Putin’s Gas Squeeze on NATO: Causing Pain, but Will it Work?

September 19, 2022

Vlad Putin bet on weaponizing his fossil fuel supplies when his Ukraine invasion plans sputtered. Instead, he ended up jump starting the move away from fossil fuels, permanently.

Wall Street Journal:

U.S. utility customers, faced with some of their largest bills in years, are set to pay even more this winter as natural-gas prices continue to climb.

Natural-gas prices have more than doubled this year because of a global supply shortage made worse by the war in Ukraine, and they are expected to remain elevated for months as fuel is needed to light and heat homes during the winter. The supply crunch has made it substantially more expensive for utilities to purchase or produce power, and those costs are being passed on to customers.

From New Hampshire to Louisiana, customers’ electricity rates are increasing. The Energy Information Administration anticipates the residential price of electricity will average 14.8 cents per kilowatt-hour in 2022, up 7.5% from 2021. The agency forecasts record gas consumption this year amid surging prices, in part because power producers are limited in their ability to burn coal instead due to supply constraints and plant retirements.

Wall Street Journal:

European governments say Mr. Putin’s gambit is to cut natural-gas supplies to inflict pain on European households and businesses so populations turn against current government policies of sanctions against Russia and support for Ukraine with weapons and financial aid.

Russia isn’t yet sure to lose this economic fight. But a growing consensus among officials, energy specialists and economists suggests that, although Russian actions will cause serious hardship in many places, Mr. Putin will likely fail and that Europe should ride out the winter without running out of gas. Once this winter is over, Mr. Putin’s sway over Europe’s energy supplies will have withered critically, they say.

Mr. Putin played his biggest energy card in late August when he stopped shipments of natural gas to Europe indefinitely through the Nord Stream pipeline. “This is his time. This is his point of maximum leverage and he’s all in,” said energy historian Daniel Yergin, vice chairman of S&P Global.

Russia’s energy bonanza deriving from the Ukraine war—when prices of its oil and natural-gas exports surged—appears to be petering out as gas exports have dropped sharply and oil prices have fallen. Brent crude, the global benchmark, is down from more than $120 a barrel in June to about $90 a barrel, which means Russia gets about $65 for each of its barrels.

Russian government data released Monday showed the government veered into a big budget deficit in August. It reported the budget surplus narrowed to 137 billion rubles, or $2.3 billion, for the first eight months of the year, from about 481 billion rubles in July since the start of the year.

European governments have succeeded in securing extra natural-gas supplies to replace some of the lost Russian gas. Gas usage is also likely to fall in what economists call demand destruction, or the closure of factories and reductions in household consumption because of high prices.

Last week, the European Union laid out proposals—yet to be agreed to by governments—to ease pressure on consumers, including mandatory curbs on electricity usage. Some energy specialists worry that direct government subsidies for energy will thwart efforts to curb demand.

The coming winter is the period of maximum vulnerability for European governments. If the season is harsher than usual, leading to increased energy consumption, optimism could evaporate. Maintaining European unity through the winter also might require some countries to share their stored gas with others.

One cost for Russia is its hard-won reputation that goes back to the days of the Soviet Union as a reliable supplier that never used gas as a political weapon. “Now they’re using it, not just as a political weapon, but as a weapon of war…It completely obliterates their credibility as a reliable supplier,” Mr. Yergin said.

In a sign that Russian influence is already waning, gas and electricity prices, which surged after the Nord Stream announcement last month, quickly reversed.

On Friday, wholesale gas traded at roughly 185 euros—about the same in dollars—a megawatt-hour. That is almost three times as high as a year ago, and more than double the level at the start of June, when Moscow began to throttle supplies through Nord Stream. Still, it is down more than 45% from the record closing high on Aug. 26 and back to levels from late July.

Electricity prices have almost halved from their peak. “It looks like the situation is stabilizing,” said David den Hollander, co-founder of Dutch power-trading company DC Energy Trading, pointing to near-full gas stores in central Europe, the closure of energy-guzzling smelters and fertilizer plants, and the installation of import terminals in the Netherlands and elsewhere for liquefied natural gas.

One other factor suggesting European governments won’t back down, Prof. Freedman said, is that the Russian president—who has tied resumption of gas supplies to a lifting of sanctions—hasn’t given European governments an easy off-ramp.

Evidence suggesting widespread abuses of civilians by Russian forces in Ukraine has hardened European attitudes, he said. Mr. Putin hasn’t offered the Europeans a deal that they can realistically support either. “It isn’t obvious what he expects Europe to do,” he said.

If Europe doesn’t change course, “then it actually ends up diminishing Russia,” he said.

Washington Post (August 10 2022):

In the short term, the dash back to dirtier fuels looks like bad news for the climate. Further out, the crisis has made European governments more determined to ditch Russian gas, and fossil fuels in general, and accelerate adoption of cleaner technologies. They’ve stuck with the EU’s flagship climate policy, the Green Deal, which includes a massive package of laws to meet a target of zeroing-out greenhouse gas emissions by mid-century. The 27 countries in the EU got about a fifth of their total energy from renewables in 2020 and had planned to double that share to 40% by 2030. In the wake of the war in Ukraine, the target was raised to 45%. Germany, which relied on Russia for the bulk of its oil, natural gas and coal, brought forward its goal of 100% renewable power by more than a decade to 2035. That’s an ambitious challenge since wind and solar farms take years to plan and build. 


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