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Experts warn: The energy crisis may be just beginning

The energy problem in Europe after Russia cut off the natural gas supply is progressing positively with the filling of the warehouses. However, experts predict that the demand from Asia, especially from China, will increase next year, and that the competition to be experienced may lead to an energy crisis that will last for many years.

While Europe has been shaken by the energy cost of approximately 1 trillion dollars in the energy shortage caused by the Ukraine war, it is considered that the crisis, which has the potential to be the biggest of the last decades, may be just beginning.

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Europe will have to replenish its gas reserves with little or no gas supply from Russia after this winter, and this is expected to intensify competition in tanker transport.

According to the news in Bloomberg HT, although the countries in the region commission more facilities to import liquefied natural gas, the natural gas that is calculated to be provided by the additional production capacity of countries such as the USA and Qatar will not be ready until 2026, and thus the market is expected to remain tight until this date. This indicates that there will be no escape in high energy costs.

State of emergency can last for years

Bruegel, a think-tank in Brussels, stresses that over $700 billion in government aid has helped businesses and consumers avoid most of the damage, but that the state of emergency can last for years.

 

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While it seems likely that countries will increase interest rates and slowing economies will experience recession, it does not seem possible to sustain the aid to millions of households and businesses for a long time.

Martin Devenish, Director of Consulting at S-RM, said: “When you add up all the factors like bailouts, grants, it’s a ridiculously big amount of money. It will be much more difficult for governments to manage this crisis next year,” he said.

Half of EU countries have exceeded their debt limits

The financial capacities of governments in Europe have already begun to strain. The debt of half of the member states of the European Union has exceeded 60 percent of the Gross Domestic Product, which the union has set as the limit limit.

The $1 trillion amount that Bloomberg uncovered by compiling market data drew attention to the level of energy costs for consumers and businesses, while some of this figure was offset by the aid programs provided. Bruegel states that they have similar projections to their forecasts with the demand and price increase in a report released this month by the International Monetary Fund (IMF).

Despite the record prices last summer, the race to fill the tanks seems to have eased the pressure on supply for now, but freezing weather will give Europe’s energy system its first real test this winter. The German energy grid authority warned last week that not enough gas was saved and that two of five key indicators, including consumption levels, reached critical levels.

Despite the austerity measures, the supply gap may be 27 billion cubic meters in 2023.

While businesses and consumers are asked to reduce their use due to limited supply, the International Energy Agency announced that the EU has managed to reduce its gas demand by 50 billion cubic meters this year. On the other hand, the region still faces a potential deficit of 27 billion cubic meters for 2023 in a scenario where Russian supply drops to zero and Chinese LNG imports return to 2021 levels.

Bjarne Schieldrop, Principal Commodities Analyst at Swedish bank SEB AB, said: “Gas supply is an absolute necessity and we will likely see widespread storage efforts in Europe. The race has begun to fill the natural gas stocks in the EU,” he said.

The European Commission has set minimum targets to avoid a possible supply crisis. Accordingly, storage facilities are expected to be at least 45 percent full by February 1, in order to avoid the possibility of depletion of reserves until the end of the warming season. In the case of a mild winter, the target was set to stay above the 55 percent level.

Economic recovery will intensify competition

While LNG imports to Europe reached record levels, new floating LNG terminals started to be opened in Germany. While government-backed purchases have helped to divert shipments from China to Europe, it is estimated that a colder season in Asia and a potential strong economic recovery after Beijing eases Covid restrictions will make this more difficult.

According to the Institute of Energy Economics, an affiliate of China National Offshore Oil, China’s natural gas imports for 2023 are estimated to be 7 percent higher than this year. The state-owned company is in direct competition with Europe for additional capacity purchases as it begins work to secure LNG supplies next year. China’s historic decline in gas demand this year corresponds to about 5 percent of global supply.

However, demand from China is not the only problem for Europe. Other Asian countries are also preparing to supply more gas. Japan, the world’s largest LNG importer this year, plans to build a strategic reserve as the government subsidizes purchases.

Public support is not sustainable

European gas futures prices, which peaked at 345 euros in July this year, fell to around 135 euros per megawatt-hour. If prices rise to 210 euros, import costs could reach 5 percent of GDP, according to Jamie Rush, Chief Economist for Europe at Bloomberg Economics. Experts say this scenario could turn the previously predicted mild recession into a deep economic downturn and cause governments to cut aid programs.

High energy costs mean competitiveness with the US and China, especially for countries like Germany, which depend on affordable energy to manufacture products ranging from automotive to chemicals.

Isabella Weber, an economist at the University of Massachusetts Amherst, known as the inventor of low natural gas prices in Germany, said: “It is important for the German government to intervene, given the shock that the sharp increase in energy prices will have potentially tremendous political and social repercussions and the shock to the spine of the German economy.” .

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