Saudi Arabia is one country that benefits from rising fossil fuel prices, and Russia is another. The Kremlin’s gas revenues were two to three times higher than normal in the first half of this year, boosting the country’s ability to withstand a long economic siege. According to consultancy Capital Economics, 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 completely cut off supplies for a year without any negative impact on Russia. economy. Europe, as it was in the 1970s, is a net importer of natural gas and oil, so it is at the sharp end of the energy crisis. Oil prices more than quadrupled in late 1973, while natural gas prices have increased fifteenfold since early 2022. Import costs are rising much faster than the value of exports, worsening the terms of trade. Even on the conservative assumption that gas prices will ease in the coming months, the hit to some European countries – including Germany and Italy – will be more severe than in any of the oil shocks of the decade of 1970. Europe is facing an extremely difficult winter. The question is not whether there will be a recession but how deep it is and how long it will last. Britain, despite North Sea oil and gas production and a growing renewable energy sector, will be hit by rising global energy costs. As in 1973, rising energy prices have taken European governments by surprise. They were quick to impose sanctions on Russia after its invasion of Ukraine, but slower to think about the economic consequences. There appears to be no immediate prospect of an economic collapse that will force the Kremlin to end the war. History shows that Russia can withstand plenty of pain for extended periods, and possibly 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 after the war, what are Europe’s options? One possibility – in theory at least – would be to do nothing. Europe could accept that rising energy costs would make it poorer for a while and just suck it up. Eventually, the loss of production caused by excessively high prices would lead to a drop in demand for oil and natural gas and prices would plummet. The problem with allowing the market mechanism to work is that it would cause enormous hardship to the citizens of European countries, especially those in the poorest households. Even the most ardent free marketers embrace the premise of helping those who are already struggling to pay their gas and electricity bills. A second option would be to seize the opportunity provided by Putin to equip natural gas to accelerate the transition away from fossil fuels. This is the “never let a good judgment go to waste” approach, and it clearly has merits. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. Western governments have signed up to net zero carbon goals, and here’s a way to speed up progress. Instead of relying on Russian gas, Western countries should create their own cleaner, greener forms of energy. This process happens. Europe is trying to wean itself off Russian gas, but it won’t be able to do so this winter. Prices rose sharply last week when Russian state-owned Gazprom announced an unscheduled maintenance stop on the Nord Stream 1 pipeline. The fear is that natural gas supplies to meet Europe’s demand will be insufficient. Before resigning as Italy’s prime minister, Mario Draghi proposed another way out of the West’s dilemma: a cartel of buyers. This would involve energy buyers telling producers what they were willing to pay, and was initially introduced by Draghi in May as a way to respond to high oil prices. Nothing has been heard of it since, and there is a good reason for that: it would have required a degree of international solidarity on the part of the consuming nations, which is conspicuous by its absence. Draghi could not even find consensus within the European Union, let alone with China and India. An obvious way to lower energy prices would be to find a way to end the war. Prices are expected to remain high throughout 2023 as markets see no early end to a conflict in which neither side appears capable of delivering a knockout. This seems a reasonable assumption, given that both sides seem well dug in. No serious efforts are being made diplomatically to end the stalemate, largely because the West believes that anything short of Russia’s total defeat would provide an incentive for future aggression. This approach comes at a financial 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 fancy escape, the war is going to continue and renewables will take time to make a difference, European governments have no alternative but to find packages rescue for consumers. There are several ways to do this. Governments could target cash payments to the least affluent. They could introduce permanently lower social tariffs. They could do as France did and freeze the accounts. What is certain is that they will need to continue to offer support on a massive scale.
