Only five or six months ago, Germany and much of the rest of Western Europe were barrelling toward recession. Crippling oil and natural gas prices were about to inflict deep economic pain, forcing energy-intensive industries, from glass makers to steel foundries, to close en masse – putting a smile on Vladimir Putin’s face. Other than outright victory in Ukraine, there is nothing the Russian President wanted more than to see his weaponization of energy make Europe freeze in the dark.
Today, Europe is talking about the energy crisis that wasn’t. Natural gas prices are still three times higher than their long-term average but have plummeted since their August peak; in the past month alone, they fell by half. Crucially, there is no imminent danger that gas supplies will vanish any time soon – incredibly, European storage tanks are almost full.
The upshot is that Mr. Putin’s energy war against Europe, like his war against Ukraine, is not going to plan. The energy turnaround has also exposed the pointless appeasement of Russia by former German chancellors Gerhard Schroeder and Angela Merkel. In the two decades before the start of the war, they doubled down on Russian gas, insisting that the mighty German economy could not thrive without the seemingly endless supplies of that cheap energy.
They were wrong. Softening energy prices have, so far, allowed Germany to skirt recession. According to the initial estimate from the country’s statistical agency, the economy grew 1.9 per cent in 2022, though probably flatlined in the last three months, suggesting that a shallow recession is still possible. This week, Goldman Sachs said it no longer sees a euro zone technical recession (defined as two quarters of negative GDP) in 2023, thanks to falling energy prices and China’s lifting of most of its COVID-19 restrictions, allowing its borders to reopen.
How did Europe avoid economic disaster? Governments’ abject fear of the lights going out (and losing the next election) was certainly a motivating force. Their energy ministers scoured the planet for gas, paid steep prices and came up with shiploads of liquefied natural gas (LNG), mostly from the United States – an LNG superpower – and Qatar, though also a few loads from Russia.
At the same time, the weather worked in their favour. The European winter has been far warmer than average, barring a few scary days in early December. In Germany, those frigid days triggered a low-grade panic. Gas in storage was being drawn down at the rate of 1 per cent a day, meaning a third of the supply would be gone in a month if the cold weather persisted, and none of Germany’s new floating LNG import terminals were operational yet. Mr. Schroeder and Ms. Merkel failed to build any LNG infrastructure because of their conviction that Russia would forever be a reliable gas supplier.
Then it got warmer – much warmer – and the drain on gas reservoirs was reversed. Earlier this month, when Germany received its first shipment of LNG at the North Sea port of Wilhelmshaven, lingering fears that the country would have to shut its factories all but disappeared. The leased floating LNG terminal was one of five the country will put into operation.
With Europe halfway through the winter heating season, the likelihood of severe gas shortages appears slim, even if extreme cold returns. At the same time, the exceedingly high energy prices of the summer and autumn reduced demand. Martijn Rats, Morgan Stanley’s chief commodities strategist, said total gas demand in December in the EU was 19 per cent below its five-year average, proving that the best cure for high prices is high prices.
Put it all together – warm temperatures, a gusher of LNG, demand destruction – and Europe has been able to refill its gas storage sites at amazing speed. In Germany, France and Italy, storage levels at last count ranged from 80 per cent to 90 per cent, providing ample cushion. Whether this success can be repeated next winter is an open question. If the Chinese economy rebounds, it will need more LNG, depriving Europe of supply. In 2021, China became the leading importer of the fuel, surpassing Japan.
Russia is still selling gas to Europe, but not a lot. Kremlin-controlled Gazprom, the world’s largest gas exporter, began cutting supplies to Europe well before the Nord Stream 1 pipeline connecting western Russia to Germany was sabotaged by an underwater explosion in September (the culprit is still unknown; Russia denies wrecking its own pipeline). Russian gas exports to Europe have fallen about 80 per cent since the war started almost a year ago. The EU banned imports of Russian seaborne crude oil last month.
Now that Europe has proven it can live without Mr. Putin’s oil and gas, it seems unlikely that Russian energy will ever again play a big role in the European energy mix – a huge revenue loss for the Kremlin and its effort to weaken the resolve of NATO countries, most of them European, to send weapons to Ukraine.
Europe’s quick energy transformation marks nothing short of a revolution (though one that did virtually nothing to decrease power-generation carbon intensity) and shows other countries that changing the energy mix virtually overnight is easier than advertised if the political will to do so exists. If only governments would apply the same zeal to encouraging the green transformation.