Energy Policy: A Forewarning from Europe

Presented by:

A global energy crisis looms as commodity prices spike around the world, and governments and other institutions scramble to try to minimize the damage. It is an ironic circumstance because many of these governments are largely responsible for the crisis as a result of making bad public policy decisions and being geopolitically outmaneuvered.

Currently, the crisis is most severe in Europe, where natural gas prices have risen 500% from a year ago. Yes, demand has increased as the continent emerges from the pandemic, but the root of the problem is Europe’s gas supply, which is increasingly dependent on Russia. The main source of Russian gas to Europe has been through an older pipeline that travels through Ukraine. Another source is the TurkStream line that takes Russian gas under the Black Sea to Turkey and brings it into Europe through Bulgaria. The controversial Nord Stream 2 line, which will supply Russian gas to Germany via the Baltic Sea, has been completed but is not yet certified by the EU and Germany. Russia has refused to put additional volumes of gas through the Ukraine transport system because Vladimir Putin says it is old, in need of repair and additional volumes might cause “something to burst.”

Putin is, of course, using that excuse to push Europe to expedite the opening of Nord Stream, lessening the need to transport Russian gas through Ukraine, while still increasing Europe’s reliance on Russian gas. This is a foreign policy blunder for Europe and the U.S., as Europe will now be more dependent on Russian gas, and Russia is already using its gas as a weapon.

What is especially disturbing about Europe’s energy price crisis is that it is taking place during the fall, normally a season where demand is low and temperatures are modest. It is frightening to think about what prices could do in the winter. Expensive gas means expensive power, as the highest priced energy in the European system sets the contract price.

Inadequate infrastructure is further compounding the direness of the situation. While there are many LNG terminals in Europe, there is simply not enough to supply a market that is currently undersupplied. Under Europe’s deregulated power market there is little incentive for gas storage, and policymakers and the public have recently discovered that there is no spare capacity. Europe’s own gas production, from the North Sea and the Netherlands, has been declining. While Europe does have gas potential, such as shale gas in the Paris Basin as well as gas potential in the Mediterranean, policymakers have refused to allow its development. Nuclear power has been eliminated in parts of Europe, as has coal. Eastern Europe, which still has significant coal-fired capacity, supplies electricity to the west during periods of high demand and/or when there is low renewable energy output.

Watch Jack Belcher in the latest installment of Energy Policy Watch, a partnership between Hart Energy and Cornerstone.

Subscribe to receive notifications about new Energy Policy Watch episodes.

Tragically, the price situation is bankrupting businesses in Europe, especially manufacturers that are now at a profound disadvantage to competitors with lower priced energy. The European Commission is attempting to adjust regulatory policies to allow EU member nations to subsidize businesses that can’t afford their energy bills. Other proposed solutions vary from a windfall profit tax on investor-owned utilities to freezing prices to making changes to the EU’s Emissions Trading System.

A political backlash for these prices can be expected in upcoming elections. Businesses and workers alike that are disillusioned with recent European Commission activities, such as the European Green Deal, think that the EU is moving too far, too fast. Populist movements are returning, and yellow vests can again be seen in the streets of Paris. Could there be a return to Brexit-type movements and a rise in power on the right? How will this all impact the COP26 Climate Conference that is commencing in Glasgow?

On this side of the pond, the U.S. is embarking on or pursuing numerous policy initiatives that could also facilitate an energy crisis. A budget reconciliation package is currently stalled in Congress that would make significant changes to our tax code that could undermine the competitiveness of the oil and gas industry and disincentivize E&P at a time the U.S. needs more supply. Additionally, efforts are underway to cut off oil and gas leasing on federal lands and waters and make it more difficult anyway. At the same time, investors remain wary of investing in the sector, due to anti-fossil sentiment among investors and the federal government.

What is troubling about the situation in the U.S. is that we have the resources to meet our own needs and to help supply Europe and the rest of the world through exports. However, current public policy discourse has apparently chosen to ignore that fact and disregard the significance of doing so. Instead, the federal response to rising oil prices has been to make domestic production more burdensome while asking OPEC to increase its production. Let’s hope we don’t find ourselves in the same situation as Europe.