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 neutered Western sanctions. Russia’s current account balance stands at record highs. Meantime, the same forces are de-industrializing Europe right before our eyes. Industry after industry is throttling back, shutting down, or considering doing so if the energy chaos continues. Britain is staring at the potential shutdown of 60 percent of its manufacturers. Germany and most of Europe are on the same track.
Discussions of how to rebuild Ukraine when the ground war eventually ends are prevalent, but the question of the decade will be how to rebuild Europe’s industrial infrastructure. Industrial facilities and supply chains that use and produce energy can’t easily be restarted once stopped. That’s one lesson, at least, that policymakers should have taken from the Covid lockdowns.
Europe is learning the importance of energy resilience and reliability and seeing just how pivotal energy-intensive industries are for an economy. With gas and electricity prices soaring by as much as 1,000 percent, the fuel bills to make steel, aluminum, glass, or fertilizer in Europe far exceed what the final products can be sold for—hence the closures. Those products are inputs to other domestic industries, from cars and beer to agriculture, that are scrambling for other sources or closing down themselves.
All this economic carnage and geopolitical leverage arises from Europe losing just 5 percent of its total energy supply. Most of that loss comes from an overall 20 percent drop in available natural gas (courtesy of Russia’s maneuvers), which itself constitutes about one-quarter of overall EU energy. That gap cannot be closed by surging Europe’s vaunted renewable energy sources. The extent of this still-developing energy crisis, and the collateral damage in inflation, jobs, and exports, depends now on the vicissitudes of nature (a cold winter could be catastrophic) and what unfolds from the war in Ukraine.
Europe doesn’t have many options to deal with the immediate shortages. Essentially everything that can be done quickly has been done: installing floating liquified natural gas (LNG) import terminals, reanimating old coal plants, preserving nuclear plants that had been scheduled for decommissioning, switching many industrial boilers from natural gas to more fungible oil, and sending symbolic messages about reducing demand via cold showers and the dimming of lights. Europe’s remaining near-term alternatives are now a brutal combination of more shutdowns, outright rationing, massive inflationary subsidies for citizens, and bailouts for industries. Some are already talking of nationalizing critical industries, which would hand Putin another victory.
Policymakers are doubtless praying that the energy chaos will be short-lived, after which most appear to think that life will go back 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 recovery and independence from Russian hydrocarbons is to redouble commitments to alternatives, meaning solar, wind, and battery (SWB) technologies.
What many policymakers have yet to understand, or admit, is that the energy policies of recent decades were made possible by depending on massive amounts of cheap conventional hydrocarbons from Russia. That is, in the main, what enabled the continent to halt usage of its own conventional domestic energy supplies while continuing to operate critical energy-intensive industries. And those low-cost imports freed up the cash to spend a couple of trillion dollars, directly and indirectly, on building SWB machines.
The consequences of those energy policies were being exposed before Russia invaded its neighbor. Oil prices were already in the $100-per-barrel range before the invasion. Natural gas and electricity prices saw a similar 1,000 percent spike in late 2021 when northern Europe experienced a week-long wind drought: the kind of event that occurs regularly in nature but is inherently unpredictable.
The existential economic issue facing Europe in the aftermath of the twenty-first century’s first energy war, then, is whether the continent can fully rebuild many of the energy-intensive industries already shut or facing stoppages. (Certain classes of machinery, notably some in glass and steel manufacturing, can be irreparably damaged if shut down.) Whether such businesses decide to risk deploying capital to reopen involves speculation about whether foreseeable energy supplies will be both reliable and cheap. If the answer is found in locations in Asia, or Africa, and even Russia, that’s where those supply chains, jobs, and economic benefits will migrate.
European policymakers should know by now that depending on SWB technologies instead of hydrocarbons requires answering a basic question: How does an economy store enough energy to survive the week-long natural droughts of wind or sun that are common—or longer disruptions resulting from both natural and manmade disasters and geopolitical meddling? We know the answer for conventional energy.
On average, economies the size of the U.S. (and in normal times, the EU) store one or two months’ worth of coal, oil, or natural gas. Stowing away such quantities of hydrocarbons is relatively easy and inexpensive. Advocates of the energy transition propose that building more batteries can store excess energy from solar and wind installations. But matching the energy value of the two months’ worth of natural gas Europe now has in storage would require building $40 trillion worth of batteries, which would take all the world’s battery factories combined about 400 years to produce. Handwaving 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.
Or consider Europe’s rush to increase gas imports from non-Russian sources by installing some 20 LNG import terminals, the biggest single get-out-of-jail factor for the continent. Many will be online shortly; the rest will come next year. The terminals will cost a total of about $15 billion and deliver enough fuel annually to produce a quantity of electricity that would require building $200 billion of wind turbines. Those hypothetical wind turbines, of course, would still require natural gas backup for wind droughts—that is, trillions of dollars of batteries.
These realities are why Liz Truss, the new U.K. prime minister, has announced that the country will pursue shale gas and oil. Naysayers, including Britain’s chancellor of the exchequer, said earlier that fracking wouldn’t solve the energy crisis even “if we lifted the fracking moratorium tomorrow,” for “it would take up to a decade to extract sufficient volumes.” Obvious and true, but the point is to forge an energy path that gives businesses enough confidence about the future to deploy capital today. And that confidence will rest on whether planners see a future with sufficient, resilient, and cheap energy.
China is now building the world’s biggest natural gas storage facility, drilling more, and increasing its coal use. What does China know about the future of essential energy-intensive industries?
If European policymakers want to restore energy sanity, they should reanimate North Sea oil and gas production and reopen the Netherlands’ massive Groningen natural gas field, which alone has the capability to make up most of the potential near-term shortfall if Europe sees a cold winter. The Dutch government has made it clear that the long-planned voluntary shutdown remains on track.
The bedrock sources for future hydrocarbon supplies for Europe are found in three domains: OPEC, deep-water rigs (global and U.S. offshore), and American shale fields. So restoring energy sanity would also include striking comprehensive, long-term buyer agreements with fuel suppliers, not just in the Middle East—which Europe has already rushed to do—but also in the U.S. Of course, for the U.S. to step up as a significantly greater supplier, that would require government policies that facilitate, not oppose, domestic hydrocarbon expansion.
Theoretically, Congress could enact the necessary legislation. And it’s something that would not cost taxpayers money but instead generate profits for American firms. It would also, in due course, reduce energy prices for consumers because it would ultimately oversupply markets, which always reduces prices and inflation. But the only way to do that would be to reset the regulatory structures that impede major development. It would require, in short, a political attitude change.
But if the EU and the U.S. were to work together for a major reset of energy supply and production, that would send precisely the market signals needed for reindustrialization and recovery. Any reset would have to be enshrined in legislation, not rhetoric, to be credible enough to inspire major private capital commitments. None of that would require governments to repeal their ambitions for SWB technologies.
Alas, promoters of magical thinking about the energy transition are redoubling their PR and lobbying efforts. The champion of the transition, IEA’s executive director Fatih Birol, recently took to the pages of the Financial Times to clear up what he called the “three myths about the global energy crisis.”
Birol is wrong on two counts and misguided on the third. Birol first claims that far from winning the energy battle, “Moscow is doing itself long-term harm by alienating the EU” and damaging long-term mutually beneficial relationships. But much of the rest of the world, from China and India to many African nations, don’t care about that “damage” and are instead enjoying the fruits of buying Russian commodities at a discount. Russia is also a major (often a top-three) producer of many critical minerals, from copper to nickel to aluminum.
Birol then writes that it’s “absurd” to claim that “today’s global energy crisis is a clean energy crisis,” and that leaders he talks to “regret not moving faster to build solar and wind plants.” Doubtless some people believe this, but Europe’s electric grids and industries cannot operate without hydrocarbons. The issue for Europe is who supplies them, and at what price.
Finally, Birol says that he doesn’t see the energy crisis as a “huge 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 even more massive subsidies or nationalization efforts to regain footing. That outcome would qualify as a huge setback for the continent. The alternative? A return to energy sanity, in partnership with America’s mighty hydrocarbon machine.