EVery energy shocks have their winners and losers. Countries that exported more oil and gas than they imported did well, while those that imported more than they exported suffered. That was the case in late 1973 when oil prices were soaring, and it is the case now.
Saudi Arabia is one country benefiting from rising fossil fuel prices, Russia is another. In the first half of the year, the Kremlin’s gas revenue was two to three times higher than normal, bolstering the country’s ability to withstand a prolonged economic siege.
If natural 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 be cut off entirely within a year, according to consultancy Capital Economics supply without adversely affecting the Russian economy.
As in the 1970s, Europe is a net importer of gas and oil and is therefore on the brink of an energy crisis. Oil prices more than quadrupled at the end of 1973, while natural gas prices have risen fifteenfold since early 2022. The cost of imports has risen much faster than the value of exports, worsening the terms of trade.
Even under the cautious assumption that gas prices will fall back in the coming months, some European countries, including Germany and Italy, will be hit harder than any oil shock in the 1970s.
Europe is going through an extremely difficult winter. It is not a question of whether there will be a recession, but the depth and duration of the recession. Although the UK has North Sea oil and gas production and a growing renewable energy sector, it will still be hit by rising global energy costs.
As in 1973, rising energy prices have caught European governments by surprise. After Russia invaded Ukraine, they were quick to impose sanctions on Russia, but slower to think about the economic consequences. There appears to be no immediate prospect of an economic collapse forcing the Kremlin to end the war.
History shows that Russia can endure a great deal of pain for a long time, and possibly longer than the West. The siege of Leningrad between 1941 and 1944 was an example of the extraordinary stoicism in the face of a blockade that lasted nearly 900 days.
So, six months after the war, what are Europe’s options?
One possibility – at least in theory – is to do nothing. Europe can accept that rising energy costs will make it poorer for a while and then simply suck it away. Ultimately, the loss of production caused by sky-high prices will lead to a drop in demand for oil and gas, and prices will drop significantly.
The problem with making the market mechanism work is that it can cause enormous hardship for citizens of European countries, especially those from the poorest households. Even the most ardent freelance marketers embrace the reason to help those already struggling to pay their gas and electricity bills.
The second option is to seize the opportunity presented by Putin’s weaponization of natural gas to speed up the transition from fossil fuels. This is the “never let a good crisis go to waste” and clearly has merit.
Western governments have signed up to net-zero carbon targets, a way to accelerate progress. Instead of relying on Russian gas, Western countries should build their own cleaner, greener forms of energy. This process is happening. Europe is trying to wean itself off Russian gas, but won’t be able to do so this winter. Prices rose sharply last week when Russia’s state-owned Gazprom announced the closure of its Nord Stream 1 pipeline for unscheduled maintenance. There are fears that there will be insufficient gas supplies to meet European demand.
Before stepping down as Italy’s prime minister, Mario Draghi suggested another way out of the West’s predicament: a buyer’s cartel. That would involve energy buyers telling producers what they were prepared to pay, originally proposed by Draghi in May as a way to deal with high oil prices. It hasn’t been heard of since, and for good reason: it requires a certain level of international solidarity in consuming countries, which is apparently caused by its absence. Draghi cannot even agree within the EU, let alone with China and India.
An obvious way to lower energy prices is to find a way to end the war. Prices are expected to remain elevated throughout 2023 as the market sees no early end to a conflict in which neither side appears to be able to deliver a complete blow. Given that both sides appear to be deeply involved, that seems like a reasonable assumption. There has been no serious diplomatic attempt to end the stalemate, not least because the West believes that anything other than a complete Russian defeat will only spur future aggression.
This has come at an economic cost, as Boris Johnson acknowledged last week when he warned Britain of tough times ahead. But if doing nothing is an option, buyer cartels are an illusion, wars will go on, renewables will take time to play a role, and European governments have no choice but to come up with a package for consumers Rescue options. There are multiple ways to do this. The government can make cash payments for the less well-off. They can permanently introduce lower social tariffs. They can do like in France and freeze the bill. To be sure, they will need to continue to provide support at scale.
