Rising NG European energy crisis intensifies as Russia shuts key gas pipeline, euro sinks to 20-year low
The euro plunged to a 20-year low and energy prices soared Monday after Russia turned off the taps of the main conduit for natural gas to Europe, increasing the prospect of rolling blackouts and factory closures on a continent starved for fuel.
The euro dropped as much as 0.8 per cent to US$98.78, its weakest level since 2002. European natural gas prices, already up tenfold in a year, jumped again, with benchmark Dutch futures opening about 30 per cent higher to more than €270 per megawatt hour (MWh).
In energy equivalency terms, that’s like paying US$450 for a barrel of oil.
Oil prices also rose, partly because OPEC, the Saudi-led oil cartel, has signalled it may not raise output, as U.S. and European governments want it to do. Brent crude, the effective international benchmark, was up almost 4 per cent in early trading, taking it to US$97. That is up 33 per cent in one year though still well short of its recent high of US$139.
The trigger for the latest surge in the price of natural gas was Russia’s decision over the weekend to indefinitely suspend flows through the Nord Stream 1 pipeline, the main source of Russian gas to Germany. Gazprom, the Kremlin-controlled company that holds a monopoly on gas exports, had signalled it would reopen the pipeline Sunday at 20-per-cent capacity after three days of maintenance.
Russia claimed a technical fault was behind the decision to keep Nord Stream 1 closed, but that explanation was widely dismissed in Brussels and other European capitals.
European leaders have accused Russian President Vladimir Putin of using energy as a weapon against Europe, after many countries implemented financial and economic sanctions against Russia and began supplying weapons to Ukraine. Moscow is no longer fully denying that the gas shortfalls are politically motivated. Dmitry Peskov, Mr. Putin’s spokesman, said Monday that Russia’s gas exports would not fully resume until the “collective West” lifts its sanctions.
In a message posted on Telegram over the weekend, former Russian president Dmitry Medvedev said Germany was “acting as an enemy of Russia” and that European countries “have declared hybrid war against Russia.”
On Monday, Timothy Ash, a strategist at BlueBay Asset Management of London, said on Twitter that “Medvedev’s comments make it clear that Russia is blackmailing the West – stop supporting Ukraine if you want energy from Russia.”
Energy prices have reached unaffordable levels for many European families and small businesses, with a wave of closures and bankruptcies expected. In Italy and the U.K., owners of restaurants and pubs have seen their electricity and gas bills rise about 400 per cent over a year.
High fuel prices are already triggering political instability and civil unrest in parts of Europe.
On Saturday, an estimated 70,000 people flooded into Prague’s Wenceslas Square to demand that the ruling coalition, which had just survived a confidence vote, take action to bring down prices. “The aim of our demonstration is to demand change, mainly in solving the issue of energy prices, especially electricity and gas, which will destroy our economy this autumn,” co-organizer Jiri Havel told a Czech news site.
The European Commission (EC) and European governments are scrambling to design support packages for utilities and consumers.
On Sunday, Finland said it would offer the equivalent of US$10-billion in liquidity guarantees to power companies facing insolvency. Sweden said it would do the same, offering as much as US$23-billion. “This has the ingredients for a kind of Lehman Brothers of energy industry,” Finnish Economics Affairs Minister Mika Lintila said, referring to the collapse of the Wall Street investment bank in 2008 that triggered the global financial crisis.
At the same time, German Chancellor Olaf Scholz announced that his coalition government will impose a windfall tax on electricity producers and use that revenue to finance a €65-billion package. He called the tax an “electricity price brake,” which will allow households to buy basic amounts of electricity at reduced prices.
The EC, meanwhile, is considering gas price caps and a tax on excessive energy profits that would be applied throughout the 27-state European Union. These proposals and other emergency interventions, such as an EU-wide credit line for struggling utilities, will be discussed Friday at a meeting of energy ministers.
With Russia having eliminated or reduced gas supplies to more than a dozen EU countries, energy ministers pledged over the summer to reduce gas consumption by 15 per cent to try to avoid an energy crunch over the winter that could result in gas rationing and rolling factory closures.
Europe’s energy crisis is made worse by the drought affecting much of the continent and limiting the ability of hydroelectric plants to generate power. In Italy, where rivers everywhere have dried up, electricity generation from dams is down by almost half. Even some nuclear plants in Europe have been forced to shut down or reduce output because of a lack of water, which is used to cool the reactors.