Europe and the world will make it through this winter but next winter is shaping up to be an energy emergency without any good solutions
JAYANTI IS AN EASTERN EUROPE ENERGY POLICY EXPERT. SHE SERVED FOR TEN YEARS AS A U.S. DIPLOMAT, INCLUDING AS THE ENERGY CHIEF AT THE U.S. EMBASSY IN KYIV, UKRAINE (2018-2020), AND AS INTERNATIONAL ENERGY COUNSEL AT THE U.S. DEPARTMENT OF COMMERCE (2020-2021). SHE IS CURRENTLY THE MANAGING DIRECTOR OF ENEY, A U.S.-UKRAINIAN DECARBONIZATION COMPANY.
For policymakers grappling with global energy shortages and households scrambling to pay record high utility bills, some unwelcome news: This year’s energy crisis is going to look mild once next year’s kicks in. It is winter 2023-2024 that is going to be the real crisis. Any current energy planning that fails to account for next year and beyond is jumping out of the frying pan and into the fire—where this winter is a problem, 2023’s may be a catastrophe.
The immediate problem is simple: There is not enough fuel, and therefore not enough electricity, so prices have skyrocketed for both. To a large extent, this is a result of decreased Russian exports of oil, natural gas, and coal, which have been hit by western sanctions and other policy efforts to curb Russian revenues funding atrocities in Ukraine. Most Russian fuel supplies are still reaching international markets, however, because countries like China and India are happy to buy discounted product from a not-quite-fully marginalized Kremlin. But Russian exports are down, too, approximately 18% in August compared to February. Notwithstanding a current drop in natural gas prices now that European storages are mostly full, prices have been so high as a consequence of tighter supplies that Russian President Vladimir Putin is enjoying record energy revenues—over €200 billion since the start of the war on February 24. In turn, markets are tight globally and countries are competing for limited supplies in what has become a zero-sum energy game.
This year’s energy shortage is not just a Russia problem, however. Other factors keeping energy supply below demand are the unexpected surge in economic and industrial activity as countries awoke from COVID-19, refining capacity shortfalls caused by myriad fires, labor strikes, and other maintenance activities, and overall inflation that puts upward pressure on prices independent of supply constraints. The knock-on effect—high prices and lower than normal generation—on electricity are because most power plants burn oil, coal, and natural gas. Utilities can neither raise prices on consumers without regulatory approval nor buy fuel imports with unchecked debt under existing laws that prevent risky behavior by critical service providers. Many power plants around the world are struggling to continue generating electricity.
Meanwhile there are not nearly enough nuclear, wind, solar, and other non-fossil fuel alternatives, and hydroelectric plants worldwide are suffering due to climate change droughts. The end result is current or forecast brown and blackouts across the developing world, in parts of Europe, and maybe in the U.S., too, according to the U.S. Federal Energy Regulatory Commission. Developing countries are the worst off because they have less ability to absorb higher energy costs.
This is the situation we are in now, which winter will exacerbate, but it is going to be a walk in the park compared to next year. To start with, this year is not as bad as it could be. Although this year’s winter will prove uncomfortable and expensive, Europe is nonetheless in a surprisingly good position. Bloc-wide, natural gas storages are now well over 90% of the annual target, which is actually at least 15% higher than their levels a year ago. This is not enough to heat and power the continent through a cold winter, or even a normal winter at current consumption levels. But barring any unforeseen calamities, current natural gas reserves are probably enough for one winter if the E.U. succeeds in implementing both its voluntary and mandatory cumulative 15% electricity usage reduction policies.
Of course, a warm winter and a 15% consumption reduction is a best case scenario, and it is far from certain it will play out. During a cold snap in September and October, Poles were burning trash to stay warm. Europeans are hoarding firewood, and blackouts are already occurring in some countries. And, unfortunately, warm weather now coupled with energy subsidies are likely to disincentivize conservation of existing energy resources. Alexey Miller, CEO of Russia’s Gazprom, thus estimated in mid-October that European countries could be short about one-third, 800 million cubic meters (mcm) of natural gas per day during a cold spell this winter even with gas storages full now.
He’s not wrong. An unusually cold week in Europe in September functioned something of a stress test for whether energy use was being successfully reduced. It was a failure. Amid a massive effort to lower consumption, German consumers instead used 14.5% more gas than in previous years. So much for belt tightening.
What is certain is that if Europeans, and the rest of us, could see ahead to 2023 and beyond they would be doing everything in their power to save energy reserves now in preparation. The fundamental problem faced this year—a fuel and thus power shortage causing insanely high prices—will not go away by next year. It will instead expand into an energy crisis that makes this year’s look manageable.
First, there is a high probability that China will finally come out of COVID-19 slumber. It will rock and roil energy markets when it does. China’s ongoing lockdowns resulted in a sharp decline in fossil fuel and power consumption, a 9.14% drop for oil and 5.8% for natural gas in April 2022 over 2021. In fact, Chinese consumption has dropped so much that it was recently arbitraging energy, buying U.S. liquified natural gas (LNG) on preexisting fixed long-term contracts and selling it for a huge profit at current spot market prices to Europe. This August, China, the world’s biggest consumer of energy, imported a full two million barrels of crude oil a day fewer than expected. For comparison, Russia exports an average of 10 million barrels per day, meaning that when China wakes up from COVID-19 it will rise with a voracious energy appetite equal to 20% of Russia’s exports. This will put tremendous additional pressure on energy markets already straining under current demand.
Second, Putin is not about to turn the energy taps back on for Europe. If he is still in power next year, the Russian President will demonstrate his famous ability to hold a grudge by doing whatever he can to continue punishing Europe for backing Ukraine. He would not have sabotaged Nord Stream 1 and 2, his own gas pipelines to Germany, if he were considering starting to again send fuel to Europe. Putin is instead playing a long game, waiting for the energy crisis to cause enough inflation to bring about enough popular unrest to topple western governments opposed to Russian imperialism. He would also not be damaging Russia’s oil and gas industry if energy relief for the West were in his plans. The physics of natural gas and oil wells are such, to differing degrees, that they are not like a light switch that can be flicked on and off. The sanctions coupled with the loss of western expertise and reduced export volumes mean Russia will have trouble quickly getting its petroleum industry back up and running at scale after the war, if ever.
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If Putin is not in power next year, then possibly new Russian leadership so deftly takes the helm of the Russian economy and its petroleum industry that sanctions are lifted and oil and natural gas again flow westward freely, but probably not. Far more likely to flourish in the power vacuum Putin would leave in a situation of political and economic instability. So, either way, Russia is probably not going to be the world’s energy bank in 2023, and likely not for years after.
This means that when Europe emerges from this winter in April 2023 it will have exhausted its fuel reserves and will have a much harder time finding ways to replenish them. Over 40% of Europe’s stored gas for this winter came from Russia, despite sanctions and conflict. In 2023 and beyond, Europe will try to—will have to—source its energy imports from elsewhere, which will put it in direct competition with other countries and result in a bidding war for resources. This will, in turn, drive prices up even higher. Although natural gas prices have dropped precipitously for now, down 70% as Europe has stopped buying now that its storages are relatively full and Autumn has been mostly warm, they will spike again in 2023 as soon as demand rises.
The simple reality is that there aren’t adequate supplies anywhere in the short to medium term—6 months to 2 years. U.S. LNG cannot save the world. This year’s 12% increase in U.S. LNG exports is a rate of growth that cannot be sustained. Existing U.S. production is already mostly maxed out for now and there is inadequate infrastructure—not enough pipeline capacity to move gas to LNG terminals, and no new LNG terminals planned for another two years. The next one expected to come online is Exxon’s Golden Pass LNG facility, a joint project with QatarEnergy, hoped for in 2024.
Even were there more production and export capacity in the U.S., global import capacity is limited to the fewer than 50 LNG terminals in existence. In Europe, for one, LNG terminals have had spare capacity to import less than 70 billion tons, whereas the continent imported about 170 bcm of pipeline gas, the equivalent of 118 billion tons of LNG, per year from Russia before the invasion of Ukraine. Europe is looking to rent floating LNG terminals to alleviate this bottleneck, but the cost is massive and other issues persist. And, a dirty secret is that much of the LNG that has rescued Europe this winter is in fact Russian, a sanctions loophole that is almost certainly going to be closed. Russian LNG imports into Europe are up 42%, but won’t be next year. Moreover, LNG is now shockingly expensive, too. LNG tanker charter prices were recently $400,000 per day and were expected to hit $1 million.
Yes, Germany and other countries are now building new infrastructure, but none of it will be ready next year. Building new pipelines takes 1.5-4 years and LNG terminals need 2-5 years. It will take another 3-5 years, at a minimum, for the LNG markets to balance supply and demand. Meanwhile, few reasonable investors will pour billions into infrastructure projects with a 10-30 year breakeven timeline for fuels the world is trying to phase out in 8 years because of climate change. New fossil fuel projects may be redundant before they are even completed. In the meantime, in 2023 there will not be enough U.S. or Qatari liquified natural gas (LNG), nor Azerbaijani gas, nor Kenyan, nor Australian, nor any other to compensate for the total loss of Russian imports.
Nor can renewables yet save the day. Wind and solar farms can be built relatively quickly and cheaply, but they cannot be used to power heating at a large scale because most households are not equipped with electric heaters or heat pumps. Replacing an entire country’s heating systems will take longer than a year. In any case, there are supply chain bottlenecks for solar panels and wind turbines, mostly because of China’s lockdwon policies, so this is not a viable option in the short term anyway. Nuclear power is also not a solution for the 2-5 year range because nuclear plants take 5-10 years to license and build. Biofuels and geothermal heating are promising technologies, but suffer from the same shortcomings—either they take too long to build or are not sufficiently scalable and thus unable to solve the immediate problem. While the energy crisis is proving an excellent stimulus for innovation, none of the new technologies it brings forth will be ready by 2023, or 2024, or probably even 2025.
Taken together, Europe is likely to be short by as much as 20% of its needed fuel in 2023. The bulk of what it can secure will come at a price so high that recession-hit governments will have trouble buying it while simultaneously paying their populations’ energy bills. Without the ability to bring new energy sources online in a hurry, the single tool governments have at their immediate disposal is cutting consumption. This is the equivalent of zipping up the tent in a hurricane, but it is what’s available. As the German experience in September shows, however, getting people to use less gas and electricity is very, very difficult. A mild winter in Europe this year will also make people less likely to conserve for 2023.
Of course, it’s not the rich countries of North America and northern Europe that will suffer the most through the energy crisis, whether this year or next. This energy crisis is global. Already poorer countries are facing blackouts, protests, and worse because European and Asian demand has driven fuel prices higher than developing countries can afford. Sri Lanka, Pakistan, Ecuador, and Haiti are just a few of the cash strapped countries rocked by energy inflation, fuels shortages, and the violent protests they triggered. Continued food insecurity due to lack of fertilizer and fuels will worsen, too, and unrest with them. And as scarce energy resources pit countries against each other, it is the those that were already behind that will lose on the market. These trends will accelerate when the real energy crisis hits in 2023 and 2024.
For fuel-rich countries, like the U.S., the consequences of the energy crisis escalating through 2023 will be mixed. On one hand, there is a lot of money to be made. The 2022 energy crisis has brought record profits to petroleum companies, which will continue as long as fuel shortages do. The large increase in U.S. LNG exports has meant massive profits for private U.S. petroleum companies, such as Exxon. The same is true for Norway. Norwegian gas imports into the E.U. are up 8% compared to last year, making it the E.U.’s top supplier since Russia mostly cut off gas exports. Equinor, the state-owned petroleum company, is expecting $82 billion more in 2022 and 2023 in energy revenues, up from $27 billion in 2021. Even embattled Venezuela could cash in—the White House was considering relaxing sanctions on Caracas to allow Chevron to bring more Venezuelan crude oil into play. China’s LNG arbitrage made for good money, too.
On the other hand, the macroeconomic and political fallout from the energy crisis will be felt everywhere, even in net energy exporting countries. Record energy prices have almost certainly pushed European and other countries into recession, which will necessarily reverberate in the U.S., Canada, OPEC countries, and elsewhere. Even in Norway, inflation has tripled, up from a 20-year average of 1.84% to almost 7% in September 2022. Economies are simply too interlinked for problems on one continent not to affect everywhere else.
