The European Energy Crisis Is Transient And The Response Should Be Also

European countries are facing one of the worst winters in decades from the point of view of energy availability and price. Natural gas and electricity prices are several times normal and governments are calling on the public to conserve as much as possible, suggesting price caps, heating assistance and windfall profit taxes, while some industries are reducing operations in the face of soaring bills. Renewable advocates blame the reliance on fossil fuels, especially gas from Russia, while opponents insist that renewables are not reliable enough to fill the gap. Meanwhile, gas supplies from Russia fluctuate and a number of countries turn to cheap, dirty coal. This could prove to be a classic case of how—and how not to—respond to an energy crisis.

Politicians often argue that a crisis should never be allowed to go to waste, meaning use them as an excuse to implement desired policies. This could be countered with the physicians’ credo, ‘first do no harm.’ The 1970s energy crises saw many governments, listening to experts who insisted that natural gas was a premium fuel and scarce, encouraged higher coal consumption (with the blessing of the International Energy Agency). Arguably, this proved foolish and damaging to the environment.

The biggest challenge politicians (and analysts) face is differentiating between short-term transient difficulties and long-term, underlying problems. Most people understand the difference between a high tide and rising sea levels, but commodity price spikes are an entirely different case. Bad harvests almost always bring arguments that population growth needs to be addressed, and high energy prices result in claims of scarcity and bring calls for permanent policies. The current European energy situation is primarily due to short-term events and require short-term, or one-time, solutions.

One quarter of Europe’s energy is from natural gas, and of that, about 30% is normally derived from Russian imports which have historically been very reliable. Indeed, many have joked that Russia is a country in the service of Gazprom, the producer and seller of most Russian gas, suggesting their business is not at the service of the state or its foreign policy. For all the talk of mechanical problems, it seems abundantly clear that this is no longer the case. The biggest lesson should not be to avoid fossil fuels or Russian gas supplies, but diversify supplies.

And the biggest problems now are not systemic but largely transient: Europe entered 2021 with low gas storage levels and higher prices because of colder than normal weather, something that can be expected to occur from time to time but does not require permanent solutions. More storage, for example, as opposed to inflexible contracts for higher supplies.

Similarly, the power sector has suffered because of problems with France’s nuclear power plants, many of which have had to be shut down for repairs. This will be temporary albeit painful; France has benefitted from relying on a standard plant design, but it now appears overdone as half of the plants are offline at the same time because of similar problems with corrosion. On the other hand, most of them should be operating by the time winter sets in, so a crash program to replace them with renewables or gas turbines would not make sense. New nuclear plants should be standardized, but not around one design to avoid a similar problem in the future.

Finally, the war in Ukraine has meant that Russian gas supplies have become constrained and uncertain, first when Nordstream 2 was not approved in protest of the invasion, and then as Russia reduced deliveries because of supposed technical issues, a claim widely disbelieved. While the war might continue for years, it might also end suddenly with gas supplies restored. This won’t hurt LNG exporters who can redirect sales to other markets, but countries that build large and permanent infrastructure in response will find themselves burdened with idle or underused capacity. This explains the desire for Floating Storage and Regasification Units, which can be redeployed when the crisis is over.

And those who adopt a doctrinaire reliance on free markets as the solution need to accept that, in the case of physical supply disruptions, the cure could be worse than the disease. Telling the public that the problems are likely short-term and should be suffered in silence will hardly prove acceptable to either the public or politicians. Energy markets will move back into balance, but in the short-term, doing so will be through the price mechanism, meaning enormous pain and economic damage.

That said, attempting to set prices would be a mistake because, first, it discourages conservation and second, it could lock governments into the role of determining prices, usually in response to political pressure rather than economic logic. One time or short-term energy assistance payments are a much better way to minimize the economic damage from higher prices, and thus hopefully minimize the hit to consumer (net) incomes and spending, and ultimately employment levels.

More wind, solar and nuclear might be desirable in the long run, but should not be promoted as a solution to the current problem, rather, pursued when and how beneficial under normal circumstances. And while Russian gas might flood back into Europe by next year, countries should certainly pursue diversification of supplies, whether American LNG or African/Mediterranean pipeline gas. And the unscientific bans on fracking for shale gas should be scrutinized for their harm, especially to energy intensive industries.

The history of energy policy-making is one of legislate in haste, repent at leisure. Governments should try to focus on the short-term nature of the current situation and try not to lock themselves into policies, like permanent price caps, that they will regret later, but find hard to reform. Case in point: U.S. export controls on petroleum were politically expedient but economically foolish with untold billions of dollars in costs on the economy, yet took decades to reform.