The Great Game #6 – European Gas Drought?
The Great Game #6 – European Gas Drought?
Will the new price cap drive Europe into gas shortages next winter? And how will Xi and Putin capitalize on this?
Have you read Andreas’ thought-provoking piece on the EU gas price cap from last night? If not – do so here! Especially if you live in or care about the immediate future of Europe!
In that piece, we argue that the new European price cap on natural gas would have caused gas shortages in Europe this winter had it been in place this summer, when prices soared high above the 180 EUR/MWh cap. Why? Simply because the gas suppliers will ship their gas elsewhere. Europe is completely dependent on liquid gas import since the cut-off of Russian pipelines, and the thing about liquid gas is that it can easily be shipped to Asia, where there are plenty of buyers without annoying price caps. So we forecast that the price cap could well lead to European gas shortages next winter, unless Europe magically finds another source of gas imports.
Why did the EU do this?
The idea to implement a gas price cap has been brewing in the European south for months – especially in Rome and Warsaw. The Italian and Polish consumers are hit hard by rising energy prices and their governments are approaching panic mode. The price cap is seen as a stop-gap measure to “end the market manipulation of Russia and Gazprom” as Polish Prime Minister Morawiecki put it recently.
Opposition and condemnation was widespread both from the European bureaucracy and the good old “austerity gang” with the Netherlands, Austria and Denmark tathe lead. They (rightly) feared that a hard price cap would simply lead to sellers taking their gas elsewhere and that the price cap could jeopardise financial stability and force European energy providers to seek risky deals with private suppliers, who are not included in the price cap.
The two sides stood firmly against each other until the Czech presidency reached an agreement this week. The tipping point was (of course) Germany. They had been fiercely opposed to the price cap, but agreed to a deal in exchange for a speed-up of renewable energy permits to accelerate the European transition away from fossil fuels. Eventually, only Viktor Orban’s Hungary voted against the price cap - quite ironic considering Orbans frequent clashes with Germany and the austerity gang.
The energy transition is of course the right path in the long run – but the long run doesn’t cover next winter. We are very concerned that the EU will simply not get the natural gas it needs and could run dry next winter.
What could be the geopolitical consequences?
First of all, a European gas shortage will very quickly bring support for Ukraine into jeopardy. Around Europe, the misconception that we could immediately re-establish gas imports from Russia still exists. That is of course impossible since the destruction of Nordstream, but the European population has a very short patience with stomaching rising energy prices to aid Ukraine. This is exactly what Putin is banking on. His strategy is to keep the war going and slowly exhaust the European household.
Secondly, the West is risking a more permanent isolation from key players in the Global South. We have already seen India refuse the G7 price cap and seeking to build their on sea-born supply lines of natural gas and oil from Russia. We could be looking at a golden age for Asian ship manufacturing as the world market will to some extent need redundant (Asian) shipping capacity because of price caps and gas embargoes. This plays directly into the Chinese long-term plan to pivot the world economy towards Shanghai as the next financial centre of gravity.
Therefore, the Indian response is alarming for the West as they compete with China for influence in emerging markets. The Chinese club of nations now firmly includes Russia and this allows Beijing to offer both cheap weapons and cheap energy to potential partners. What more could you want as an aspiring African or Asian autocrat? The West, on the other hand, can offer expensive weapons and no energy – and on top of that, they keep asking annoying questions about human rights. Beijing simply offers a much more lucrative and complete one-stop package for developing countries around the Global South. If even a democratic and historically anti-Chinese country like India is alienated from the West by the gas price caps, it is worth considering if that is indeed the best cause of action.
If you want to read more about the global West/China-rivalry, read our last Great Game here. Also, we are getting close to the launch of our Steno Research platform on www.stenoresearch.com, which will give you and your institution the best independent coverage of everything macro and geopolitics - including ongoing coverage of China, Europe and the Global South. Reach out for more information about institution deals with early bird discounts at mikkelrosenvold@stenoresearch.com.
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Last I checked 'caps' inevitably create a decline in production.....shocker....
I think one has to separate Europe and North America when talking about the west in this regard. The point about India is not that relevant for the US and their relations are improving because of Chinese foreign policy. India has a long way to go in terms of lifting its people out of poverty, and they will be damned to accept higher energy prices because of some geopolitical conflict they are not involved in. Rightly so.
Moreover the Europeans have their own style of botched foreign policy which is not as alienating as the Chinese version but still bad. It was amusing to see several western European countries struggle with trying to hijack the World Cup in Qatar for a totally irrelevant moral message. Because while they all have very loud and very annoying activists at home, most of the politicians obviously understand that they need the good will of Qatar, especially now. The scourge of NGOs is backfiring hard. Even now there are regular protests by anti-nuclear climate activists that want to axe the entire fossil fuel industry, on top of the EU 2030 climate plan. At some point all this will collide with very real national interests.
The strategic failures of Europe in terms of energy security are now laid bare for all to see. They were misinformed, misled and deceived themselves into a sense of security.