestingly enough, the former chancellor of Germany, Gerhard Schroder was appointed to the supervisory board of the state owned Russian natural gas producer Gazprom. This appointment was made in February 2022, less than a month before the invasion of Ukraine.
Following Russia’s brutal invasion of Ukraine in March of 2022, the United States and its NATO allies responded by placing strict economic sanctions on Russia. These sanctions made it almost impossible for Europeans to do business with Russia, crippled the Russian ruble and led to western businesses rapidly abandoning their operations in the nation. In addition to these sanctions NATO members began to supply the Ukrainian armed forces with the weapons and supplies needed to defend themselves from the invading Russian forces.
Russia’s response to this was to demand that nations pay for their natural gas using rubles and stop the flow of gas all together. This is the reason for the large spike in prices in March of 2022, around this period when the price of oil surged to nearly $140 a barrel as Russia is a member of OPEX+. This sudden supply cut has crippled the European continent, with many businesses unable to continue operations simply due to the exorbitant energy costs. Unfortunately the data set from the World Bank only goes to 2015, but according to Reuters in 2021 nearly 27% of Germany’s energy demands were met by natural gas. In Germany natural gas is not only used for energy production, but heating as well. In addition to the natural gas data, the World Bank’s nuclear data only goes to 2015. The % of energy in Germany has fallen to near 0%, only in the past few weeks has the government reversed its decision to decommission its last three operating reactors in 2022 and opting to keep them in operation through the winter until April 15th, 2023. While Nuclear energy may seem like the solution for Europe’s energy crisis, in France (which produced over 80% of its energy through nuclear reactors) droughts and maintenance have led to 26 of the nations reactors being offline. This means that currently only 51% of France’s nuclear capacity is online. Typically an exporter of low cost energy, France has been forced to import energy from its neighbors, further exacerbating the crisis. One winner in this crisis is Norway, with their state owned energy firm Equinor being one of the few that sells directly to the SPOT market. Interestingly enough, Norway is one of the few nations opposed to price caps on natural gas.
In conclusion, the decision of Europe’s largest economy to decommission its nuclear fleet over the opinion of a minor political party and rely on an aggressive adversary for its energy needs has led to their current energy crisis.
