Putin’s “Price Terrorism” with the European Gas Supply

Russian President, Vladimir Putin, is putting on a masterclass on how to bring modern Europe to its knees. With a reliance on Russian oil and gas despite voicing objections about their actions in Ukraine, European nations are facing an existential crisis as they move into the fall and winter months. As countries try to band together and pledge to reduce consumption, Putin appears to hold all of the bargaining power with some of the world’s largest economies. 

We’ll look at how Russia is controlling the flow of natural gas into Europe and how these actions are adversely affecting global energy security. 

Russia Historically Supplies Europe with Around 45% of its Natural Gas 

According to the International Energy Agency (IEA), the EU imported around 155 billion cubic meters of natural gas from Russia in 2021 alone. That massive total translates into around 45% of the gas imports for the entirety of the European Union. The EU, to its credit, is not sitting on its laurels as this crisis has unfolded. 

The European Green Deal is a climate-change initiative that seeks to reduce fossil fuel dependence and move the continent towards net zero. With the punishment of Russia being added as a sort of “activism” to green energy initiatives, member nations ascribing to the Green Deal are scrambling for alternatives to Russian gas and oil. 

One such alternative being floated is to increase Europe’s coal-fired fleet, possibly in combination with using more oil in gas-fired power plants. These alternatives are both costly and even if the entirety of the sweeping European Green Deals initiatives were enacted, according to the IEA’s reports it would result in only cutting their dependence on Russian oil and gas in half. 

One must wonder if such a massively unstrategic initiative is ideal as Europe stands on the brink of recession, consumer prices are skyrocketing, and ordinary citizens are the true pawns in a political showdown between Russia and the rest of the world.

European Nations Resort to Gas Rationing with Dwindling Russia Supply 

When the Nord Stream 1 pipeline was shut down for maintenance, all of Europe panicked. Russian gas conglomerate, Gazprom, announced that force majeure was the cause for their failure to deliver on contractual obligations and that the pipeline needed critical maintenance. Gazprom started to return to normal operations and then just days later, announced earlier this week they would need to reduce gas flows again. 

While European leaders may seem incredulous about the reasons Gazprom is giving for reducing gas flows, the reality of the situation seems to be sinking in. The European economy is already being strained to its breaking point following years of disruptions from the global pandemic, critical levels of inflation, and a war in Ukraine that seems mired no matter how many economic sanctions are leveled against Russia. 

A day after the Gazprom announcement on July 25th, various EU governments announced they had reached an agreement to ration gas. This is truly a last-ditch effort that relies on altruism in the face of what’s often a long and hard European winter. With several nations already bucking the demands of the agreement, it will remain to be seen if the accord holds up to harsh realities. One bright light at the end of this bleak tunnel is the recognition of the need in modernizing energy infrastructure. Shale was there more than a month ago during the Greater Houston Partnership Summit when leaders in oil and gas discussed this very issue with truly cutting-edge concepts like miniature nuclear reactors. 

Despite what global Green New Deal disciples may want to admit, it is the oil and gas industry that is leading the charge in the decarbonization of oil and gas, measuring and managing emissions, and next-gen hydrogen technology. 

“Gas Wars” in Europe Threaten Global Energy Stability

As one of Europe’s largest economies, economic drivers in Germany act as a harbinger for the whole of the continent. With a huge reliance on Russian oil, Germany in particular is in a bit of a pickle. Business confidence in Germany has dropped to rock-bottom levels with record inflation and slackened energy supplies. The world-renowned IFO Institute for Economic Research is based in Munich, Germany. In a news report, IFO President Clemens Fuest remarked that economic indicators point towards the fact that “Germany is on the brink of a recession.” 

Having such a huge upswing in energy prices, Germany faces even more trouble down the road. Consumer confidence wanes and businesses look elsewhere to protect their operations. If real GDP growth continues to fall as it has in Germany and across Europe, the threat of recession goes from theoretical to reality very quickly. If Germany enters into a true recession, expect other countries to fall like proverbial dominos, with global economic ripples being felt on America’s shores as well.

Russian Response to Gas Cap Could Prove Disastrous for Europe

Russia is facing a slew of economic sanctions from its war in Ukraine. World leaders may have believed that Russia would take these sanctions and cease and desist. However, any student of history can tell you that isn’t Putin’s style. Instead, Putin has used one of the most powerful weapons available to him—the Russian gas and oil supply. As we noted, European leaders are scrambling for alternatives including possibly from the U.S., and resorting to a loose rationing agreement out of Brussels that no one seems to want to wholly agree to.

In response to the proposed “gas cap” on Russian oil, Russia has made it clear that they simply won’t deal with any country that tries to impose it. When confronted with zero supply, it will be interesting indeed to see which countries “stick to their guns” with the proposed gas cap and which fold to the reality of not having gas for industry, citizens, hospitals, and more in the upcoming winter months.

American Response Includes Sacrificing the SPR 

We’ve reported on the drastic releases from the SPR, where the Biden Administration has unabashedly delivered large amounts of U.S. oil reserves to nations like China. The Administration continues to release strategic reserves even though the amounts are far and above what was initially called for by the IEA member countries. The latest release will build on the more than 125 million barrels of oil from the SPR that have already been sold. With around 180 million barrels contributed from the American stockpile, our nation is forking over 300% more oil than that of other IEA member countries. 

Biden’s own Treasury Department warned that a dollar decrease in the price per barrel of oil does not correlate economically to a dollar decrease at the pump—

“However, recently refining markets have been very tight, and it’s possible that a $1 change in crude oil would not lead to an equal decline in the retail price of gasoline.” As stated in a report released by Assistant Secretary for Economic Policy Benjamin Harris and Deputy Assistant Secretary for Climate Energy Economics Catherine Wolfram

There are far more complex economic drivers at play and demand destruction is perhaps the biggest driver for the lower gas prices of recent weeks. Still, Biden seems dead set on draining the SPR to critical levels to appease his “green agenda” initiates, while at the same time announcing plans to buy more domestic oil to replenish the reserve. Such blatant two-facedness seems to rely on thinking the American public is simply ignorant.

Europe May Be Next As U.S. Tips into Technical Recession 

With the second consecutive quarter of negative GDP growth, the U.S. has officially entered into the widely-accepted economic definition of a recession. The first quarter saw a 1.6% decline and the second a 0.9% decline in gross domestic product. Despite Biden rejecting the claim that the U.S. is in a recession, statistics don’t lie. The U.S. is battling crippling inflation, weeks of a weakening U.S. dollar, continued disruptions from COVID-19, political infighting, chaos at the border, and foreign policy that includes getting rejected when begging for Saudi oil. 

With one crisis simply ushering in the next, the reactionary #trending Administration is doing little to quell fears domestically that anything is “under control”. As our global economies are more entwined than ever, the effects of this recession will undoubtedly be felt across both sides of the Atlantic.  

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