Europe in Crisis as Russia Cuts Supply of Gas

Europe is paying a high price for its dependency on Russian gas. The Kremlin, seemingly in retaliation for being hit with sanctions after invading Ukraine, has been steadily cutting off supply of this crucial substance used to heat homes, generate electricity, and power industry, leading energy bills across Europe to become very expensive.

What Happened?

The European Union (EU) imports about 90% of the gas it consumes, with Russia responsible for about 45% of this. Access to cheap Russian gas, which feeds directly into Europe via various pipelines, was a favorable arrangement for many years. Then, in May, Russian state-owned company Gazprom, the owner of these pipelines, began turning the taps off.

Politicians, businesses, the stock market, and households got particularly spooked in early September when the key Nord Stream 1 pipeline, which stretches 1,200 kilometers (745 miles) under the Baltic Sea and historically supplied about one-third of the gas exported by Russia to Europe, was shut down indefinitely because of, according to Gazprom, malfunctions and a faulty turbine.

A lot of pundits aren’t buying that. Many outside of Russia believe that the repair stories are lies and that the country is in fact purposely cutting supplies to get back at Europe for hitting it with sanctions after it invaded Ukraine.

Siemens Energy, which produces gas turbines, claimed that the reported reason for closing the pipeline is false as “such leaks do not normally affect the operation of a turbine and can be sealed on site.” EU President Ursula von der Leyen has also voiced her skepticism, writing on
Twitter that “Putin is using energy as a weapon by cutting supply and manipulating our energy markets.”

How Is the Russian Pipeline Freeze Affecting European Energy Prices?

When there is not enough of something to satisfy demand, prices generally tend to rise.

Demand has been rocketing due to weather conditions—cold winters, hot summers, and less wind—as well as the reopening of countries following COVID-19 lockdowns. And rather than ramping up supply to meet these needs, the opposite has happened.

Supply was already being tightened by maintenance work on gas infrastructure in Norway. Now Europe is also having to deal with its largest energy supplier closing its taps, prompting greater shortages and prices to climb even further.

Gas Prices Dictate Electricity Prices

These unfavorable supply-demand dynamics aren’t just affecting the price of gas but the entire energy market. In Europe, the wholesale electricity price is set by the most expensive power plant called on to meet demand on any given day. In other words, cheaper renewable energy is sold at the same price as more expensive fossil fuel-based power, and gas-fired power stations are dictating energy prices.

TTF natural gas futures, the European benchmark, traded at about €200 per megawatt hour at the time of writing this article, having peaked at $350 in August. Markets have been extremely volatile since midway through 2021. Before then, TTF natural gas futures were fairly stable, trading around the €20 mark for at least a decade.

What’s the Outlook?

Politicians across Europe have been scrambling to come up with ways to manage the energy crisis. Desperate times call for desperate measures, with unprecedented interventions including price caps, energy rationing, and windfall taxes on profits all being explored.

These proposals, though somewhat controversial, led the price of TTF natural gas futures to retreat from its August peak, as did reassuring signs that countries across the continent have been building up decent reserves. Still, it’s hard to be optimistic. With winter around the corner and the prospect of Russia cutting off the remaining streams of gas it supplies to Europe very likely, additional volatility and price spikes should be expected.

A continuation or worsening of current prices would spell doom for European households and businesses. Barring a massive intervention or change of heart by Moscow, Europe could be on the brink of blackouts, unheated homes, shuttered industry, and a deep recession.

The Bottom Line

Russia supplied a large portion of Europe’s gas for many years, which provides both heat and electricity to much of Europe. After sanctions were imposed on Russia due to its invasion of Ukraine, Russia began limiting the amount of gas it sent to Europe. This has sent prices of gas and electricity soaring across the continent.