The Current Oil Crisis in the EU and What can be Done About it
War is something that has plagued humans for centuries and is seen as a way to show power and to take what you want from others. However, as technology and the world as a whole developed, the way wars have been fought has changed. There has not been an all-out war since the second world war and during this time countries formed alliances and came up with new ways to stop wars without the mass loss of lives. The way world powers stop these wars is by sanctions that are backed by the United Nations (UN). These sanctions are direct shots to limit the economy of the oppressing nation without any direct harm to the lives of the people in the country. So as Russia declared Ukraine as part of Russia and commenced an invasion on 24 Feb. 2022, the UN set sanctions on the Russians in hopes to undermine their invasion by attacking their economy. Placing sanctions allowed countries like the United States and the United Kingdom to not be directly involved and avoid another world war. The sanctions used were to restrict all trade out of Russia and attack the offshore bank accounts of the Russian oligarchs. However, in placing these sanctions a direct issue arose in Europe. That issue is that Russia supplies Europe with 45% of its oil and natural gas. With the absence of this oil and gas, the subsequent rise of prices for energy started to plague European citizens as they saw their electricity prices rise exponentially. War alone is rough but coupled with an ongoing pandemic, COVID-19, which has ravaged the economies of countries all over the world limiting the normal practices of civilians and causing inflation to set in globally. Some may say that countries facing these rises in energy prices should just produce more oil or go green, but it is not as easy as it may seem. Limitations set globally on oil production have hindered the desire to mass-produce oil in hopes to continue to combat climate change; furthermore, some countries just do not have the capabilities to be able to manufacture green energy at this moment. So what can these countries do? Organizations like the European Union (EU) need to take the load off of the consumers and place it on the countries as well as take on the matter of defusing the benefit that Russia is receiving from the rise in oil prices.
The issue of producing enough energy to fuel a country is an issue that every country faces. Oil and natural gas have been staples in doing so since the turn of the 20th century but due to revelations in the aspect of global warming, the move to different kinds of energy production began. As new technologies developed and revolutionized the field of energy many countries decided to start the switch to renewable energy; however, in the case of many others, they stuck with the reliable way of fossil fuels. Germany, for example, was one of those countries and currently is one of the countries most affected by the current sanctions on Russia. Germany halted construction on multiple nuclear power plants which would have allowed the Germans to become self-sufficient in regard to energy production. However, these plans were canceled in the hopes of a major deal with Russia where they would construct the Nord Stream 2 pipeline supplying Germany and Europe with large quantities of oil. Consequently, do the start of the invasion and the sanctions placed on Russia the Nord Stream 2 was canceled and now leaves Germany missing significant amounts of oil. The Germans’ reluctance to achieve self-sufficiency has left them in current turmoil as the absence of oil and the coinciding global inflation, from the pandemic, have caused troubles for their already struggling economy.
The COVID-19 pandemic is the route of the problems with inflation that the globe is witnessing. “Emerging markets and developing economies have been hit by a similar wave, with 78 out of 109 EMDEs also confronting annual inflation rates above 5%. That share of EMDEs (71%) is about twice as large as it was at the end of 2020,” states Reinhart. The rise of inflation is in part due to the inability of people to work and the limited amount of stimulus provided by the governments that which these people reside. So as inflation is rising at an unprecedented level which has not been seen in 40 years coupled with the lack of oil/energy, the world is in a crisis.
The problem of war in East Europe is just one of the roots of the issues that people across the world are facing. The lack of oil is showing how much the rise of inflation has really affected people. The problem is not something that a normal person can solve on their own. This being said the governments must intervene in these issues to allow for a possible recovery from the turmoil that the normal person is facing. Also, the exponential rise of gas prices in Europe is something that other countries can not just come in and solve right off the bat. Due to environmental issues that the world is facing the production of oil in the United States is already starting to lower as the rise of renewable energy starts to take over the industries. So why don’t European countries just go green? Well, they could but this solution would take years to accomplish, and by that time the economies of Europe would have already suffered drastically. Furthermore, the turmoil that is coming from the sanctions is actually giving Russia hope as they see the dependence of their oil from Europe and is actually benefitting their hopes that the sanctions be removed. The removal of their sanctions would spur life to their devastated economy which could even see more forward action on the Ukrainian front.
The European Union needs to stand together to combat the rise of these prices together in hopes to solve the issue. Furthermore, some action has already been taken by “25 Member States have adopted measures in line with the toolbox which are already easing energy bills for over 70 million household customers and several million micro, small and medium-sized enterprises.” (Strasbourg) However, implementing more major solutions to the issue with the recent dynamics in natural gas prices has led some to call for wide-ranging reviews of the European market model, such as a centralized model for gas procurement. However, such radical changes to the European market model are likely to be ineffective given the current market structure, while at the same time they would expose European consumers to the risk of unnecessary costs in the future. We instead advise the legislator to focus on improving areas of the European market where there is still room for integration and coordination while retaining the basic current market design. We have identified one such area to be the security of supply, in particular regarding harmonization of price caps and scarcity pricing rules and/or harmonization of storage capacity allocation rules. In particular, the marginal cost should be used as the reservation price for storage across Europe to ensure efficiency. Furthermore, the capacity allocation rules and particularly the mandatory storage filling provisions are unlikely to impact the security of supply at the EU level. However, they might prove beneficial in reducing the winter-summer price differential and therefore the occurrence of significant price spikes, regardless of the real scarcity or the need to have gas volumes in store.
The European Union could learn from what the United States did over its development into this new age of energy where the strategy of building on-ramps to traditional energy growth now, while simultaneously building even bigger offramps. But as stated previously this is a solution that is already too late to implement for the EU. Rather than implementing something now, they could seek the help of the UN where the EU could ask for stocks of oil from other countries like the US for the time being to help fill their replenished stocks of oil.
The implementation of monetary policy will be the most effective way to solve the issue at hand in the most time-crunched scenarios. Where stimulus and price caps would allow for life to proceed back to something close to normal as the implementation of new forms of energy are being produced. The EU needs to learn from its reliance on other countries for something so monumental as energy and needs to become self-sufficient as countries like the US have moved towards.
