Since the start of the Russian-Ukraine war, Nord Stream gas pipeline has been the focus for energy supply to Germany and most of the European countries. Since many decades, Germany and rest of the European nations have been relying very heavily on Russia for their energy needs. The main reason has been not only the proximity of Russia and the gas supply through a pipeline and seas but also because of the strategic reasons to avoid the 1973-like OPEC -led oil embargo in the future.
Other energy sources like Africa, the Middle East and Australia are not only located far away, but they do not have pipeline infrastructure for oil and gas deliveries to Germany and Central Europe. Not only will their seaborne deliveries be significantly expensive, they will also require longer lead time and large local safety stocks.
According to the latest data, Germany has been importing (before the Russian invasion of Ukraine) more than 40% of its natural gas, 35% of its oil and 54% of coal from Russia. Clearly, it shows how intertwined the two countries have been, particularly for the cheap energy supply that has transformed Germany into the economic powerhouse of Europe and has positioned its automotive, chemicals, machinery, electronics, and pharma, the most competitive, robust, and dominant industries in Europe and the rest of the world.
Since the start of the natural gas supply in 2011 through the Nord Stream1 gas pipeline, a joint venture (JV) between Germany and Russia, the former has further solidified its competitive advantage in the energy intensive industries. Under the JV terms, Russia will supply Germany the natural gas for the next half a century (50 years). Like Germany, other European countries also rely heavily on energy supplies from Russia for their industrial activities and citizens’ heating and everyday cooking needs. According to the latest data from the International Energy Agency (IEA), prior to the US-led sanctions, Russia was supplying 45% of the natural gas and over 29% of oil to the European countries.
Majority (up to 40-55%) of the imported energy by Germany is used for its industrial activities while the everyday use by consumers for their daily food preparations and heating makes the second major sector of the energy use.
Since many decades, Germany has been treated as the energy distribution hub for rest of Europe. As has been mentioned earlier, in reprisal to the US- led sanctions, Russia has started supplying its gas to Germany at less than 40% level for the last couple of months. As a result of which, Germany has tried to explore all the options to substitute its natural gas supply loss by other sources.
To-date, it has not been able to find new sources at reasonable costs and in a timely manner to avoid slowdown of its robust industries, vibrant economy, and bitter cold winter temperatures for its citizens. The only option that is viable at this point is to import LNG from the US, the Middle East, Africa, Australia, and other gas producing countries. However, in addition to the fact that the LNG imports from these sources will be very costly compared to those made available by Russia, but right now it does not have the infrastructure needed for handling the liquefied natural gas (LNG).
As the winter will be approaching, Germany and many other European countries will have very little supply of the gas for heating of homes and office buildings. According to Klaus Muller, President of German Energy Agency, under 100% full gas storage facility “German could sustain itself for two and half months of average winter”.
Similarly, Europe’s collective local gas storage capacity is not big enough to hold enough gas for more than a few months also. As a matter of fact, as of June, European storage was already less than 50% of its capacity levels. Thus, for Germany and the other European countries to have sufficient gas for their citizens heating and cooking needs, they have only few options available, and this is going to be very detrimental to their economic activities and public order in society.
One of the major options available to Germany and other European countries could be a substantial reduction in gas supplies to their manufacturing sectors and availability of ample supplies to meet citizens’ cooking and heating needs with a view to averting any potential public unrest.
As a matter of fact, German leaders of the ruling coalition have already decided to have public warming places (like public baths and pools) by converting enclosed stadiums, gymnasiums, and other public places. They are also requesting their citizens to use heating prudently or at reduced levels. Under the reduced gas supply to the industry, manufacturing output will suffer.
In turn, it will affect the economy and its ripple effects will be seen beyond manufacturing, resulting in job losses and unemployment. It will have a dramatic impact on the GDP in the coming months and years. Additionally, it will further create food shortages above and beyond what Germans and other Europeans are currently experiencing under the pandemic and the Russian-Ukraine war.
Also, because of the higher cost of the natural gas derived from LNG (compared to pipeline supplied by Russia), it is going to add further cost to the goods produced and services rendered by Germany and other European countries. This will induce additional inflation domestically and in the global markets. German and the European produced goods and services will become very uncompetitive against those produced by America and Asia. If this happens, it will deteriorate European economy as a whole. If this situation continues for one more year or so, it will be very dramatic and could inflict an unprecedented GDP loss on Germany and rest of Europe.
Under this scenario, it will create very favorable environment for the other industrialized nations, more so a very competitive playing field for the North American produced goods and services. Similarly, other energy producing countries located in Asia such as Malaysia, Indonesia, Vietnam, Thailand, Australia, and the Middle East will also benefit tremendously. Under these conditions, their economies will be excelling and outperforming the Europe’s by leaps and bounds. China will also benefit significantly as it will be buying most of its energy supplies very cheap from Russia and Southeast Asian energy producing countries.
That the Nord Stream gas supply stoppage paints a very gloomy picture for Germany and rest of Europe is a fact but under the given circumstances they have no choice but to source their energy needs from wherever they can find it. At the same time, expedite the infrastructure installation to accommodate the seaborne energy deliveries.
Thus, in conclusion, this is in the best interest of all the parties involved to find a negotiated settlement of the current war as soon as possible. Also, in order to avoid similar occurrence in the future, the major global powers must strengthen current international &multilateral institutions by giving them more power and resources than just as bodies of making resolutions.
(The writer is Executive Director, Polykemya International)
Copyright Business Recorder, 2022
The writer is Executive Director, Polykemya International
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