EUROPE’S ENERGY HOLE
Europe is highly vulnerable to Putin's gas blackmail
European leaders believe they are part of the rich world, with the power to determine their future. After they return from their sacrosanct holidays in late August, they may begin to realize that is no longer true. Russia is pulling the plug. And nobody, including America, is coming to their rescue at the last minute.
World financial markets have been attempting to put a price on their dread of some disastrous event. I think that event will come in July, with a near-complete Russian shutdown of energy exports to Europe. Ukrainian solidarity flags are cheap. War is expensive.
Of course, the European Union has a plan for the coming crisis. Or, rather, many plans. To start, there is the expectation that American or Qatari LNG can come quickly to replace Russian gas. Climate goals (supposedly frozen into law) can be temporarily set aside so coal powered electric plants can be restarted. Gas storage facilities will be filled in time for winter.
Rationing will be imposed on European industry’s use of natural gas. Renewable energy, grid upgrades, and EVs will take over, eventually. Any necessary sacrifices will be shared in a fair manner.
No. This is all a day late and a euro short. Europe was saved from energy disaster this year thanks to China’s lockdowns (which released some LNG supplies) and unusually warm weather. Without that compounded good luck, Europe would have already suffered major power blackouts and industrial shutdowns.
But China’s LNG import terminals have re-opened with the end of its Covid lockdowns. And now that Europe has abandoned its climate goals to revive coal fired power plants, there is little, if any, non-Russian coal left to buy on international markets.
And Europe’s natural gas rationing plans are based on giving priority to household consumption, along with hospitals and other emergency services. The political leadership has yet to understand, for example, that if the EU’s fertilizer producers are not assigned priority access to available gas supplies then a cold, dark winter will be followed by food shortages next year.
Putin and his allies were slow to grasp the shortcomings of Russian military technology and leadership in the Ukraine campaign. But now they get it. Ukrainians can just be ground down by artillery storms while they’re cut off from Russian pipeline gas and access to their Black Sea ports. Their European allies can ultimately be bullied into accepting a humiliating strategic defeat and unfavorable terms for a temporary peace.
The Russian fossil fuel producers know that oil and gas reservoirs can be damaged by production shut-ins and restarts. This is more of a problem for oil wells than gas wells, but according to the reservoir engineering people I have spoken to, a three or four-month shut-in by Russian gas producers would not cause too much long term damage. For Europe, though, such an interruption of supplies would be catastrophic, particularly in winter.
The Americans are too politically divided and leaderless to spend much more public money on opposing Russia. If the Republicans succeed in retaking either the House or the Senate in November, they will insist on Europe’s providing a bigger share of allied support for Ukraine.
Even before then, American energy exports to Europe have been unexpectedly reduced. The giant Freeport LNG liquefaction plant on Quintana Island, Texas, will be shut down for months after an explosion in early June, shortly before Russia drastically cut back on its European gas exports. Nearly 70% of the Freeport plant’s production this year had been sent to Europe. There is now no spare capacity left in the US.
The Putin-verse has been shown just how clueless, divided and vulnerable Europe could be, even in the face of obvious threats. Germany has little military capacity and limited interest in expanding it, let alone projecting power beyond its borders. France now has a divided government or will when a cabinet is finally formed. Southern European countries show little conviction in confronting Russia. The Nordics can defend themselves, but can’t save the rest of Europe from political and strategic paralysis.
Even now, faced with Russian energy blackmail, European utilities and major industrial users cannot get approval for long term procurement contracts for additional fossil fuel supplies. And it’s true that such deals would be contrary to Europe’s clean energy policy commitments.
But you can see how this makes foreign fossil fuel suppliers reluctant to make huge capital investments in export capacity to meet European demand, given that that Europe is committed to dumping their business as soon as possible. There is already a global shortage of qualified workers such as pipeline welders, oil field workers and coal mine equipment operators. Why should they be committed to projects serving only a short-term demand spike? Those people can’t be moved around like inconvenient paragraphs in party platforms.
American national energy policy is equally incoherent. But there is more “project on project” risk for investments intended to supply European markets than there is in America. The fossil fuel production facilities (mines and drilling rigs) need to be matched with more expensive transport facilities (LNG liquefaction terminals, LNG carriers and shore terminals) with correspondingly longer payout periods.
Planning permissions have, historically, been easier to obtain in the US. The US has made much softer commitments to reductions in fossil fuel use. Maybe that was morally wrong, but then we see how Europe’s “firm” commitments to decarbonization can be dropped when they become inconvenient.
All this is not to say America will be insulated from a European-centered energy crisis. Apart from the epic financial costs for American investors, banks and corporations, the US industrial base is closely integrated with Europe’s. Americans have close family and personal friendship ties with Europe.
One way or another, though, America will survive the European energy catastrophe. Political and economic freedom in Europe may not.