Europe is losing the energy war

Wars are fought on many fronts. So far, Russian President Vladimir Putin is winning the energy war. High energy prices, triggered by supply disruptions, have neutralized Western sanctions. Russia’s current account balance is at record levels. Meanwhile, the same forces are deindustrializing Europe right before our eyes. Industry after industry is downsizing, shutting down or considering doing so if the energy chaos continues. Great Britain is considering the potential closure of 60% of its manufacturers. Germany and most of Europe are on the same path.

Discussions about how to rebuild Ukraine when the land war is finally over are rife, but the question of the decade will be how to rebuild Ukraine’s industrial infrastructure. Europe. Industrial facilities and supply chains that use and produce energy cannot easily restart once they have been stopped. That’s a lesson, at the very least, that policymakers should have learned from the Covid lockdowns.

Europe is learning the importance of energy resilience and reliability and seeing how energy-intensive industries are fundamental to an economy. With gas and electricity prices rising by as much as 1.000%, fuel bills for making steel, aluminum, glass or fertilizers in Europe far exceed the value that the final products can be sold – hence the closures. These products are inputs to other domestic industries, from automobiles and beer to agriculture, that are either turning to other sources or shutting down.

All this economic carnage and geopolitical leverage results from the fact that Europe loses only 5% of your total energy supply. Most of this loss comes from an overall 20% drop in available natural gas (courtesy of Russian maneuvers), which in itself constitutes around a quarter of the EU’s total energy. This gap cannot be filled by increasing Europe’s vaunted sources of renewable energy. The extent of this still-developing energy crisis and collateral damage to inflation, jobs and exports now depend on the vicissitudes of nature (a harsh winter can be catastrophic) and what unfolds from the war in Ukraine.

Europe does not have many options to deal with the immediate shortage. Essentially, everything that can be done quickly has been done: installation of floating liquefied natural gas (LNG) import terminals, reactivation of old coal plants, preservation of nuclear plants that were slated for decommissioning, replacement of many industrial gas boilers for more fungible oil and sending symbolic messages about reducing demand through cold showers and dimming of lights. Europe’s remaining short-term alternatives are now a brutal combination of more shutdowns, total rationing, massive inflation subsidies for citizens and bailouts for industries. Some are already talking about nationalizing critical industries, which would give Putin another victory.

Without a doubt, politicians are praying that the energy chaos will be short-lived, and after that most seem to think that life will return to normal. Unfortunately, that means a return to the same energy policies that facilitated the chaos in the first place. Advocates of the “energy transition” are already saying that the path to Russian hydrocarbon recovery and independence is to redouble commitments to alternatives, namely solar, wind and battery (SWB) technologies.

Equalizing the energy value of the two months of natural gas that Europe now has in storage would require the construction of US$ 40 trillions worth of batteries, which all the battery factories in the world combined would take about 400 years to produce.

What many decision-makers have yet to understand, or admit, is that the energy policies of the last few decades were made possible by Russia’s dependence on large amounts of cheap conventional hydrocarbons. , primarily, which has enabled the continent to discontinue use of its own conventional domestic energy supplies while continuing to operate critical energy-intensive industries. low-cost imports freed up money to spend a few trillion dollars, directly and indirectly, on building SWB machines.

The consequences of these energy policies were being exposed before Russia invaded its neighbour. Oil prices were already in the range of US$ 100 per barrel before the invasion. Natural gas and electricity prices had a similar increase of 1.15% at the end of 2021, when northern Europe suffered from a lack of wind for a week: the kind of event that occurs regularly in nature, but is inherently unpredictable.

A The existential economic question facing Europe after the first energy war of the 21st century, then, is whether the continent can completely rebuild many of the energy-intensive industries already closed or facing shutdowns. (Certain classes of machines, notably some in glass and steel manufacturing, can be irreparably damaged if shut down.) If these companies decide to risk investing capital to reopen, it involves speculation about whether the predictable supply of energy will be reliable and cheap. If the answer is found in places in Asia, Africa and even Russia, that is where these supply chains, jobs and economic benefits will migrate.

European policymakers should already know that relying on SWB technologies instead of hydrocarbons requires answering a basic question: How does an economy store enough energy to survive the short periods of no wind or sun that are common — or longer outages and man-made disasters and geopolitical meddling? We know the answer for conventional energy.

On average, economies the size of the US (and, in normal times, the EU) store coal, oil or natural gas for a month or two. Storing these amounts of hydrocarbons is relatively easy and inexpensive. Energy transition advocates propose that building more batteries can store excess energy from solar and wind facilities. But matching the energy value of the two months of natural gas Europe now has in storage would require building US$ 15 trillions of batteries, the that all the battery factories in the world combined would take about 400 years to produce. Talking about more factories and better batteries in the future is irrelevant to the task of what can be built now to keep economies, businesses and people alive.

Consider Europe’s rush to increase gas imports from non-Russian sources, installing around 20 LNG import terminals, the best way out of a difficult situation for the continent. Many will be active soon; the rest will come next year. The terminals will cost a total of around US$ 15 billion and will provide enough fuel annually to produce an amount of electricity that would require the construction of US$ 60 billion in wind turbines. These hypothetical wind turbines, of course, would still require natural gas as a backup for wind droughts – that is, trillions of dollars worth of batteries.

These realities are why Liz Truss, the new first-ever UK minister announced that the country will seek shale gas and oil. Opponents, including Britain’s Chancellor of the Exchequer, have previously said that fractionation would not solve the energy crisis even “if we lift the fractionation moratorium tomorrow” as “it would take up to a decade to extract sufficient volumes”. Obvious and true, but the goal is to create an energy path that gives companies enough confidence about the future to invest capital today . And that confidence will depend on planners seeing a future with sufficient, resilient and cheap energy.

China is now building the world’s largest natural gas storage facility, drilling more and increasing its use of coal. What does China know about the future of essential energy-intensive industries?

If European policymakers want to restore energy sanity, they must revive North Sea oil and gas production and reopen the huge Groningen natural gas field in the Netherlands, which alone has the capacity to make up most of the potential short-term deficit if Europe experiences a cold spell in winter. The Dutch government has made it clear that the long-planned voluntary shutdown remains on track.

The rock sources for future hydrocarbon supplies to Europe are found in three domains: Organization of Petroleum Exporting Countries (OPEC), deepwater platforms (US global and offshore) and American shale fields. Therefore, restoring energy sanity would also include striking comprehensive, long-term agreements with fuel suppliers, not only in the Middle East – which Europe has already rushed to do – but also in the US, a significantly larger supplier, which would require government policies. that facilitate, not oppose, the domestic expansion of hydrocarbons.

Theoretically, Congress could enact the necessary legislation. And it’s something that wouldn’t cost taxpayers money, but would generate profits for American companies. Also, in due course, it would lower energy prices for consumers because it would eventually oversupply markets, which always lowers prices and inflation. But the only way to do that would be to redefine the regulatory frameworks that prevent major development. In short, it would require a change in political attitude.

If the EU and the US worked together for a major redefinition of energy supply and production, this would send precisely the market signals needed for the reindustrialization and recovery. Any redefinition would have to be enshrined in legislation, not rhetoric, to be credible enough to inspire major private capital commitments. None of this would require governments to revoke their ambitions for SWB technologies.

Finally, the promoters of magical thinking on the energy transition are redoubling their public relations and lobbying efforts. The champion of transition, IEA Executive Director Fatih Birol, recently took to the pages of the Financial Times to clarify what he called “three myths about global energy crisis”.

Birol is wrong on two points and wrong on the third. Birol first claims that far from winning the energy battle, “Moscow is hurting itself in the long run by alienating the EU” and undermining mutually beneficial long-term relationships. But much of the rest of the world, from China and India to many African nations, doesn’t care about this “damage” and is instead enjoying the fruits of buying Russian commodities at a discount. Russia is also a major producer (usually one of the top three) of many critical minerals, from copper to nickel and aluminum.

Birol then writes that it is “absurd” to claim that “the global crisis of today’s energy is a clean energy crisis” and that the leaders he speaks of “regret not moving faster to build solar and wind farms”. No doubt some people believe this, but Europe’s power grids and industries cannot function without hydrocarbons. The question for Europe is who supplies them and at what price.

Finally, Birol says he doesn’t see the energy crisis as a “major setback” for climate policy. On that, at least, the jury is still out. Even a mild winter will damage Europe’s industrial core. European governments are talking about even more massive subsidies or nationalization efforts to restore balance. This result would qualify as a major setback for the continent. The alternative? A return to energetic sanity, in partnership with America’s mighty hydrocarbon engine.

Mark P. Mills 2022 is a senior fellow at the Manhattan Institute, a strategic partner of the Montrose Lane energy technology venture fund, author of ‘The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s’, and host of The Last Optimist podcast.