The true price of unhooking Europe from Putin’s gas

A quiet confidence is emerging amid the gloom of Europe's energy crisis. Natural gas prices are falling as storage tanks fill up. Demand is being dialled down, helped by the weather. Getting through winter without relying on Vladimir Putin's gas is looking achievable.

The optimism is such that even after the euro area's latest painful inflation figures, economists are imagining a softer downturn ahead. Bloomberg Economics last week floated the possibility that even a shallow recession might be averted if energy costs kept falling and luck stayed on policy makers' side.

But confidence mustn't turn into complacency.

The huge cost and effort in preparing for winter show the extent to which Europe is still paying the price for its dependence on Russian gas, which once accounted for 40% of the European Union's supplies; the number is now below 20%.

The quest to fill up storage with gas ahead of winter has required a scramble to maximise alternative sources, from Norway to the United Arab Emirates, at wartime prices. A back-of-the-envelope calculation by Ben McWilliams of Brussels-based think tank Bruegel, using average gas prices of 140 euros per megawatt-hour, suggests the total value of extra gas in storage across the EU between 1 April to 31 October is 107 billion euros ($104.8 billion). 

That's a big number, equivalent to about double the United States' total aid to Ukraine so far. The danger is that the bill for next year proves even higher. A cold winter could deplete existing storage entirely and kick off another race to fill tanks all over again, only this time potentially without the 15%-20% layer of supply from Russia. 

"Prices for next summer are very high, reflecting the risk that storage will be used up this winter," says Anise Ganbold, head of research for global energy markets at Aurora Energy Research in the UK. (Only about 10% of stored gas is under the direct control of public officials.)

A lot also depends on being able to reduce demand, which comes at a cost. Countries are scrambling to cushion the blow to households and businesses, but rising interest rates and financial-market volatility are pressuring the likes of France and Poland to dial back financial support.

Worse, buying storage is effectively running to stand still — it diverts resources from longer-term needs to improve energy security. Investment in extra storage capacity, in expanding alternatives to fossil fuels, in more energy-efficient technology are all big budget line items for the future.

"We shouldn't rest on our laurels," says Jacob Kierkegaard, of the Peterson Institute For International Economics.

Success hinges on whether EU countries can find a unified path through this energy crisis. As successful as the refilling of storage tanks has been, it's largely been a story of national efforts. Germany's role has been key as the economy most visibly hooked on Russian gas yet also the one with the deepest financial pockets to spend on wriggling free. 

Fortunately for its neighbours, Germany has been willing to go above and beyond in the storage race, filling capacity to almost 100% from 25% at an estimated cost of just under 25 billion euros, according to Bruegel's McWilliams. It's nationalising energy giant Uniper SE in the process.

Yet Germany's "bad-cop" side has also been apparent in its foot-dragging over keeping emissions-free nuclear reactors open and its resistance to sharing the burden of the crisis more evenly through more joint borrowing. Finance Minister Christian Lindner rejected the latter, even as Berlin plans a domestic energy-aid package of up to 200 billion euros — which other countries understandably see as a competitive threat.

It's time for more coordinated answers. A jointly funded program like the 100 billion-euro pandemic SURE loans for worker support could target energy infrastructure investments, supply chains or energy-efficient housing. A "grand bargain" on energy would encourage domestic sources of supply to stay on for longer, such as the Netherlands' Groningen field. 

"This crisis should signal the end of complacency with regard to how we consume energy," says Jack Sharples, of the Oxford Institute for Energy Studies.

Europe has shown an admirable willingness this year to pay the cost of its past errors. But it needs to do more. The cost of dependency was around $100 billion — we don't want to know how high the cost of complacency is.

Lionel Laurent. Illustration: TBS

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.