For months, the energy policy of Europe was based on the hope that Russia would honor its gas supply contracts. The energy policy of the Biden administration was based on the hope that Saudi Arabia would pump more oil. Now that both hopes have been dashed, the world needs to brace for an energy crisis and take actions to mitigate its effects.
Last week, Russia said it cannot repair flaws in Nord Stream pipeline equipment, blaming the German manufacturer. That cuts the pipeline’s natural gas flows to Europe by a staggering 80% at a time when energy companies are building up supplies to get through the winter. German Chancellor Olaf Scholz refuted the claim, saying Russia was blocking the repairs. The move by Moscow is widely seen as a signal that Russia will soon ratchet up the pressure and shut off all natural gas supplies to Europe, which gets 40% of its natural gas from Russia.
A day later, there was more bad news: OPEC+, an organization that includes Russia and Saudi Arabia, announced that it was capping new oil production at a level that maintains current high oil prices that strongly benefit their economies.
The feared winter energy crisis in Europe is a looming reality. Close cooperation among European countries and the United States is needed because Russia seeks to exploit the energy crisis as a way to divide Europe and NATO and limit their efforts to stymie Russia’s quest for victory in Ukraine. Different European countries face different risks. The European Union already is struggling to get unanimity on measures to reduce reliance on Russian energy supplies and to curb demand.
Cooperation also is needed because an energy crisis will surely push the European economy into a recession that threatens to drag down the U.S. economy with it. Working together to manage energy supplies would help soften the economic and humanitarian impacts of a severe shortage.
There is little time left to act. The International Energy Agency estimates that if Russia stops exporting gas to Europe by October, the European Union will not get through the winter without shutting down factories and rationing supplies.
Europe has begun preparing for such a scenario by calling for voluntary conservation, developing lists of factories that would have to shut down and switching electric generation to coal. Germany soon might decide against shuttering its remaining nuclear reactor. Rationing is likely to be introduced in the heavily gas dependent economies of Central Europe, Germany and possibly Italy.
The head of the International Energy Agency, Fatih Birol, recently said the world is facing a global energy crisis and is not prepared. “We have seen some progress … particularly in terms of diversifying gas supplies, but not enough, especially on the demand side, to prevent Europe from finding itself in an incredibly precarious situation today. … The next few months will be critical.”
It’s important to remember that Europe is not the only economy in peril. The United States can help by urging conservation measures to reduce demand for gasoline and natural gas at home, and by increasing our production and energy exports to Europe. But we must act quickly to counter Russia’s attempts to squeeze Europe.
The International Monetary Fund says that overcoming obstacles to energy cooperation within Europe would make a coming recession there less severe. If cooperation is broadened to include the United States, the overall economic impact of an energy crisis could be greatly reduced. That also could help thwart Vladimir Putin’s bid to crack the Atlantic Alliance. But we need to act now.