The energy crisis in Europe: natural gas and the impossible bridge

Perhaps it was inevitable. Once you turned natural gas into a bridge to the future, the one and only transition fuel, the market was bound to get constricted. From behind, everyone was planning to move into gas, but the future after the transition still had to wait, and no one knew for how long.

Russia is not singly to blame. Exports of liquified natural gas from Norway have fallen 93 percent so far this year, from Trinidad 37 percent, and from Nigeria 19 percent. These countries accounted for 10 percent of global supplies in 2020.

Current shortages are directly connected to a sharp decline in investment five or ten years ago. Where did the decline come from? In part it followed the collapse in oil prices, but many investors were also reacting to political signals on the need to transition to greener energy sources. This essay by Helen Thompson explains the investment dynamics. And remember that China’s demand for natural gas has absorbed something like 80% of the limited growth in supply. Where did this growth in demand come from? Well, China was also trying to make space for the transition fuel, the bridge to the future… As one recent report noted, “Europe is the market of last resort in LNG. In 2020, this meant getting LNG no one wanted, crashing prices; in 2021, it means getting too little LNG.” It now seems that only Russia has the ability — with just a few words from Putin — to stop future recurrent market panics. See the oped I wrote seven years ago calling for a transatlantic energy union. It was the right time to prepare for the current crisis.

One way to put it is Europe has come to rely on natural gas as the critical transition fuel without putting in place the necessary policies to ensure not just the availability of supply in an emergency but stable prices. Was the reluctance to adopt these policies and make the necessary investments a consequence of regarding gas as no more than a transition? You see here how difficult it is to develop dynamic policies that react differently to different moments in time and can move and adjust to that variance.

We are indeed already in transition, but every transition is full of risks and uncertainty. Most home accidents, I am told, happen on the stairs between floors. Accelerating energy costs could make central banks jumpy about inflation risks. Some European countries are already witnessing spikes in public debt yields. In a meeting in Brussels earlier today, a number of European leaders criticised the European Commission for not responding quickly enough, warning that soaring prices could risk social unrest.

How do you solve a problem like natural gas?