EAny energy clash has its winners and losers. Countries that export more oil and gas than they import do well while those that import more than they export suffer. This was the case when the price of oil jumped at the end of 1973 and it is the case today.
Saudi Arabia is one country that benefits from rising fossil fuel prices, and Russia is another. Kremlin gas revenues were two to three times higher than normal in the first half of this year, increasing the country’s ability to withstand a long economic siege.
According to consultancy firm Capital Economics, if gas prices remain at current levels, Vladimir Putin could keep exports to Europe at 20% of normal levels for the next two to three years, and could completely cut off supply for a year without adverse effects on Russia. economy.
Europe, as it was in the 1970s, is a net importer of gas and oil and therefore finds itself at the heart of the energy crisis. Oil prices have more than quadrupled at the end of 1973, while gas prices have increased fivefold since the start of 2022. Import costs are rising much faster than the value of exports, which is deteriorating the terms of l ‘exchange.
Even on the cautious assumption of lower gas prices in the coming months, the blow to some European countries, including Germany and Italy, will be more severe than it was in the oil shocks of the 1970s.
Europe is about to experience an extremely harsh winter. The question is not whether there will be a recession, but how deep it will be and how long it will last. Britain, despite its North Sea oil and gas production and growing renewable energy sector, will be hit by rising global energy costs.
As in 1973, rising energy prices took European governments by surprise. They were quick to impose sanctions on Russia after its invasion of Ukraine, but slower to consider the economic consequences. There does not appear to be any immediate prospect of economic collapse forcing the Kremlin to end the war.
History suggests that Russia can endure a lot of pain over long periods of time, and probably longer than the West. The siege of Leningrad between 1941 and 1944 is an example of extraordinary stoicism in the face of a blockade that lasted almost 900 days.
So, six months into the war, what are Europe’s options?
One possibility – at least in theory – would be to do nothing. Europe could accept that rising energy costs would impoverish it for a while and simply suck it in. Eventually, the loss of production caused by exorbitant prices would lead to a drop in demand for oil and gas, and prices would fall sharply.
The problem with allowing the market mechanism to work is that it would cause immense hardship for citizens of European countries, especially those from poorer households. Even the most ardent free marketers agree to help those who are already struggling to pay their gas and electric bills.
A second option would be to seize the opportunity offered by Putin’s weaponization of gas to accelerate the transition away from fossil fuels. It’s the “never let a good crisis go to waste” approach, and it clearly has merits.
Western governments have signed on to net zero carbon goals and here’s a way to accelerate progress. Instead of relying on Russian gas, Western countries should develop their own cleaner and greener forms of energy. This process is ongoing. Europe is trying to wean itself off Russian gas, but it won’t succeed this winter. Prices rose sharply last week when Russian state-owned Gazprom announced an unscheduled shutdown for maintenance of its Nord Stream 1 pipeline. The fear is that gas supplies to meet European demand may be insufficient.
Before resigning as Italian Prime Minister, Mario Draghi suggested another way out of the Western dilemma: a cartel of buyers. It would involve energy buyers telling producers what they were willing to pay, and was originally floated by Draghi in May as a way to respond to high oil prices. It has not been heard from since, and there is a good reason for that: it would require a certain international solidarity on the part of the consuming nations, which is conspicuous by its absence. Draghi could not even achieve unanimity within the European Union, let alone with China and India.
One obvious way to lower energy prices would be to find a way to end the war. Prices are expected to remain high through 2023 as markets see no early end to a dispute in which neither side appears capable of delivering a killing blow. This seems a reasonable assumption given that both parties seem to be well grounded. No serious attempt is being made diplomatically to end the standoff, not least because the West believes that anything other than a complete defeat of Russia would simply incite future aggression.
This approach comes at an economic cost, as Boris Johnson admitted last week when he warned the UK of tough times ahead. But if doing nothing is not an option, a cartel of buyers is a fantasy, the war is about to drag on and renewables will take time to make a difference, European governments have no no choice but to offer bailouts for consumers. There are different ways to do this. Governments could target cash payments to the less well off. They could introduce permanently lower social tariffs. They could do like France and freeze the bills. What is certain is that they will have to continue to offer support on a large scale.