Energy prices are through the roof across Europe as demand surges and supplies tighten in the wake of the novel coronavirus pandemic. Over the course of the global economic shutdown, energy production has decreased considerably as industries shut down, people stayed inside, and demand for electricity and fuel plummeted. Now, as the world returns to work and gets back to the ‘new normal’, energy demand is back with a vengeance, but the energy supply simply isn’t there.
Europe’s leading natural gas benchmark, the Dutch Title Transfer Facility, reports that prices have skyrocketed from €16 per megawatt-hour at the beginning of this year to €75 by mid-September, representing an increase of more than 360%. Italian officials have warned their citizens to expect a 40% increase in their bills in the coming weeks and months. Spain has agreed to send €100 payments to over 5.8 million low-income households and sent a letter to Brussels pleading with the European Union (EU) to take sweeping action.
And then there’s Russia. Nearly half of all-natural gas imports in the EU come from the great white north, making Europe highly dependent on the Kremlin for its energy security. This dependence is a big part of the reason that Europe is now entering into an energy crisis, because as demand for natural gas has surged, Russia has not increased its exports to the EU. For one thing, Europe is competing with Asia for limited energy resources as both continents surge back to life as pandemic restrictions ease. So far, markets seem to be favoring Asia, for economic as well as strategic reasons.
There is rife speculation that this is a strategic decision on the part of the Putin administration in order to push through the opening of the controversial Nord Stream 2 pipeline. The 1,230-kilometre pipeline, which runs under the Baltic Sea to connect Russia and Germany, is complete but has yet to come online. The project has drawn much criticism for “perpetuating the bloc's dependence on fossil fuels and extending President Putin's geopolitical influence” according to Euronews. And now Europe’s dependence on Russia is being put into stark relief by the current energy crunch and appeasing the Kremlin while also opening a new entry point for much-needed natural gas may make the Nord Stream 2 seem a little more appealing.
Russia is not just playing hard-to-get with natural gas. As Europe’s struggling energy markets look to import any form of affordable energy they can, power producers have resorted to asking for Russian coal as well, with little success. The EU has been working on weaning itself off of coal entirely for years now, and when demand for the dirtiest fossil fuel suddenly spikes this winter, the previously shunned fuel source will likely be in extremely short supply, as supply routes out of Russia, the world’s third-largest coal exporter, have been almost entirely redirected to Asia.
“If all the European utilities switch to coal, it will result in a huge spike in coal demand that Russia alone cannot provide for on such a short notice,” Natasha Tyrina, research analyst at Wood Mackenzie Ltd. told Bloomberg this week. “That would need supply from other countries as well, from the U.S. for example, but the situation there is similar to everywhere else.”
As we head into the cold winter months, Europe’s energy crisis is set to worsen, and their dependence on Russia to keep the lights on will only intensify. Asia, too, will be facing an energy crunch this winter, leading the entire world to resort to burning more and more coal at a time that most countries have pledged to do exactly the opposite. At a moment that countries are just beginning a green energy transition in earnest, and the United Nations is sounding a “code red for humanity” concerning climate change, this return to coal is an extremely worrying development that will hopefully be short-lived as even coal proves to be insufficient to ease supply crunches in the coming months.
By Haley Zaremba for Oilprice.com
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