Europe is facing an immense crisis. Inflation is forecast to reach decades-high records. Whole populations are being squeezed and the poor face turmoil as winter approaches. Rumblings of discontent are beginning to emerge: 70,000 demonstrated in Prague against household energy cost and Czech support for Ukraine. Driving this crisis is an explosion in wholesale prices of natural gas and electricity. Governments across Europe and much of the world are being confronted with a major problem: how to ensure social stability while protecting the interests of the giant energy monopolies.
At present, natural gas demand is outstripping production, and ever-increasing prices reflect this. Spiralling consumer energy prices and wholesale electricity prices are a consequence. In Europe and Britain, electricity prices are set at the level of the most expensive power generating asset. This is designed as an incentive for renewables, which have far lower running costs. But current gas prices means that renewable producers, which account for about 35% of European electricity demand, are enjoying enormous profits. In comparison, Europe gets about a quarter of electricity from natural gas, a quarter from nuclear and 15% from coal. Britain and the EU are now looking to decouple electricity prices from gas.
Gas prices
European gas prices are some eight times higher than their average levels throughout the previous decade. Between 2010 and 2020, European gas prices would rarely exceed €25 per megawatt hour (MWh). But by early June 2022, prices were around €80/MWh and had exploded to €339/MWh by the final week of August.
Levels have since fallen to around €185/MWh, both as speculation following Russia’s closure of Nord Stream I gas pipeline has subsided and as European powers have announced measures to alleviate the crisis. However, these immediate measures have largely focused on reforming the way energy markets are structured and have done little to address the underlying issue: a deficit in gas production.
Corporate media is attempting to attribute the energy crisis solely to the conflict in Ukraine and sanctions on Russia, which have squeezed Russian gas supply on which Europe has historically depended. Russian gas imports represented some 40% of European consumption in 2021; this has been cut by 80% since the onset of sanctions on Russia and subsequent pipeline closures. This is certainly a significant exacerbating factor, but the rise of European and Asian gas prices prior to the Ukraine war makes clear that there is an underlying problem. European prices rose fourfold throughout 2021, a period which also saw Asian liquified natural gas (LNG) prices triple, all long before Russian military action against Ukraine.
The crisis in production is caused by capitalism’s refusal to increase supply in line with growing demand following the reduction of Covid-19 measures. Since the end of lockdowns, demand rebounded in 2021 back above pre-pandemic levels. Under capitalism, production of commodities such as oil and gas is entrusted to private or capitalist state-owned interests motivated by profit. With exploding prices, there is little incentive for them to increase production; instead they are content to reap the consequent windfall returns.
A European crisis
Europe is particularly vulnerable to supply shocks because it acts as a balancing market for global gas production, especially in relation to LNG. LNG is a versatile way of importing gas because it is shipped, unlike pipeline transport which relies on land-based infrastructure. LNG is used to meet the demand of countries in Asia and Latin America which generally have limited access to domestic production or piped imports. Europe, however, has both. In recent years, Europe has moved away from a model where gas prices were tied to oil prices, in favour of one where they more closely reflected supply and demand. Access to cheap LNG in times of high supply, essentially picking up the leftovers, has seen Europe become increasingly dependent on imports. Further decline in gas production followed. Now, Europe is vulnerable to skyrocketing import prices, and its wilting domestic production cannot fill the gap.
Asia and Europe were by far the biggest net gas importing regions in 2021, with Latin America the other net importing region. Gas prices are generally set regionally, a reflection of its relative difficulty to transport, as well as the differing circumstances facing each region. US gas prices are slightly over double levels throughout the previous decade: along with other exporters, US is somewhat shielded by its high domestic production capacity. The energy crisis is therefore disproportionally felt in specific regions: Asia, Latin America, and Europe.
Europe’s shortfall
An analysis of LNG demand before and after the pandemic’s height makes clear the crisis facing Europe (excluding Russia). In the first eight months of 2021 non-Europe regions imported 28 billion cubic metres (bcm) more LNG than in the same period in 2019, 60% driven by growing Chinese demand. Europe subsequently imported 9bcm less. This fall occurred against a backdrop of further stagnating European production, particularly in Britain and the Netherlands. Overall, Europe produced 12.5bcm less in the first eight months of 2021 than in the same period of 2019.
Supply via piped imports told the same story: 9.5bcm less imported in this period in 2021, with Russia squeezing exports to Europe long before current sanctions. In total, Europe’s supply was 30bcm less in the first eight months of 2021 than in the same period of 2019; total annual demand is about 400bcm.
Gas storage
The massive gap between supply and demand could only be met by using existing stored gas. This meant that at the onset of the Russian invasion of Ukraine, European gas storage was already limited. European gas storage dropped below 50% on 12 January 2022. This was the earliest in the year 50% had been breached on record, generally not occurring until mid-February. The EU was forced to step in. On 27 June this year, it announced that member states would be required to ensure EU gas storage reaches 80% by November. EU states began importing LNG to meet this demand despite the immense cost. 80% was met by the end of August, well ahead of the November target. European powers are clearly preparing for worse times to come this winter and have mobilised to ensure that they at least will not face a significant shortage.
Crisis in Britain
Britain is disproportionately reliant on natural gas, making it vulnerable to soaring prices. 80% of British homes depend on gas for heating, and it is used to produce 40% of electricity. Roughly half of demand is provided by gas from the North Sea.
Britain has pitifully low gas storage, which amounts to just four or five winter days’ worth. In the warmer months this year, unable to store the gas it is producing, Britain has had no choice but to export its excess gas to Europe and will likely have to repurchase it this winter at premium prices. With remarkable short-sightedness, in 2017 Britain shut down its only major gas storage facility – Rough, which provided 70% of UK capacity – because it was ‘not economic’. While Rough is now due to reopen, this comes far too late to make any real difference to the energy crisis this year.
European response
The energy crisis now threatens social stability across Europe. As such, various measures have been taken to shield consumers, in varying degrees. At the start of this year, the French government capped energy price increases to 4% for the whole of 2022, to be extended to 15% next year. France generates most of its electricity through nuclear power, and just 6% by gas. It does however rely on gas for heating. France is taxing the state-owned supplier EDF €8.4bn to pay for this cap.
On 14 September, the European Commission laid out plans to raise €140bn with windfall taxes to help alleviate the crisis. 80% of this will be raised by taxing non-fossil fuel energy producers, with the rest raised by a 33% tax on taxable surplus profits on fossil fuel extractors for the 2022 fiscal year.
In Britain, the Liz Truss government announced it will cap average annual household energy bills at £2,500. The £150bn plan will not be paid for by taxing the windfall returns of energy giants. Truss will pay for the plan through government borrowing that will be paid back by the working class over successive years. British household energy bills are the highest among comparable European countries. Even with the £400 grant for every household, the energy price rise represents an 85% increase on average annual household energy bills in April 2021.
Liquidity crisis
As is the nature of monopoly capitalism, in times of crisis some corporations will make huge profits and others will go bust. In Britain, smaller energy suppliers, which generally do not generate electricity are going bust. These smaller suppliers simply bought gas and electricity at wholesale prices and resold it to consumers, something which increasing wholesale prices amidst the price cap made impossible.
Remaining suppliers across Europe, as well as gas producers, use market mechanisms to ‘lock in’ prices in advance of delivery. This allows them to mitigate against seasonal fluctuation in prices. Essentially, they sell a contract to deliver the commodity at some point in the future. If the price falls and they receive less at this point in time, any loss is offset by previously selling the higher valued contract. However, drastically increasing prices mean that the opposite is occurring.
In order to enter into these contracts, increasingly large sums have to be posted as collateral. Unprecedented wholesale prices mean that suppliers do not have the liquidity to cover these sums. Estimates stand at $1.5 trillion facing European energy firms, excluding Britain. Comparisons are being made with the Lehman Brothers collapse in 2008, where one energy company going bust threatens a cascade of defaults.
European powers are recognising this crisis, and mobilising sums to bail out energy suppliers. Recent announcements include the Bank of England with £40bn loan guarantees, Germany with €67bn through a repurposed Covid-19 bailout fund, all on top of numerous billion-dollar loans secured for individual European suppliers. The German government has since nationalised key energy supplier Uniper to keep it afloat.
Governments across Europe have no choice but to step in on behalf of these energy suppliers. Further, this crisis will undoubtedly be a consideration in implementing any measures to support consumers; if people cannot pay their energy bills the suppliers will default, and the banks which have up to now been stepping in with liquidity will not see their loans repaid. What is also certain is that this cost will be shifted back onto the consumer, over a period of many years and through further assaults on working class living standards.
Divine right to profit
Amidst all of this, the fossil fuel multinationals are enjoying eye-watering returns. Shell and BP made £10bn and £7bn in the second quarter of this year, respectively. The first half of this year saw $100bn profit for the largest five fossil fuel companies. US President Biden summed it up: they ‘made more money than God’. Just as in 1973 when imperialism was faced with a supposed energy crisis, it was the giant British and US multinationals that reaped the rewards. Oil prices have slipped below $100 a barrel in recent months as fears of recession set in, causing OPEC to commit to another supply cut to push prices back up. It remains to be seen how imperialist governments can entice producers into filling the gap in supply.
George O’Connell
