‘Obligatory Rationing’—The Energy Nightmare Is Coming True

The European energy fiasco is reaching a climax.

As long feared, last Friday, the Kremlin-controlled gas giant Gazprom announced that it is shutting down Nord Stream indefinitely. Later, Putin threatened the tap would be closed for as long as the West holds its sanctions.

On that news, energy prices once again blasted through the roof. European gas (Dutch TTF) went up 35%, back to a near all-time high—which, for perspective, is 6x higher than two years ago.

Households are feeling the pinch.

Even before the latest hike, energy bills in Europe have grown twofold compared to a year ago. And the Brits—who are paying the highest toll—are seeing their energy bills triple from last year.

Meanwhile, Europe’s leaders are scrambling to implement emergency measures, one of which is a massive $375 fiscal package to cap energy prices. The UK alone is planning to spend a whopping $150 billion over the next 18 months.

For perspective, that amounts to a $1 trillion package relative to the US economy size.

So what’s all the fuss about that Russian pipe?

Zooming out

Europe is dead reliant on Russia because it generates over two-thirds of its energy from natural gas—40% of which comes from, you’ve guessed it, Nord Stream. For some countries, including the Czech Republic, Hungary, it is the one and only source of gas.

The Kremlin now plays on Europe’s energy impotence to blackmail the West into lifting sanctions.

In June, Nord Stream cut its gas flows to 40% of its capacity. Then, during a regular mid-summer maintenance, the flow came to a full stop for ten days. Finally, on July 21, it was restarted, but at only 40% of pre-maintenance levels. And last Friday, Gazprom shut the gas flows “indefinitely.”

Why can’t Europe source gas from elsewhere?

It can, but it’s impossible to do so on short notice because the alternative is to ship a liquefied form of gas through LNG terminals, which requires an entirely different infrastructure.

Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, wrote: “You’ve still got to get all the pipeline infrastructure laid. So it’s certainly not going to happen this year; it’s too late for this to be a relevant source of supply for Germany this winter, even if it will be a major role during the next one.”

Besides, there isn’t enough LNG supply on the market to replace all the Russian gas that Europe just lost. And ramping it up will, again, take time.

Looking ahead

Nord Stream’s shutdown wasn’t that much of a surprise for European leaders who have actually been bracing for this worst-case scenario for months.

Since the beginning of the summer, Europe has been implementing voluntary rationing programs and pumping up as much gas as possible into its reserves ahead of the cold season.

But unfortunately, that’s not enough.

For example, Germany’s national gas reserves are currently at 85%. But Klaus Mueller, president of Germany’s energy regulator, warned that even 95% storage would last for only two months of average demand.

So, there’s a good chance that Europe will have to switch from voluntary to obligatory rationing. In fact, by Goldman Sachs calculations, in the worst-case scenario, “Germany [wouldn’t] have many options and we estimate it could mean a 65% industry curtailment in Germany if flows stopped coming entirely.”

In other words, this energy fiasco could bring part of the industry in Europe to its knees. And the worst part, even the $375 billion fiscal package Europe has mustered may not save it because, well, you can’t buy gas that isn’t there, right?

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