Why will Europe suffer from the cold this winter?

BarcelonaSince ancient times, several civilizations have understood the arrival of cold weather as a time of the year when it was necessary to be prepared. There are examples of this even in the Neolithic, when the first sedentary people accumulated the summer harvest to try to have reserves during the time of the big frosts. In the global energy industry, every year we experience similar behaviour: governments and large companies around the world try to ensure that the onset of the cold weather catches them with sufficiently full tanks so that they do not have to suffer during the winter months. But this year, the year of the beginning of the economic recovery after the covid-19 shake-up, the forecasts are not very good. And there is a key factor: gas. For weeks now, experts have been warning that this winter there could be a natural gas shortage crisis in several parts of the world that could have major economic, political and social consequences. And one of the regions of greatest concern is Europe, where reserves are at remarkably low levels despite the fact that, on the continent, natural gas is used to generate around a fifth of electricity.

The latest update of gas reserves figures for the Old Continent, released this week by the International Energy Agency (IEA), paints a rather bleak picture. Reserves are 16% below the average of the last five years and 22% lower than the amount in storage in October last year. The countries of North-West Europe are in the most delicate situation: they have about 65% of the capacity at the gates of the time of year when there is more demand for consumption. According to most experts, this amount will be insufficient if the winter is as cold as last year's.

In the Netherlands, for example, some reservoirs have not received new injections for months. In the United Kingdom, which has practically no storage capacity, six distributors have gone bankrupt due to the brutal increase in the price of gas which, in the European market and in view of the increase in demand, has reached eight times the price paid last year. If the price of gas rises, obviously the price of electricity also rises: it is calculated that for every euro increase in the price of gas, the price of electricity on the wholesale market rises by two.

Energy dependence

If, in general, in other years gas reserves were quite full at the gates of winter, what has happened in 2021? There are several factors that explain this. From an increase in domestic consumption with a winter, that of 2020, that was particularly cold in Europe, and a summer with strong heat waves that multiplied the use of air conditioning, to the steady recovery of industrial production after covid-19 or the significant increase in the prices of CO₂ emissions, which favour the switch from coal to gas. However, these are circumstantial reasons. Then there are the fund reasons, which probably carry more weight.

The European Union is the world's third largest energy consumer after China and the United States, but it has few energy reserves of its own. As a result, the European economy relies heavily on energy imports from elsewhere in the world to meet its demand, so it is highly vulnerable to any disruption in international markets and politics. "And the gas crisis we are experiencing is a good example of this", says Gonzalo Escribano, director of the Energy and Climate Change Programme at the Elcano Royal Institute. Europe has to import 90% of the gas it consumes, and the two big exporters are Russia and Algeria. Gas pipelines from these two states reach a large part of the Old Continent: Russian gas is centred, above all, on the countries in the north-west of the continent; Algerian gas has the countries of the south - above all Spain, France and Italy - as its main customers. To a lesser extent, Norway, Iran and Azerbaijan also supply gas to some European states.

This year problems have come from both Algeria and Russia. The North African country has broken off relations with Morocco and, as a result, is planning not to renew the contract it has with Spanish and Portuguese energy companies for the Maghreb-Europe gas pipeline. The reason? This gas highway passes through Morocco before crossing the Strait of Gibraltar and entering European territory. If there is no turn of events before the contract expires on 31 October, Spain will be left without 25% of its supply.

The role of Russia and China

However, on a continental scale, the role of Russia is much more decisive. The Eurasian country supplies a third of Europe's gas and is therefore the region's largest supplier. But this year Moscow has limited its pipeline exports on EU soil for various reasons, such as high domestic demand or interruptions in production for technical reasons. Although the Kremlin reiterates that it is complying with the contracts it has signed, several voices in Europe accuse Vladimir Putin of intentionally withholding extra packages of gas in order to raise the price and thus put political pressure on the governments of the European Union. Russia is pushing to launch the new Nord Stream 2 gas pipeline, pending final approval, which, via the Baltic Sea, will pump gas directly to Germany. For Putin it would mean doubling the volume of gas exported to the EU, cornering Ukraine and, above all, gaining even more energy and therefore political power over the major European governments.  And it is precisely the latter that many in Europe and also in the United States do not see clearly.

Russian Energy Minister Aleksandr Novak said this week that speeding up the activation of Nord Stream 2 would "ease the gas crisis for European states". The Kremlin also called for calm and, showing energy muscle, on Thursday assured that the country has enough potential to increase gas deliveries to Europe during the winter.

In a context like this, the most normal thing would be for Europe to try to acquire more gas through other - not so usual - exporters, such as the United States, which produce more gas than they need and where deposits are at a good level before the cold season: only 7% below their historical average.

However, this is where the other major factor that explains this crisis comes in: as Antonio Turiel, a researcher at the Institute of Marine Sciences of the CSIC, points out, several Asian countries, especially China, Japan, India and Pakistan, are also short of gas and have embarked on a race against time to increase their reserves before the drop in temperatures arrives. These Asian countries, which after years of economic and demographic growth are beginning to play a key role, are the ones that have monopolised the gas ships in recent months, and have left European states with few options. Why? Very simple: they can pay a higher price.

Unease among governments

Among European governments the unease is increasingly evident. There are many things at stake. A few weeks ago, the Spanish government proposed to Brussels to use a model of joint action, similar to that of the vaccination campaign, which would involve applying a collective system for the purchase of gas. The European Commissioner for Energy, Kadri Simson, promised Wednesday a plan to reform the gas market before the end of the year.

Along with Spain, France, Greece and the Czech Republic are the ones who are pushing the hardest. Also Romania, which this week saw its government fall after a no-confidence vote was passed. One of the reasons was the increase in the price of electricity. On the other hand, countries like Belgium, Finland, Sweden and Germany believe that the rise in gas prices is temporary and reiterate that the solution is to invest in renewable energies.