What Americans Should Know about the European Energy Crisis
As the holiday season approaches, Christmas lights are illuminating the long winter nights across the US. And, while some households may be paring back their yard and light displays amid rising electricity bills, the holiday light situation is much direr in Europe. Christmas light displays in Europe will be substantially scaled back, as many European countries are encouraging or requiring their citizens to reduce or nix the festive lights completely. While this holiday austerity is not a tremendous sacrifice, it may be hard for Americans to imagine similar measures ever happening at home.
Prices at the pump in the U.S. have fallen sharply since the summer surge as gasoline has returned to 1Q:22 levels. Coupled with a warm autumn, falling gas prices have perhaps led to some complacency among Americans when it comes to rising energy costs. But Europe’s ongoing energy crisis continues to create global energy supply worries and economic risk. It may impact electricity prices in the US, and the crisis has the potential to create European fiscal woes for years.
How We Got Here
While Russia’s invasion of Ukraine was the primary catalyst in the current energy crisis, it’s important to keep in mind that global oil prices were on the rise prior to the invasion. This was largely due to supply chain issues amid increased demand resulting from the Covid pandemic and re-openings, underscored by Europe’s reliance on imported oil. European countries differ in their consumption of fossil fuels versus renewables and nuclear sources, leaving some countries such as the UK and Italy more vulnerable to reduced oil supplies; however, in the months that followed Russia’s invasion, the European Council moved at unprecedented speed and enough solidarity to place sanctions on Russia.
This past summer, the European Council (EC) banned almost 90% of all Russian oil imports, with limited exceptions. As the reduction in oil imports threatened economic catastrophe, the EC subsequently passed measures to reduce gas demand by 15%, provide aid to citizens and businesses, and seek concessions from fossil fuel companies that benefitted from a windfall of rising prices. The EC also sought to shore up gas supplies for the coming winter.
Europe’s preparedness for the winter season is debatable, and the weather may be the critical variable. If conditions are difficult for renewable production, then widespread blackouts may be possible.
The European Economic Fallout
The cost of subsidies to keep household bills manageable has topped €700 billion, a number that will certainly grow. The cost of these subsidies will handicap government spending and increase taxes. The UK, amid its recent political turmoil, has reduced the period of its energy price freeze from two years to six months, a sign that governments can’t afford the burden forever.
The economic costs will also be felt in European manufacturing, where high energy prices will create headwinds if prices do not fall in line quickly with global markets. Therefore, the investment environment in Europe will be challenged for the foreseeable future.
The US Economic Fallout
Tight global energy supplies will impact costs in the US. Electricity wholesale prices are expected to be 20% to 60% higher this winter, with New England likely to see the highest prices. Amid other inflationary impacts, this will not be welcome news for the US consumer or manufacturers, likely fueling recessionary forces.
Part of the supply constraints within the US is due to uncertainty in the liquefied natural gas (LNG) market. US LNG companies have helped ease some of Europe’s energy needs through shipments of LNG, which has only recently become a viable export. On the positive side, this has been a boon for US LNG suppliers like Cheniere Energy, which has seen its stock price surge in 2022. It will be interesting to see if political pressure begins to build to supply more LNG domestically as US citizens see higher winter energy bills.
In the coming months, we can expect economists to become amateur climatologists, watching weather reports and hoping for a fair winter to avoid worst-case scenarios in Europe, the US, and globally. Meanwhile, Americans may want to consider preemptively shutting off at least a few strands of twinkle lights.
