Vladimir Putin has his finger hovering over Europe’s light switch.
Kremlin critics, and now even the International Energy Agency, have accused Russia and state producer Gazprom of restricting supply to Europe, helping to fuel the surge in gas prices across the region.
The Kremlin has added to these suspicions by offering a simple solution to the feared winter shortage: approve the controversial Nord Stream 2 gas pipeline that will tighten Putin’s grip on European energy supply. The pipeline, which bypasses Ukraine and is vehemently opposed by the US, is finally ready to pump gas into Europe but is awaiting approval from German regulators.
“Get Nord Stream 2 operational or else: that’s, in the end, the signal they sent,” says Prof Andreas Goldthau at the Institute For Advanced Sustainability Studies. “Typically over summer Gazprom pumps a lot of gas into Europe, not because it’s needed, but because they replenish gas storage facilities, which they have all over Europe. “You fill up the storage and you start to stock draw in the winter. What has been happening over the summer is the Russians didn’t do that.”
Whatever the Kremlin’s intentions, soaring gas prices ahead of the winter is threatening to add to building inflationary pressures and damage Europe’s post-Covid recovery, particularly in Germany and Spain. A number of factors other than Russia are worsening Europe’s gas price crisis from freak weather in South America to higher demand in Asia.
Jacob Nell, Morgan Stanley economist, warns the gas price crisis could hit growth in Europe by squeezing disposable incomes and hurting energy-intensive businesses. He says the price surge risks becoming more damaging if Russian supply fails to pick up following the approval of Nord Stream 2 or “a cold winter with high gas and power demand”.
The gas price crisis has revealed the fragility of the region’s energy supply and the need to beef up resilience. Governments across Europe have rushed to soften the blow on consumers with multibillion-euro packages to protect households.
Europe is heavily dependent on Russian gas for energy – and is set to become even more reliant as Nord Stream 2 arrives.
The EU imports more than 40pc of its natural gas from Russia amid warnings that it needs to diversify its energy supply.
The next largest supplier, Norway, holds far less clout, providing just 16pc, according to Eurostat, the bloc's official statistics body. Spain, Greece, and Italy have three-quarters of their energy needs met by imports, and Germany have seen its dependency climb, rising from 59pc in 2000 to two-thirds of its supply in 2019. Germany is the biggest consumer of natural gas in Europe, accounting for a quarter of its energy needs.
However, gas storage in Europe’s biggest economy is just 62pc full ahead of the winter when demand will pick up, according to Barclays. That is almost 30 percentage points below the normal average for the end of September and the bank’s analysts believe bringing Nord Stream 2 online will do little to boost Europe’s supply this year.
“There’s a lot of politics going on,” says Jason Durden, head of energy markets at Alfa Energy, who adds that Germany had been caught between Moscow and Washington. “Russian-owned storage within Germany is low and partly that will be the whole Nord Stream 2. You might interpret that as political pressure.”
He says Germany’s industrial sector is “particularly exposed”.
“This is huge for industry and particularly for Germany, less so for the UK… Energy intensive industry cannot operate at these levels so it closes down.”
German and Spanish households are the most likely in the eurozone to be squeezed by rocketing prices. Electricity and gas make up a larger proportion of the two countries’ inflation baskets, meaning their consumers are more affected by any rise or fall in prices. Spain has also suffered one of the biggest jumps in electricity spot prices.
Capital Economics expects higher energy bills in Spain to add 0.5 percentage points to inflation in the coming months, pushing its cost of living gauge above 4pc to turn the screw on households.
“Governments are stepping in to cushion the blow, but higher energy bills are a downside risk to the eurozone’s consumer recovery,” says Jessica Hinds, Europe economist at Capital Economics.
“While rising energy prices won’t derail the consumer recovery, they may still prove a headwind.”
European governments are intervening to stave off a winter crisis that squeezes struggling families and ailing suppliers.
Spain signed off on emergency measures that will redirect €2.6bn of profits at energy firms to cap gas prices and provide help for consumers. Madrid has warned the EU that the surge in prices threatens to cause a backlash against the transition to renewables after the country was hit by waves of protests against higher energy bills.
France has unveiled a €100 one-off energy grant to help almost 6m low-income households meet their bills while Italy is also said to be mulling billions of euros of aid.
Analysts are warning that another cold winter could keep prices high well into 2022, keeping up the pressure on inflation. Winter is coming and a cold chill is set to descend on households and governments across Europe.