Natural gas could now be rationed across the EU until the spring of 2023, according to a European Commission plan announced this week, as the continent experiences what a number of economists are calling its worst energy crisis ever. For decades, Europe has depended on Russia for much of its natural gas, but Vladimir Putin drastically reduced exports to the EU after it imposed harsh sanctions on Moscow for invading Ukraine. Discussing the rationing proposal, European Commission President Ursula von der Leyen said, “Russia is blackmailing us. Russia is using energy as a weapon.” The human costs of the natural-gas shortage are already apparent, as some housing cooperatives in Germany are limiting hot-water usage by residents. Utility bills for some Europeans are up 500 percent from last year, contributing to steeply rising inflation that’s provoked labor strikes in several European countries. And even as the record heat wave in much of Europe severely strains the union’s power grids, the prospects for the winter are even worse, as most EU homes and businesses rely on natural gas for heating—and Putin could still further decrease supplies. How bad could this crisis get?
Samantha Gross is the director of the Energy Security and Climate Initiative at the Brookings Institution in Washington. In her view, European countries don’t have any easy solutions to the emergency. They can’t just switch to another energy source to power their homes and businesses, and they can’t buy up enough natural gas elsewhere to make up for the Russian shortfall. EU states are trying to stock up as much gas as possible now for the winter months, and they’ll try to cut back on gas usage wherever possible—including asking citizens to conserve at home. But, Gross says, rationing gas could easily push the continent into a recession, as turning off the power needed for industry would cost many workers their jobs. As she sees it, the next stage of the crisis will largely depend on the winter’s weather and Putin’s actions—both highly unknowable. Putin could completely shut off Russia’s gas pipelines to Europe, because oil is more important than gas to his state’s overall revenue—and because maintaining that revenue is important for continuing his war in Ukraine. On the other hand, Gross says, Putin wouldn’t be able to ship that gas anywhere else, and the country’s gas fields could be permanently damaged by halting production even temporarily.
Michael Bluhm: Why is natural gas so expensive in Europe?
Samantha Gross: The natural-gas market is fundamentally different from the oil market. Oil is relatively easy to transport; you can put it in tankers and move it around. But for a long time, natural gas only moved through pipelines. The relationship between producers and consumers connected by pipelines was like a long-term marriage.
This has changed with liquefied natural gas, or LNG. As more LNG is produced, more gas can move between markets, so you get more price similarity in natural-gas markets than you could before. That said, Europe is still very dependent on pipeline gas from Russia. It gets about 40 percent of its supply from Russia. Certain countries—especially Germany—are even more dependent than that.
Russia has been using its gas supply to Europe as a weapon. Europeans and other Western countries are not buying Russian oil, to try to punish Russia. But Russia is trying to punish Europe by sending less gas. They have cut off supply completely to Poland and Bulgaria. They’ve cut way back on shipments to Germany through Nord Stream 1, the direct gas pipeline from Russia to Germany.
This energy weapon works both ways. The West is using it against Russia, and Russians are using it against the West. In Europe, there’s not enough other gas available to replace the Russian pipeline gas. There’s not enough liquefied natural gas. That’s why you’re seeing natural gas prices so high in Europe: They’re losing so much of their most important supply, and there’s not enough available in other places to make up for it.
Bluhm: Back in May, you said the EU wanted to wean itself from Russian gas supplies, even though that poses potentially serious economic problems. How is the effort to quit Russian gas going?
Gross: The EU would certainly like to wean itself off Russian gas, especially because the profits Russia is making by selling gas to the EU are funding the war in Ukraine.
But you can’t eliminate that gas use quickly. Some Russian gas is used to produce electricity, and that gas is easier to replace with renewables, while some countries can replace it with nuclear plants or even coal plants—and that’s happening now. But a lot of European gas is used in places where it’s extremely hard to replace quickly.
Germany is a good example. The majority of gas there is used for two purposes—home heating and industry—and neither of those can replace gas easily. In a factory that’s built to use gas as part of an industrial process, you can’t just change that right away. In home heating, changing would require switching from natural gas to a new system in millions of individual homes—and that can’t happen quickly. There are plenty of good reasons for Europe to get away from Russian natural gas, but they can’t just stop using it immediately without losing these important functions that gas serves for their people and their economy.
Unless you want people to be cold and industry to stop running, you can’t just stop using gas. It’s that simple.
Unless you want people to be cold and industry to stop running, you can’t just stop using gas. It’s that simple.
Bluhm: Aside from the European Commission’s proposal to ration gas, what are governments in Europe doing to reduce the negative consequences of exorbitant natural-gas prices?
Gross: They’re doing a number of things. In some cases, they are financially helping homeowners who need to buy gas for home heating. You’re seeing encouragement to move away from natural-gas use, particularly in homes. That’s a long-term project.
In the short term, European governments are putting as much gas into storage for the winter as they can. And they’re trying to pull back on gas use where they can—mostly in the power sector, where they can replace it with other sources—and put that gas into storage, so they’ll have more gas available this winter when they really need it for home heating. They’re socking gas away for a cold day.
Bluhm: What economic effects is this energy crisis having?
Gross: Unusually high natural-gas prices present a strong economic headwind. The problem in energy markets usually isn’t shortages; it’s this—high prices. But the growing concern is that Europeans may face an actual shortage of gas this winter, and rationing may be needed; the Commission proposal still needs to be approved, and governments will still have to make decisions about who does and doesn’t receive gas. You’ll see encouragement for consumers to turn down their thermostats or put on a sweater. There’s even the possibility that some industries may have to shut down in order to use scarce gas for keeping people’s homes warm, if the winter is particularly cold. That could have a horrendous impact on jobs and the economy overall.
Bluhm: What sorts of consequences are Europeans seeing in their everyday lives?
Gross: Ordinary folks are seeing very high energy bills, and there’s not a lot that they can do about it, particularly when winter comes around. If you have the ability to replace your home-heating or water-heating system with electricity, you might do it. But that is something that people with more money can do; those harmed the most by the high prices are people with less money and less ability to make the investments they’d need to make to change their systems.
Bluhm: Could this crisis tip some European countries—or the entire EU—into a recession?
Gross: This situation could tip the European Union—and particularly countries that are especially dependent on Russian gas—into a recession. Whether it does depends on two things. One is the weather—colder weather means more demand for gas—and the other is what Putin does. But there’s no question that if governments have to ration gas, that can harm GDP and push the EU into a recession. Some countries are less dependent on gas than others, but for countries that are more dependent, this could be really difficult.
Bluhm: What other causes for high gas prices would you identify, beyond Russia’s invasion of Ukraine and the disruptions of Covid?
Gross: There are some structural reasons for high natural-gas prices. In Europe, gas production is decreasing. A large natural-gas field in the Netherlands is being shut down this year. That field was diminishing, and they were having some seismic problems.
This situation could tip the European Union—and particularly countries that are especially dependent on Russian gas—into a recession.
So, at the same time that they want to wean themselves from Russian gas, the European Union is producing less gas itself. They’re working to fix that; Norway has been working to increase its production.
Bluhm: In May, you indicated that Putin could completely cut off all gas exports to Europe, even though it would badly harm his economy. What are Putin’s possible strategies here?
Gross: He has a number of options. He’s cutting gas to Europe to punish Europe for the sanctions that Russia is suffering from. He has the upper hand there, because Europe is so dependent on Russian gas; it’s so important to the European economy.
Another thing works in Putin’s favor with gas: The Russians usually made about three times as much money from oil as from gas, before the invasion of Ukraine. Natural gas is less important to their budget than oil is.
Despite all the sanctions on Russia, its oil revenues have actually gone up since the invasion. Even though they now have to sell oil at a discounted price, that’s a discount from the very high current price. Putin is not losing money on his energy industry right now, and that plays into his hand.
On the other hand, some factors work toward Europe’s advantage. One is that gas fields can’t just be turned on and off. If Putin shuts down Russian fields to stop supplying Europe, it can be difficult to get them going again. They aren’t spigots that you just open and close.
And Russian gas would have nowhere else to go. They don’t have facilities to send that gas out as LNG, and they don’t have any pipelines to connect that gas to Asia, where some Russian gas goes. Gas from Western Russia goes to Europe in a pipeline, and gas from Eastern Russia goes to Asia in a pipeline—but those pipelines don’t meet in the middle. The Russians don’t really have another market for the gas from Western Russia. So if they don’t want to harm the fields and future revenues, they might want to continue to supply some gas to Europe.
For a while, some people in Europe—particularly in Germany—viewed this economic relationship with Russia as mutually beneficial. They thought that they could all get along on this basis. But it’s become clear that gas is political; this isn’t just a business relationship. That’s changed forever.
No one will view Russia’s gas supply as safe from geopolitical influence anymore. That idea died with the invasion of Ukraine. It’s obviously political, and that’s going to change the nature of Russian society and the global gas market forever.
Bluhm: There’s an adage in the oil industry that the cure for high prices is high prices. That means that when prices rise and make oil production extremely lucrative, then new producers will rush new supplies to the market—and then an excess of supply will bring prices back down. Natural-gas prices in Europe are extremely so high now, so could new gas supplies replace the reduced Russian production?
Despite all the sanctions on Russia, its oil revenues have actually gone up since the invasion.
Gross: That adage is largely true for oil, but oil is different than gas. Oil is mostly fungible—you can replace one supply with another—and it’s easier to move around. But Europe was mostly supplied by Russian pipeline gas, so it doesn’t have the infrastructure to take in that volume of gas in other ways. Europe has some infrastructure to import LNG—and that infrastructure is being used heavily right now—but not enough to handle the amount of Russian gas they’ve lost.
The other thing is that there’s not enough LNG available in the world to replace that Russian gas. To replace it, you would need more production elsewhere, more export infrastructure, and more import infrastructure in Europe.
The challenge with building more infrastructure is the energy transition—the move from fossil fuels to renewables and other fuels that don’t emit carbon dioxide. Natural gas has the lowest carbon emissions of any fossil fuel, but it’s still a fossil fuel. The trick is keeping the European economy going now without building infrastructure that locks in a future with more fossil fuels.
Europeans will have to think about their infrastructure for the long term. Some may be dual-purpose, designed to carry natural gas or hydrogen.
But they’re not going to try to replace Russian gas only with other gas. Because of the energy transition, they’ll try to speed up investments in electric home heating and in renewables to replace gas in electricity generation. They’ll try to replace Russian gas with renewables or perhaps green hydrogen over time—and build just enough natural-gas infrastructure to get by in the meantime.
Figuring out how to do that is tricky. The level of difficulty of Europe’s energy transition just went up. Some countries were looking at natural gas as a bridge fuel between coal and renewables—and cheap Russian gas made that possible. That’s not looking like such a great option anymore.
Bluhm: If these countries can’t bring in enough gas to replace Russian imports, then what else can they do to get enough energy supplies to get through the winter?
Gross: They’ll probably take a number of steps. One is trying to cut back gas from users who don’t absolutely need it. For instance, coal-fired electricity plants are running more, and gas-fired electricity plants are running less, so the unused gas can go into storage for the winter. It’s not good for climate change, but it’s a short-term thing—to make sure they can get through the winter.
Governments will ask people to conserve. If there’s a cold winter, or if the supply cutoffs get worse, then you’ll see gas rationing, as the Commission has proposed. European governments will make decisions about how much gas should go to the residential market and how much should go to the industrial market. Those would be tough decisions, economically; you don’t want people to be cold, but you also don’t want job losses or other negative economic effects. That’s the last thing a government wants. They’d like to get through the winter by way of conservation and building up storage now, but if the winter is particularly cold, or the Russian cutoffs are especially bad, rationing will be the last resort.
The weather is a huge wild card in this. Another is Putin’s actions—and he may be even more unpredictable.
No one will view Russia’s gas supply as safe from geopolitical influence anymore. That idea died with the invasion of Ukraine. It’s obviously political, and that’s going to change the nature of Russian society and the global gas market forever.
Bluhm: Given that you can’t predict the weather or Putin, how do you see the likely scenarios for the next few months of this energy crisis?
Gross: I talked about government rationing, but high prices could cause the same outcomes as rationing. European gas prices are several times higher than last year. High prices encourage people to turn down their thermostats. Some industries may not want to operate on gas at that price. If a business is no longer profitable at a high natural-gas price, it may shut down for a while.
You may see some changes in economic activity that don’t have anything to do with a government decision to ration gas. That’s probably the most likely outcome. Negative economic effects may happen just because of high prices.
Bluhm: How do you see the likely scenarios for the price of natural gas in the short term?
Gross: That’s really a question about price elasticity: How much does demand change based on price? I don’t have a good answer for that. But Europeans are certainly going to be stuck with high natural-gas prices for a while, and it’ll encourage the kinds of changes that will make prices lower in the future. I suppose that, as with oil, the cure for high natural-gas prices is high natural-gas prices, even if it plays out slightly differently.
Bluhm: You say the energy crisis is causing a short-term increase in carbon emissions, as countries restart coal-fired power plants. But the EU had been pushing countries worldwide to move away from fossil fuels. What does this crisis mean for carbon emissions and the transition from fossil fuels to renewables?
Gross: There are short- and long-term time frames for this question. We have an energy system in the world now—even in Europe, which is really focused on the energy transition—that’s largely dependent on fossil fuels. And we can’t change that overnight. We have to keep the economy going and feed the energy system we have. That’s why you’re seeing the EU push for investments in natural gas and seeing countries burning coal to provide electricity.
In the short term, that’s a problem. You’re definitely going to see emissions rise a bit higher this year than they would have without this crisis.
Over the longer term, the crisis highlights the security reasons for moving toward an economy that’s not based on fossil fuels. Russia has invaded Ukraine, and it’s using natural gas as a weapon. If Europe wasn’t dependent on Russian natural gas, it wouldn’t be in the crisis it’s in today.
Getting to that new energy system is the challenge—not locking in too much fossil-fuel infrastructure or too many projects that you don’t want to run indefinitely. Investment decisions for gas infrastructure will be made with that challenge in mind. Europe may not get as much gas as it would like, because some producers may say, We don’t think you’re going to want this gas for long enough for our project to pay off. Investors are going to keep the reality of the energy transition in mind. For the long term, the situation today has made it more obvious why we need to go in that direction.
