Europe has little option but to rescue consumers
from the energy crisis
Larry
Elliott
With no end to Ukraine war in sight and transition
away from Russian gas ongoing, scale of support will have to be massive
Sun 28 Aug
2022 11.48 BST
Every
energy shock has its winners and losers. Countries that export more oil and gas
than they import do well while those that import more than they export suffer.
That was the case when the price of oil surged in late 1973 and it is the case
now.
Saudi
Arabia is one country that benefits from rising fossil fuel prices, and Russia
is another. The Kremlin’s gas revenues have been two to three times greater
than normal in the first half of this year, increasing the country’s ability to
withstand a long economic siege.
According
to the consultancy Capital Economics, if gas prices stay at current levels
Vladimir Putin could keep exports to Europe at 20% of normal levels for the
next two to three years, and could cut off supplies entirely for a year without
adverse effects on the Russian economy.
Europe, as
was the case in the 1970s, is a net importer of gas and oil so it is at the
sharp end of the energy crisis. Oil prices rose more than fourfold in late
1973, while gas prices have risen fifteenfold since the start of 2022. Import
costs are rising much faster than the value of exports, worsening the terms of
trade.
Even on the
cautious assumption that gas prices will fall back in the coming months, the
blow to some European countries – Germany and Italy among them – will be more
severe than it was in either of the oil shocks of the 1970s.
Europe is
in for an extremely tough winter. It is not a question of whether there will be
a recession but how deep it is and how long it lasts. Britain, despite its
North Sea oil and gas production and growing renewables sector, will be hit by
rising global energy costs.
As in 1973,
rising energy prices have taken European governments by surprise. They were
quick to impose sanctions on Russia after its invasion of Ukraine, but slower
to think through the economic consequences. There seems no immediate prospect of
an economic collapse forcing the Kremlin to end the war.
History
suggests Russia can withstand plenty of pain over prolonged periods, and
probably for longer than the west can. The siege of Leningrad between 1941 and
1944 is an example of extraordinary stoicism in the face of a blockade that
lasted nearly 900 days.
One
possibility – in theory at least – would be to do nothing. Europe could accept
that rising energy costs were going to make it poorer for a time and simply
suck it up. Eventually, the loss of output caused by sky-high prices would lead
to a drop in demand for oil and gas, and prices would come down sharply.
The problem
with allowing the market mechanism to work is that it would cause immense
hardship for the citizens of European countries, especially those in the
poorest households. Even the most ardent free-marketeers accept the case for
helping those already struggling to pay their gas and electricity bills.
A second
option would be be to seize the opportunity provided by Putin’s weaponisation
of gas to speed up the transition away from fossil fuels. This is the “never
let a good crisis go to waste approach”, and it clearly has merits.
Western
governments have signed up to net zero carbon targets and here’s a way of
accelerating progress. Instead of relying on Russian gas, countries in the west
should be building up their own cleaner, greener forms of energy. This process
is happening. Europe is trying to wean itself off Russian gas, but it won’t be
able to do so this winter. Prices rose sharply last week when Russia’s
state-owned Gazprom announced an unscheduled maintenance shut down of its Nord
Stream 1 pipeline. The fear is that supplies of gas to meet Europe’s demand
will be insufficient.
Before he
resigned as Italy’s prime minister, Mario Draghi suggested another way out of
the west’s dilemma: a buyer’s cartel. This would involve buyers of energy
telling producers what they were prepared to pay, and was originally floated by
Draghi in May as a way of responding to high oil prices. Nothing has been heard
of it since, and there is a good reason for that: it would require a degree of
international solidarity on the part of consuming nations, something that is
plainly noticeable by its absence. Draghi could not even find unanimity within
the European Union, let alone with China and India.
An obvious
way to bring energy prices down would be to find a way of ending the war.
Prices are expected to remain high throughout 2023 because the markets see no
early end to a conflict in which neither side looks capable of delivering a
knockout blow. This looks a reasonable assumption given that both sides seem
well dug in. No serious attempts are being made diplomatically to end the
stalemate, not least because the west believes anything other than complete
defeat for Russia would simply incentivise future aggression.
That
approach comes at an economic cost, as Boris Johnson admitted last week when he
warned the UK of tough times ahead. But if doing nothing is not an option, a
buyers’ cartel is a flight of fancy, the war is set to drag on and renewables
will take time to make a difference, European governments have no alternative
but to come up with rescue packages for consumers. There are various ways to do
this. Governments could target cash payments on the less well-off. They could
introduce permanently lower social tariffs. They could do as France has done
and freeze bills. What is certain is that they will need to continue to offer
support on a massive scale.
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