Europe needs to prepare now for an extended energy shock
Flows of oil and gas do not resume like turning a tap back on
Michael Stoppard
The severity of the energy crisis that has been unleashed by the conflict in the Middle East is still being underestimated.
While we hope for the best, we must now prepare for the worst.
The initial expectation of many was that any disruption from the war to the Strait of Hormuz — the vital conduit for about 20 per cent of the world’s oil and liquefied natural gas — would last a few days, maybe a couple of weeks before transport of oil and gas would start to normalise.
But energy flows do not resume like turning back on a tap.
Take for example LNG.
The world’s largest LNG plant in Qatar was fully closed down more than two weeks ago having sustained only minor physical damage from a drone attack.
Qatari energy minister Saad al-Kaabi said afterwards that it would take “weeks or months” to bring the plant back to full production.
Now in the past 24 hours the site has been subjected to ballistic missile strikes causing “extensive further damage” and al-Kaabi warned on Thursday that damage to facilities could take three to five years to repair.
The conflict is escalating from temporary blockage of trade flows to damage of vital infrastructure.
Analyst estimates of disruption horizons are morphing from days to weeks to months.
A two-month period of resumption is no longer the worst-case scenario, it is the best-case scenario.
Too much of western opinion is talking about “off-ramps” for the US government while ignoring that Iran may be less disposed to find any quick solution.
Europe now needs to prepare for extended disruption, learning from the mistakes of the 2022 gas crisis.
At the peak of the 2022 crisis, I visited the European Commission in Brussels on a hot summer’s day to discuss how to manage the energy shortage.
As I entered my hotel room after the meeting, I was met by an arctic blast and found the air-con set to 15 degrees.
Not all hotels, of course — but symptomatic of the botched response.
Europe’s actions in 2022 to the loss of Russian gas were fourfold: replace, restock, protect and cap.
Replace meant scouring the world looking for alternative sources of gas supply.
Vast flows of LNG, especially from the US, were successfully secured.
An indisputable success, but the ensuing scramble among countries and across continents for a finite pool of global supplies served inevitably to push up prices.
It also priced poorer developing countries out of the market, leading to blackouts and shortages elsewhere.
Restock meant filling Europe’s depleted storage units over the summer to prepare for the coming winter.
A sensible and probably necessary obligation — but again one where the impact was to push up prices further.
Government mandates to utilities to fill gas storage by autumn at any cost was heard by traders as name your price.
Protect, or shield, meant providing price relief to critical and vulnerable consumers — in some cases massive blanket subsidies to millions of households.
The impact of protecting customers was to keep wholesale prices high by not restraining consumption habits.
The European Commission estimates total energy subsidies in the EU jumped from €213bn in 2021 to €397bn in 2022 and only a little lower in 2023 at €354bn.
Cap meant to place a cap or ceiling on European gas prices on traded gas exchanges.
But a price cap below global market prices simply meant the scarce LNG supply would not arrive to European shores but be sold elsewhere.
So the cap was “flexible”.
Alongside all this there should have been a stronger focus on managing consumption.
In practice it was left to market forces and prices to ration supply and the resulting damage to European industry was probably less than optimal.
A better response would have been first to prioritise which sectors could be called upon to make economies with a focus on moderating demand where least painful — like my hotel or local heated swimming pool.
This would be contentious but with the result of putting downward pressure on prices for everyone.
There would have to be a major public communication exercise to make citizens aware of the need to conserve — not so different from a public health campaign.
Some of these measures such as thermostat guidance were enacted in some EU countries, but timidly and largely as a secondary policy lever.
Governments cannot directly influence international commodity prices.
Their ability to alter supply may also be limited in the short term.
Where governments can make a difference is the management of demand.
That must be the centrepiece of any response.
The writer is principal of Stoppard Energy and formerly chief strategist on global gas at S&P Global
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