European Energy Crisis and its Impact
The worldwide energy crisis that began in 2021 is the most recent in a series of cyclical energy shortages that have occurred over the previous fifty years. It is especially severe in nations such as the United Kingdom, Germany, and China. The crisis has shown itself in the oil, gas, and power markets.
An energy crisis is any major stifling of an economy's availability of energy resources. It frequently refers to one of the energy sources used at a specific time and location, particularly those that feed national electrical networks or those used as fuel in industrial development and population increase, which have contributed to a boom in global energy demand in recent years.
Europe's energy crisis
The reasons for Europe's problem are diverse and linked, demonstrating how complicated and interwoven the global energy economy is. Here are five crucial ideas that will assist clarify some of the challenges that are fuelling the energy crisis.
1. Global demand is recovering strongly
Natural gas demand fell by 1.9% in 2020. This was due in part to fluctuations in energy use during the worst moments of pandemic disruption. Despite the 2020 Russia-Saudi Arabia oil price war, OPEC responded poorly to the demand recovery under the new normal, generating a supply-demand mismatch, and the 2021-2022 global supply chain crisis, which further pressured the delivery of extracted petroleum.
The International Energy Agency (IEA) predicts a resurgence in gas demand through 2022 in its Global Gas Security Review. If unregulated, worldwide gas use might be 7% higher than pre-pandemic levels by 2024.
2. Russia-Ukraine military conflict
The Russian military build-up outside Ukraine and subsequent invasion have also jeopardised Russia's energy supply to Europe, forcing European nations to diversify their energy import sources. During the Russo-Ukrainian War, international sanctions were imposed following Russia's takeover of Crimea in 2014, and were later increased following Russia's invasion of Ukraine in February 2022; the certification of the new Nord Stream 2 pipeline was also stopped. In late July 2022, Russia replied by reducing gas exports to Germany via the vital Nord Stream 1 pipeline. Russia cut down the Nord Stream 1 pipeline flow in early September, causing an international gas supply crisis that was felt most acutely in European gas markets.
3. Europe is reliant on gas imports
Gas output in Europe is declining. Several North Sea gas resources are depleting, as are a number of Dutch gas fields, including Groningen, which is set to close in mid-2022.
As a result, Europe is becoming increasingly reliant on gas imports, particularly from Russia and Norway.
4. Prices are high and could go higher
So far in 2021, European gas prices have increased by 600%.
In early October, there was a 37% increase in UK wholesale gas prices in just 24 hours. Soaring prices spurred a lobby group comprising steel, chemical, and fertiliser companies to ask the UK government for assistance in combating rising costs.
5. Climate abnormality impact on renewable energy
Brazil's electrical supply was endangered in 2021 by the worst drought in almost a century. Brazil gets two-thirds of its electricity from hydropower.
According to Euractiv, European Commissioner for Climate Action Frans Timmermans informed the European Parliament in Strasbourg that "approximately one fifth" of the increase in energy prices "may be attributable to increased CO2 pricing on the EU's carbon market."
The driest summer in Europe in 500 years in 2022 had major effects for hydropower generating and power plant cooling systems. The drought "limited hydropower in Norway, jeopardised nuclear reactors in France, and restricted coal transit in Germany," according to the New York Times. Droughts of unprecedented proportions in China and California also posed a danger to hydropower output.
Impact
The unexpected scarcity of gas in the European Union (EU) as a result of the Russia-Ukraine conflict has impacted the price of natural gas, which has risen to close to EUR 340/MWH, which is five times the price at the start of the year and about 14 times the price over the last ten years. Furthermore, it has hampered supplies in other places.
Direct impact of EU Gas Crisis on India
Effect on exports
According to the, the loss of buying power in the EU27 would have an impact on India's exports, which are in the nature of final consumption. Further disruptions in manufacturing will have an impact on intermediate products exports. If manufacturing is sufficiently hampered, even intermediate goods imports from the EU to India may be interrupted.
Effect on transportation
The current high gas prices will have an impact on the cost of CNG-powered transportation. City gas distribution businesses will face significant sourcing costs, which will have an impact on urban demand.
Effect on food and fertilizers
According to financial advisors at SBI, the present gas crisis in Europe will cause a new round of inflationary pressures in food and transportation expenses. Fertilizer and raw material costs are likely to remain high throughout FY23, since the EU has become a fertiliser importer due to insufficient domestic supply.
Effect on interest rates
In the current situation, the interest rates will continue the rising trend with pace of hardening depending upon the domestic situation across countries, said SBI.The financial service industry will suffer cause of the crisis.
Impact on power stock
European shares fell to their lowest level in nearly one month as worries about tightening gas supplies from Russia, hawkish signals from the European Central Bank and weak economic outlook weighed on investors' minds. The continent-wide STOXX 600 dropped 1.0% to touch its lowest level since July 28.
Impact on chemical sector
From an Indian standpoint, several fertilizer producers could enjoy better volume off-take, according to JM Financials. Currently, in India, ammonia is produced by GNFC, RCF, etc. Deepak Fertilizers’ ammonia plant is also scheduled for commissioning by Aug’24.
How the EU energy crisis will benefit India and China as an economy?
Sanctions will have distinct effects in China and India. Only the EU imports more Russian oil than either. However, China's supply channels are far less vulnerable to sanctions than India's. Almost all of China's Russian imports pass through the East Siberian pipeline, which is presently at capacity, some directly, some by ship from Russia's Pacific ports. Because these ports are close together, this short-haul Pacific shuttle commerce necessitates limited tanker capacity. Under sanctions, China may find it worthwhile to offer such capability by spinning out a section of its fleet and self-insuring it.
If China wants to expand Russian imports, it would have to carry those extra barrels from Russia's western ports on the Baltic and Black Seas, a three-month journey. Distance, complexity, and the possibility of sanctions would likely deter China from allocating a big number of its tankers to this long-haul western route. Furthermore, even shipping China's whole fleet would only fulfil a portion of Russia's tanker capacity requirements.
Under sanctions, India may find it more difficult to retain Russian imports. Russia has moved a substantial amount of its Western exports to India by sea since March. This tendency, though, might swiftly reverse by December. Due to limited tanker capacity, Russia may favour consumers in less distant markets like as Turkey or the trade centre of Fujairah. And India, which relies on foreign boats for 90% of its imports, lacks sufficient tankers to continue current Russian supplies.