Did the European Union Dodge the Energy Bullet?

Will the European Union avoid recession despite higher energy prices? If so, how will they have done it? Top oil and energy trader Pierre Andurand argues that the European Union has weaned itself off Russian natural gas. Is this a permanent situation? Is Russian President Vladimir Putin, therefore, in the process of losing the energy war?

EWALD NOWOTNY

Former Governor, Oesterreichische Nationalbank, and former Member of the Governing Council, European Central Bank

Recently, European gas prices fell below the [euro]50 per megawatt-hour level, but prices remain elevated compared with historical levels. In addition, there remains a high degree of uncertainty concerning gas deliveries from Russia, which still account for about 25 percent of gas imports in the European Union, with substantial differences across the member countries. Contrary to pessimistic predictions, no gas shortages have occurred in Europe, due to strong growth in the supply of non-Russian natural gas, lower energy consumption in Europe, and lower energy demand in China as a result of the Covid-19 pandemic. Ironically, global warming--the reason behind the unusually mild winter--has also been helpful. While the euro area economy is not expected to enter a recession, growth will be very weak at 0.9 percent in 2023 and 1.5 percent in 2024.

Inflation has been going down, but is still expected to be at 5.6 percent in 2023 and--optimistically--2.5 percent in 2024 according to EU Commission forecasts. Cost inflation, especially via energy prices, plays a stronger role in the euro area than in the United States. So for the European Central Bank, a restrictive monetary policy stance is warranted, with a higher intensity and over a longer period of time than for the Fed.

All in all, Russia's President Vladimir Putin will be on the losing side of the energy war, while U.S., Norwegian, Arab, and North African suppliers may be expected to be on the winning side. Europe will remain an energy importer for the foreseeable future and will therefore be negatively affected. Some countries are expected to be hit especially hard, among them Germany, Europe's largest economy. Beginning in 2020, Germany--probably prematurely--opted for a fast exit from nuclear power and coal for electricity production. In fact, a key aspect of the now-defunct Nord Stream 2 pipeline would have been to transport gas needed to substitute these "problematic" sources of energy. While green energy and energy savings are growing in importance, they cannot by far provide enough reliable energy for a highly industrialized country like Germany.

So now the traditional and highly successful export-driven German business model, based on high-quality engineering but also on cheap energy from Russia, will need to undergo substantial changes. Export dynamics are threatened by the slowing down of globalization and rising uncertainty about China. With no reliable long-term energy supply available for strategic energy-intensive industries and with rising (relative) energy prices, substantial parts of Germany's industry may dramatically increase investment abroad. The potential effects of the U.S. Inflation Reduction Act may add to this development. The danger of deindustrialization is a concern for many European countries, but most pronounced for Germany. So Germany seems to be on the losing side of the energy war.

JOHN M. DEUTCH

Emeritus Institute Professor, Massachusetts Institute of Technology, and former Director, Central Intelligence Agency, former Deputy Secretary of Defense, and former Undersecretary of the U.S. Department of Energy

A mild winter, aggressive efforts to stockpile natural gas, and a 60 percent increase in LNG imports compared to 2021 have allowed Europe to dodge an "energy bullet." But the Russia-Ukraine war, the destruction of the Nord Stream 1 pipeline, and Europe's--especially Germany's--determination not to import Russian natural gas in the future leave Europe extremely vulnerable in the international natural gas marketplace, which will be undergoing massive restructuring during the next five years. There are many uncertainties, but some trends are clear. Russia will pivot its natural gas exports to the Asia-Pacific region which is expected to be the dominant driver of global demand. Russian natural gas exports to China by the Siberian natural gas pipeline, already on the rise, will likely be accompanied by an even greater unwelcome strengthening of their political relationship.

Europe will be short of natural gas for the foreseeable future, and inevitably Europe will be in competition with Asia for global natural gas supply. The increase in global demand will be accompanied by higher natural gas prices, presenting Europe with unpleasant possibilities: A shift back to coal and nuclear to provide electricity and heat? The relocation of large international industrial firms that settled in Europe to take advantage of low-cost Russian gas to other parts of the world where natural gas is more plentiful and supply more reliable? A concern that the United States will not be a reliable supplier of liquefied natural gas to Europe at favorable prices going forward? This disquiet is heightened by the highly protectionist $369 billion 2022 U.S. Inflation Reduction Act, which infuriated Europe. It demonstrates that the United States, with strong bipartisan domestic encouragement, is prepared to put American jobs and welfare first at the expense of its trading partners.

Europe needs to prepare not for dodging an energy market "bullet" but to withstand an energy market "bomb" explosion in its natural gas market that will require much adjustment and a significant increase in the cost of home heating, electricity, and industry operations, and an unfavorable trade balance. Absent an unlikely return of Russian gas to Europe, the situation will not improve until Europe formulates and implements a new long-term energy plan bringing in some new natural gas supply by tanker or transmission pipe.

MOHAMED A. EL-ERIAN

President, Queens' College, Cambridge University, and Professor, Wharton School, University of Pennsylvania

Through a combination of skill and good luck, Europe has managed its energy crisis in a manner that reduced the probability and severity of a recession in 2023. That is very good news indeed. But it is not the whole story.

Less good is the need to repeat the accomplishment this year. Even more consequential for longer-term economic and social well-being, the region needs to evolve its economic management both to re-anchor financial stability and to generate higher, more inclusive, and more sustainable growth.

Smart inventory management and favorable weather were key to Europe's ability to reduce the immediate damage from disruptions to energy supplies. Delivering again this achievement in the context of prospects for even lower energy supply from Russia requires continued efforts to diversify sources and reduce energy intensity.

This needs to be part of a comprehensive revamp of the region's growth model centered on the green transition, as well as continued efforts to reduce inflation and limit financial volatility. There is also more room to use behavioral-based measures, including several nudge techniques, to have more efficient demand management do some of the heavy policy lifting.

This is an important and urgent policy challenge. Failing to meet it in a timely and decisive manner risks undermining growth potential, fueling persistent inflation, increasing financial fragmentation pressures, and accentuating socio-economic pressures.

Rather than just continue in a crisis management mindset, Europe should also use the 2022 energy shock as a catalyst to come closer together to deepen pro-productivity measures, improve green infrastructure, expand public-private partnerships, strengthen safety nets, and better align fiscal policy. This would only be possible in the context of greater policy integration.

DEBORAH GORDON

Senior Fellow, Watson Institute for International and Public Affairs, Brown University, Senior Principal, Climate Intelligence Program, RMI, and author, No Standard Oil: Managing Abundant Petroleum in a Warming World (Oxford University Press, 2022)

The North Sea cannot supply the European continent with clean, ample energy. This has been a fact for generations. But instead of leading the world in a wholesale energy transition, the European Union has remained largely dependent on imported crude oil, natural gas, and petroleum products. This move has enriched Russia's war machine and positioned the European Union to take the energy bullet. Now the European Union is facing high energy prices and staring down the barrel of a recession.

However, the real price of fossil fuel energy is a lot higher than what Europeans are shelling out to heat their homes and fuel their cars. The indirect energy costs for national security, migration influx, public health, and climate disasters are taking a big toll. Tipping the EU economy into a recession just adds one more hazard. Whether the damage is permanent--or not--should be less concerning than if the European Union's energy situation remains volatile. Constantly changing fortunes can be even more politically and socially disruptive.

Weaning itself off Russian oil and gas may be a necessary EU play, but it's not nearly enough. The European Union can dodge repeated energy bullets if its citizens are willing to pay more upfront for clean, secure supplies. The real question is whether EU politicians can convince the public that, while a durable energy transition will be challenging, it is worth the cost.

The recently passed U.S. Inflation Reduction Act is a good place to start. It is stocked with financial incentives that can transform America into a renewable electricity supplier at home despite its abundance of oil and gas riches. Add to that a fee on methane leakage, which is aimed at preventing wasted gas throughout...