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Could Europe Really Return to Russian Gas?

 

Germany has ended its reliance on Russian gas. The news made some cheer and others smile sarcastically while they ask to see the bill. Cutting its independence on Russia for natural gas has become priority number one, not just for Germany but for the whole European Union. For now, it’s working. The problem is, this sort of approach can’t work for long.

Bloomberg’s Javier Blas made the argument that Europe will start buying Russian gas again in December, noting the obvious price differences between pipeline gas and LNG that comes from halfway around the world.

“Europe will probably never go back to the same long-term contracts of the past with Russia, and likely would need to import less gas as time goes by, thanks to renewable energy,” Blas wrote. “But if it is going to keep its chemical, food and heavy industries competitive, it will need some cheap gas. And there is no cheaper gas for Europe than Russia’s.”

He then went on to draw a parallel between the war in Ukraine and Iraq’s invasion of Kuwait, which did not end Iraqi oil exports to the United States. It is a convenient parallel, although the situation is rather different, and not just because Iraq was not a nuclear power when it invaded Kuwait.

Related: Will Oil Continue To See Extreme Volatility?

Leaving geopolitics aside, however, the fact that Russian gas is the cheapest for Europe cannot be overlooked. The switch to LNG has cost Europe more than a trillion euros and is still costing it because while gas prices have fallen to levels from before Russia invaded Ukraine, they have not fallen back to levels from 2021 before the gas crisis began. And they may never if Europe continues on its current path.

“The Europeans today are saying there’s no way we’re going back,” the head of QatarEnergy and energy minister of Qatar, Saad Sherida al-Kaabi, said this week at the Atlantic Council Energy Forum in Abu Dhabi.

“We’re all blessed to have to be able to forget and to forgive. And I think things get mended with time… they learn from that situation and probably have a much bigger diversity [of energy intake],” he added, as quoted by CNBC.

This statement must have caused some annoyance in EU political circles, but it certainly echoes the fact that Javier Blas pointed out in his December column: so far, Europe’s economy has thrived thanks to cheap energy. Take away the cheap element of the energy equation, and the economy will suffer.

Right now, there’s much cheer that Germany did not slip into a recession last year. Instead, its GDP booked a 1.9-percent gain. That’s certainly good news, but it’s worth remembering that not all economic shocks strike immediately. Some have a delayed effect.

Europe’s largest economy may have grown, but what is it going to do when BASF moves some of its business out of the country and never returns it? What is it going to do for all those businesses that are only surviving on state aid? And, ultimately, how long will the government be able to provide this state aid?

What’s true for Germany is true for the rest of the EU, too, even though Germany’s Russian gas dependence seems to have been the heaviest. Energy costs are up, and they are about to stay up unless cheap gas returns.

Equinor’s chief executive said as much this week. Speaking to the BBC, Anders Opedal said he did not expect gas and electricity prices in Europe to return to where they were before the pandemic.

There is “a kind of re-wiring of the whole energy system in Europe particularly after the gas from Russia was taken away,” he said and, noting that the buildup of renewable energy needed to be accelerated, added that “This will require a lot of investment and these investments need to be paid for, so I would assume that the energy bills may slightly be higher than in the past but not as volatile and high as we have today.”

Europe may prove unable to “forgive or forget,” and, indeed, so may Russia because pretending Europe was an innocent victim of gas aggression does nothing to erase the fact the EU weaponized its financial and trade clout and used it in the form of sanctions just as aggressively as Russia did its gas. And this means Europeans are going to get poorer on a scale not seen in recent history.

By Irina Slav for Oilprice.com

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