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| Fig. 1: Global gas and LNG trade in 2013. [7] (Courtesy of British Petroleum) |
The 2022 Russia-Ukraine war is rebalancing the European energy sector, with natural gas turning into a global and interconnected market, affected by events and dynamics that are far beyond its traditional physical scope. [1] Today the European gas market with prices largely depending on pipeline flow dynamics between Russia and Norway is being rapidly reshaped as European nations continue to diversify its energy supply in lieu of Russian natural gas and procure additional gas from other countries.
This regional conflict has immensely accelerated the natural gas market's globalization, with analysts and market participants now calling it the "new oil," referring specifically to its geopolitical aspect, as gas is traded very differently from oil and cannot compete in terms of liquidity.
Historically, Russia accounted for 40% of EU's total natural gas imports, with Germany and Italy being the top two recipients. [2] Energy is the most important sector in Russia's economy, and natural gas is a key resource. In response to Russia's attack on Ukraine in February 2022, US and European countries commenced a wide-ranging effort to cripple Russia's economy, which is largely propelled by oil and natural gas exports. EU imposed major economic sanctions on Russia and have vowed to stop buying Russian gas by 2030.
EU's heavy reliance Russia for its energy needs left the former vulnerable to gas supply reductions through the Nord Stream 1 pipeline in the months following the outbreak of the war. [3] In retaliation, Russia decided to drop natural gas supplies to rest of Europe, resulting in a 60% drop in total exports. In September 2022, the Nord Stream 1 pipeline was destroyed by undersea sabotage from "parties unknown", cutting off all natural gas supply from this pipeline.
The pipeline flows of gas from Russia were 60 billion cubic meters (bcm) in 2022, and less than 10% of the EU's gas imports in January 2023, approximately 20 bcm. [4] Russia's share of total EU natural gas continues to dwindle by the day. Such interruptions in energy trading and uncertainties with future energy supply across the EU have caused huge jumps in energy prices and increased volatility in the stock market. [2]
The long-term consequences of the war in Ukraine will depend on current policy responses and priorities. Most recently, policy makers have been promoting energy efficiency and low-carbon sources of energy production, which is in line with the green goals of a transition away from fossil fuels to combat climate change. [3]
In March 2022, the European Commission unveiled a strategy to eliminate the dependence of the EU on Russian gas, which helped reduce imports in physical terms in 2022. [5] The plan involved a proposed 15% voluntary reduction in gas usage, a reduced demand for Russian gas by 2/3 already by the end of 2022 and be completely free from Russian supplies by 2030. [4,5] The European Commission increased its 2030 target for renewables in total final energy consumption from 40% in 2021 to 45% in early 2022, striving to reduce Europe's dependence on Russian fossil fuels. [6]
Increase the importation of liquefied natural gas (LNG) from other countries - most notably Norway, Qatar, Algeria, and the US.
Expanding its use of renewable energy sources.
Taking more energy-saving measures.
Expanding its use of hydrogen and biogas.
A certain reduction in energy supplies from Russia to EU is possible, but the region will not be able to replace Russia completely as one of the most important natural gas suppliers to the EU in the short-term. The reason is the growing imbalance between supply and demand for fossil fuels on the global market and the rise in prices for fuel in connection with this imbalance, causing a global energy crisis. [5]
In 2023, EU continues to face energy shortfall due to the sudden disruption from the Russian trade as alternative sources can replace only up to 70% of Russian natural gas previously exported to the EU in the short-term. [1] With natural gas an important input in production, the capacity of the regions economy would shrink. The continent remains vulnerable to additional energy shortage in the case of harsh winter conditions in the 2023-24 winter season and a longer full shut- off to all of Europe would likely interact with infrastructure bottlenecks, resulting in sky-high energy prices.
EU has managed to avoid an energy crisis in the short-term by importing LNG from other countries, ramping up renewable energy capacity, and cutting demand in energy-intensive industrial sectors. [4] However, the EU policy of targeting energy security and the limiting of imports of hydrocarbons from Russia do not meet the conditions of an accelerated green transition.
In the short-medium term, EU will have to continue ramping up fossil fuel-intensive LNG and oil imports to ensure enough energy supply to the continent and to avoid a mass-scale energy crisis, which in turn could trigger a financial recession.
© Maria Verbaite. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] X.-Y. Zhou et al., "Influence of Russia-Ukraine War on the Global Energy and Food Security," Resour. Conserv. Recycl. 188, 106657 (2023).
[2] S. Chen et al., "The Russia-Ukraine War and Energy Market Volatility: A Novel Application of the Volatility Ratio in the Context of Natural Gas," Resour. Policy 85A, 103792 (2023).
[3] M. Izzeldin et al., "The Impact of the Russian-Ukrainian War on Global Financial Markets," Int. Rev. Financial Anal. 87, 102598 (2023).
[4] "Proposal for a Council Regulation, Amending Regulation (EU) 2022/1369 as Regards Prolonging the Demand Reduction Period for Reduction Measures for Gas and Reinforcing the Reporting and Monitoring of their Implementation," European Commission, COM(2023) 174, March 2023.
[5] E. M. Fazelianov, "The Energy Crisis in Europe and Russian Gas Supplies," Her. Russ. Acad. Sci. 92, S902 (2022).
[6] S. Liao, "The Russia-Ukraine Outbreak and the Value of Renewable Energy," Econ. Lett. 225, 111045 (2023).
[7] "BP Statistical Review of World Energy 2014," British Petroleum, June 2014.