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Tuesday, September 27, 2022

Russia is taking advantage of the energy squeeze

This has been a bad week for Europe’s energy consumers, but a satisfying one for Vladimir Putin. European benchmark gas prices on Friday were six times higher than a year ago — but did fall back from an all-time high midweek after Russia’s president suggested Moscow might be prepared to stabilise prices. Politicians once consoled themselves that Russia could never afford to cut off gas to Europe since that would crash its economy. Recent weeks have shown Moscow has no need to turn off the taps: in a supply crunch, it can exert outsize influence even while continuing to fulfil all its long-term contracts, simply by withholding any extra gas.

The energy squeeze that has clouded the economic outlook and put markets on edge is a global affair. A rebound in activity is confronting post-pandemic bottlenecks. Coronavirus and a long winter led to delays in filling energy storage and backlogs of maintenance in some oil, gas and coal fields. India and China are experiencing shortages too.

Moves away from coal, and in some countries nuclear power, have made gas more important as an industrial fuel and, despite the advance of renewables, for power generation. Europe has suffered, too, from partial closure of the giant Groningen gasfield due to earthquakes in the Netherlands and diversion of liquefied natural gas supplies to Asia. Yet if Russia did not engineer the squeeze, it has taken advantage of it, traders say, by declining to send additional supplies into the spot market to calm things as it has in the past. The International Energy Agency chief says Russia has capacity to send substantially more gas to Europe.

Confronting a push by customers to decarbonise, Russia, like Opec in crude oil, is no doubt tempted to maximise revenues from the gas it can still sell — and send an unsubtle message about the risks of a hasty green transition.

Moscow is also using the situation to press Berlin regulators to approve its newly-built Nord Stream 2 gas pipeline under the Baltic Sea to Germany. Its energy minister reiterated this week that fast approval of the pipeline “could somewhat cool off the current situation”. Russia’s leverage may increase: with European gas storage unusually low, industry insiders fear even a marginally colder than normal winter could prompt extreme price volatility.

Approval of Nord Stream 2, an essentially political project to bypass Ukraine’s transit pipeline, will stick in the craw. It will humiliate Kyiv. Yet it will only increase reliance on Russia if EU governments and business contract to receive additional gas through it, rather than it simply replacing transit through Ukraine. Many may balk at tying themselves further to a supplier that has shown it is ready to use energy as a geopolitical tool.

Indeed, the EU’s response should be to step up moves to diversify energy sources and suppliers. It should accelerate, not slow, the switch to renewables, and expand its LNG infrastructure, contracting for more gas from Norway, Algeria, Qatar and the US.

Putin has also taunted “smart alecs” in Brussels who he says have exacerbated today’s problems by pushing for “market-based” pricing in an effort to boost competition in gas. Yet while being ready to shield the most vulnerable from sharp winter price swings, EU countries should not retreat from market mechanisms but seek to strengthen and complete them. They should insist on transparent pricing, unbundling and third-party access to pipeline networks — including for Russia.

More investment in new technology, and a better functioning, more diversified market for energy, will make the EU more resilient to future squeezes, and make it harder for Moscow to exploit them to its advantage.

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