A relatively late translation of a still relevant article by comrades from Communaut, dealing with the relation between energy resources, war and inflation.
28 November 2022
By Aaron Eckstein, Luke Egger, Ruth Jackson
Since the escalation of the war in Ukraine and the natural gas exports from Russia that have been curtailed, ‘our’ gas supply has suddenly become very precarious. This means that rosy times are not ahead for Europe as a whole, because the missing energy resources cannot be replaced in time by any other supplier. It can be assumed that gas prices, and with them inflation, will remain high in Europe for at least the next two years, while there may also be supply disruptions. The stakes are therefore high, because the availability and price of gas affects the entire economy, including private households. In the end, as always, the whole mess will be carried out on the backs of the proletariat and nature, and all alternatives promised by official politics are devastating.
Public news coverage constantly focuses on the governments’ wrangling over the gas issue. But their promises to bring prices to their knees through government action or central bank policy belies the scale of the problem. If such announcements are nevertheless believed, it also has to do with the fact that the material side of inflation is rarely analysed in depth. Since the supply-chain crisis triggered by the global reactions to the Covid pandemic, terms like “bottlenecks” [original in English] or “supply chain contractions” have been used in numerous discussions about price increases. We want to use the European gas infrastructure as an example to illustrate what is behind these rather abstract terms and to make clear their relevance for inflation.
Gas prices, infrastructure and demand
Basically, a distinction can be made between two levels of price development: firstly, a speculative level and secondly, a material level. The first is not directly related to the actual production and availability of goods in general and gas in particular, but reflects market expectations of future fluctuations in supply and demand and, related to this, the prospective rate of return. Among other things, speculation reacts to geopolitical events that allow conclusions to be drawn about future market developments. Examples of this would be that gas prices jumped each time Russia announced a mobilisation and when the inactive Nordstream pipelines were blown up.
In the following, however, the focus is on the material side of the gas price, which is determined by supply, demand, production processes and logistics. The gas price can be determined both by random factors, some of which cannot be predicted, and by the aforementioned speculation. However, the current and future development of gas prices in Europe is determined by three material factors in the narrower sense, and these will also keep prices at a high level for the time being: firstly, the amount of gas that continues to be supplied to the EU by Russia, secondly, the global demand for LNG (Liquefied Natural Gas), especially in Asia, and thirdly, the expansion and reconstruction of the European energy infrastructure.
Europe imported about 361 bcm [1] of natural gas in 2021, 42% of which came from Russia. [2] Three-quarters of the gas was delivered via pipelines, the rest as LNG. The largest pipeline suppliers were Russia (153 bcm), Norway (88 bcm), North Africa [3] (40 bcm) and Azerbaijan (8 bcm). LNG was mainly imported via Spain, France, Italy and the Netherlands. The gas infrastructure is very complex and basically consists of three important areas: the pipeline network, LNG terminals and gas storage facilities. The pipelines run throughout Europe, parts of Asia, Russia, through Turkey and North Africa. They connect the major production sites and the LNG terminals with the importing countries. This network has been built up over the last 50 years and is closely intertwined with the supply relationships that have developed over this period. For example, there are pipelines, such as the one between Germany and France, that can only deliver in one direction; from Germany to France. While some facilities are now being converted, such infrastructure conversion involves considerable effort and cost.
LNG terminals are basically located on the coasts and serve to receive and regasify the liquefied gas that is delivered from overseas. Pipeline gas is normally procured relatively cheaply in long supply contracts and – due to the fixed infrastructure – without competition. With LNG it is different: since it can be delivered worldwide by tankers, there is also global competition for supplies. [4] This in turn drives up the price, which becomes more noticeable the higher the LNG share of imports. It is expected that in the future an increasing amount of European gas will be imported as LNG from the USA instead of through pipelines from Russia. Forecasts predict a share of 40% by 2030, which is precisely what Donald Trump and his clique have repeatedly called for in recent years. This clearly shows what the often invoked “diversification of energy supply” will look like in practice.
Once it arrives, the gas will either be consumed directly or stored in large underground reservoirs. From there, it is then fed into the pipeline network when demand increases (e.g. in winter). The largest of these storage facilities within the EU are in Germany, Italy, France and the Netherlands. When they are completely filled, in the case of Germany the available gas is sufficient for about two average winter months.
The infrastructure described is distributed very unevenly across Europe and the various sub-regions are only inadequately interconnected. For example, Spain has an excess capacity of LNG terminals, but lacks pipeline connections to Central Europe to transport this gas surplus. Accordingly, the effects of reduced gas supplies from Russia manifest themselves very differently from region to region. One sub-region is formed by Germany, the Czech Republic, Slovakia, Austria, Hungary and the Benelux countries. [5] With the exception of the latter, these five countries are the most vulnerable countries in Europe; should Russian gas supplies continue to be so low or even fail altogether, they are likely to experience extremely tense supply situations or even outages in the winter of 2023/24.
The reason for this is that, so far, only the Netherlands and Belgium have fully operational LNG terminals. At the same time, these are already being operated above capacity, so there is little room for improvement here. Although these two countries also have pipeline connections to the UK, through which gas is currently delivered, the gas flow usually reverses in winter and England then imports gas from Europe. This is likely to be the case this winter and next. The Russian imports can therefore currently only be offset via Belgium, the Netherlands and the Norwegian pipeline. In Germany, two LNG terminals are planned for the winter of 2022/23 and four more by 2026, but terminals do not increase the available LNG on the world market. What Germany imports via its own terminals will be partly missed by the Netherlands, Belgium and the UK. As long as global LNG production is not expanded (which will take several years), this would be a zero-sum game. The volumes that can be moved via the planned LNG infrastructure are also minimal compared to Russian supplies. For comparison, the two LNG terminals due to become operational in Wilhelmshaven and Brunsbüttel in winter 2022/23 have a capacity of about 15 bcm. Nordstream 1 alone could carry about 55 bcm, Nordstream 2 again as much. Even the newly opened Baltic Pipeline, which will bring Norwegian gas from Denmark to Poland, only diverts gas that was previously delivered to Central Europe, and thus does not increase Norwegian export volumes.
Rosy prospects
At present, the tight supply situation is mitigated by two factors: It has been a mild winter so far and the economy in China is weakening. On the one hand, this lowers demand in Europe and, on the other, leads to a slight easing of competition with China for LNG on the world market. In addition, although Russian gas deliveries have fallen to around 14% of the norm compared to 2021, this year the gas storage facilities could still be filled to a not insignificant extent with Russian natural gas. Even in the unlikely event that these relatively favourable conditions persist, calculations show that by the winter of 2023/24 the gas depots can only be inadequately filled to about 35% of the storage volume and there may be supply bottlenecks. It is clear what impact it would have if some factors change for the worse, e.g. an unusually cold winter occurs, demand in China increases or Russian gas supplies come to a complete standstill.
An expert opinion by several academies of science comes to the following conclusion regarding such a scenario:
“In the event of an immediate failure of Russian natural gas imports, about 25% of the natural gas demand (based on 2021) could not be covered in Europe at peak load times in winter. The deficit is infrastructural: even with sufficient availability of natural gas on the world market, there are no LNG terminals and pipelines to land and distribute the gas in Europe.” [6]
The colleagues of a British think tank recently came to similar conclusions for the Central European sub-region. According to them, the utilisation level of around 35% for gas storage facilities, which is expected for the beginning of winter 2023/24, will be “catastrophic”. Getting through the winter, according to the Oxford Institute for Energy, will be impossible without “drastic reductions in demand for gas in the affected countries”. [7]
Europe got a first taste of such a situation already in 2021. At the beginning of the year, the gas price was still at 26€/MWh [8], at the end of the year it was already at 180€/MWh. Russia had already delivered less gas throughout the year [9], and cold winters and a production recovery in Europe, Asia and South America after corona increased demand. As a result, European and especially German gas storage facilities could not be filled sufficiently. Gas-intensive industries began to cut back their production. Due to supply stops and the war in Ukraine, the price rose to over 300€/MWh at certain moments in 2022 and stood at around 115€/MWh in mid-November. Although the media regularly speak euphorically of a “drop” in the price of gas, we still saw a quadrupling of the price if we compare it to the beginning of 2021.
Europe wants to free itself from dependence on Russian gas “well before 2030”. As shown, however, the core problem remains that Russian gas cannot simply be replaced, as the gas supply has objective limits. The pipeline capacities of Norway and Azerbaijan are currently fully utilised, planned production and export increases require high investments and will take at least several years. In addition, gas production in some countries such as the Netherlands, Norway and Algeria will decrease noticeably in the coming years. LNG is mainly produced (leaving Russia aside) by the US, Qatar and Australia, and only the US is expected to be able to significantly increase its production. Qatar and Australia, on the other hand, are partly tied to Asia by long-term supply contracts and therefore drop out as potential LNG sources for Europe.
Of course, short-term changes in the gas price on the market are always possible. In view of the rather mild temperatures so far this autumn, the gas storage facilities in Germany have been less heavily used than feared. In addition, certain industries had already curbed their consumption. Thus, for the time being, there was no need for gas replenishment; on the spot market, where the immediately available gas is traded, its price fell to below zero euros for a short time in October. However, these will remain rather short-lived phenomena. Optimistic forecasts, which assume that gas prices will fall again in the medium term, are based on three expected developments: they assume that either Russia will soon supply more gas again, the European infrastructure reconstruction will work smoothly, or there will be a ‘controlled’ reduction in gas consumption. However, due to the development of the war and the attack on the Nordstream pipelines, there is no geopolitical easing of tensions in sight. Meanwhile, uncontrolled gas consumption cuts are already taking place in the European Union for profitability reasons. European tin and aluminium production has been cut to half its capacity. However, Europe wants to prevent a continuation of this trend precisely because it would possibly lead to a permanent loss of world market shares. The reduced supply of European aluminium has already been compensated by an increase in Chinese production. The production model of Germany and other countries in Central Europe with energy-intensive industry, fuelled by cheap gas, could, therefore, be heading for a severe crisis.
The situation described so far also shows the absurdity of a capitalistically organised supply of basic goods. It is largely provided and operated by private companies with a corresponding profit interest. If the money is not right, an infrastructure will not be built, even though it might make a lot of sense to do so. When there is talk of ‘our’ full gas storage facilities, which have been filled as a result of the German government’s political activity, it should be borne in mind that they are largely in private hands. And even those that are in the trusteeship of the federal government operate according to private-sector standards. Only if the Federal Network Agency classifies the situation as an emergency could the gas flow exclusively to German consumption, otherwise the operators will sell the gas at a high profit margin to the highest bidders on the international market.
But the gas infrastructure is not only problematic because it is capitalistically organised and represents private property. It also has a geopolitical dimension. The historic dependence of nations that have few energy resources on those that can meet their own needs and still export in addition has been cemented by the entire pipeline and supply infrastructure. These geographical/geological and infrastructural dependencies inevitably become a factor in political power struggles – as is well illustrated by Russia’s handling of its own gas. The restructuring of the supply situation that is underway and the energy sovereignty that Europe is striving for are merely creating new dependencies and imbalances. Some use their disposal of these resources and the dependence of others as a means of exerting pressure; the energy-dependent nations want governments in the export regions that are beneficial for them and therefore try to work towards regime change if certain governments don’t suit them. The energy infrastructure always represents infrastructurally solidified geopolitical power and conflict lines. The whole mess is thus not only a question of private property and capitalism in the narrow sense, but also one of imperialism.
A reasonably rational response to the current predicament, within the current framework, would be a large-scale transformation of the European infrastructure and a common organisation of gas purchasing, which would, at the same time, presuppose far-reaching European coordination and cooperation. What we have observed in recent months, however, looked completely different. For example, the Minister for Economic Affairs, Habeck, and his crew were recently on a tour visiting various dictators [11], this time without partners from their “community of [European] values” – and even the domestic aid measures such as the gas price cap were decided against the criticism of numerous European ‘partner’ states. Fifteen EU states are calling for a common gas price cap – Germany is not one of them. The failure of the “Midcat” pipeline project, which was to run from Spain through France to Germany, is another example. Long planned and built up to the Spanish-French border in the Pyrenees, the negotiations were resumed, but after some back and forth they were buried again due to a lack of French interest. These are all examples of hard-nosed national interest politics that make a reasonably harmonious approach to the colossal problem unlikely.
Gas, fertilizer, wheat and climate change
Gas prices affect the prices of almost all other products. This is particularly true in three essential areas of life and the economy: first, obviously, heating and electricity costs. In Europe, the so-called ‘merit order’ means that the most expensive electricity determines the overall market price. So if the price of gas rises, as has been the case in recent months, the price of electricity also goes up – regardless of whether consumers buy green or coal-fired electricity. Secondly, as already mentioned, this applies to energy-intensive production such as the metal, paper and chemical industries. And third, agriculture requires large amounts of gas, especially for fertilizer production. Fertilizer production with substances such as ammonia and nitrogen is extremely energy – or gas – intensive. Since the escalation of the war in Ukraine and the rise in gas prices, fertilizer production in Europe is therefore on the verge of collapse.
This is particularly serious because fertilizer production goes hand in hand with global food supply. Since Ukraine and Russia are both major exporters of fertilizers and the raw materials that make fertilizers, but the sanctions and counter-sanctions in the wake of the war have blocked their exports, an inflationary chain reaction has ensued. Fertilizer prices are reflected particularly in wheat and grain prices and thus also in the price of bread. In the global South especially, this will significantly affect the supply of staple foods, particularly if other cereals or soya are also affected by the price increases. At the same time, cereals are not only consumed by people, but about 47% of the global harvest is used as animal feed, thus also affecting meat and milk prices. Russia and Ukraine, also two of the largest global wheat exporters, still supplied about 28% of global demand in 2021. In 2022, Ukraine exported about 30% less wheat through the blocked ports than in the previous year. The two countries are also important exporters of other grains such as maize and barley.
To this already very unfavourable situation, climate change is now added as an aggravating factor. Russia’s harvests were unusually good in 2022 thanks to higher temperatures. But at the same time, extreme heat and prolonged drought reduced yields in many other regions, such as parts of southern Europe and the USA. Agronomists assume that global wheat and food prices will no longer fall below 2008 levels due to climatic developments.
At the same time, the climate change caused by capitalism undermines the European attempt to become independent of Russian gas in the short term by ramping up coal and nuclear power at the expense of the ‘green transformation’. Due to the heat, the water level of the Rhine was so low that coal could no longer be transported by ship, but only very inconveniently by train to the German power plants. Another bizarre example is the French nuclear power plants, which had to be cranked down because the water temperatures in the rivers were too high. If the matter were not so serious, one could laugh about it.
Under these circumstances, a conversion of the energy supply to renewable sources seems more unrealistic than ever. The climate footprint of LNG is far worse than that of pipeline gas. Gas extraction by fracking in the USA or Australia, for example, is far more harmful to the environment than conventional extraction in Finland or Russia. Liquefaction of the gas is also an energy-intensive and emission-rich process. A sustainable energy supply that takes account of the climate catastrophe would have to look completely different. However, long-term considerations are subordinated to short-term geopolitical considerations.
It is repeatedly claimed that the gas infrastructure could be used for ‘green’ hydrogen in the future. However, this is doubtful for various reasons. So far, it is unclear where the hydrogen will come from, how it will be produced in an environmentally friendly way and how it will be transported. For example, you cannot feed hydrogen directly into the existing pipeline network, as hydrogen has the property of corroding and ’embrittling’ many metals – including many types of steel used for pipelines. It is more likely that the current investments will lead to a so-called ‘fossil lock-in’. This would mean that fossil fuels would be consolidated as energy sources without alternatives and that investments would not flow into the urgently needed ecological transformation.
Conclusion
For the reasons outlined above, gas prices in Europe will certainly remain high in the coming years and there may even be supply disruptions. The infrastructural solutions being considered by governments cannot be implemented as quickly as is often claimed – and with a view to the climate, they are a further step in the wrong direction. Taken as a whole, the predicament looks like a colossal vicious circle. The capitalist mode of production exists in a world of competing nation-states, and these have different energy resources on their territories, enabling some of them to act as exporters of the coveted substances and placing others in long-term dependence. At the same time, the imperial struggle of all against all is turning energy supply chains into permanent hotbeds of conflict. The currently escalating conflicts, above all the war in Ukraine, which has already cost thousands of lives, create a need for energy sovereignty among the gas importing nations. However, their attempts to achieve this are hampered by climate change, which is itself the result of the capitalist organisation of energy supply. In response, new short-term dependencies, such as those on imported LNG, are built up, further accelerating climate change and creating new potential geopolitical flashpoints. The only thing that might break this circle would be if the realisation spread among the wage-dependent majority of the population, who ultimately have to pay for the whole misery, that capital and its governments cannot be counted on. Both a rational supply of energy and averting the smouldering climate catastrophe will either be forced on the streets and in the workplaces, or postponed to an ever more distant – and ever more catastrophic – future amid the constraints of capitalist and geopolitical competition.
Footnotes:
[1] Billion cubic metres = billions of cubic metres. 1 bcm is equivalent to 9.77 terawatt hours.
[2] All information on supply volumes, infrastructure and forecasts is based on the following sources, unless otherwise stated: Scenarios for the Price Development of Energy Sources, EWI 06/2022; Special Impulse Energy Prices and Security of Supply, Leopoldina, acatech, UDAW 07/2022 Europe’s Infrastructure and Supply Crisis, OIES, 09/22; Falling Like Dominoes: The Impact of Nord Stream on Russian Gas flows in Europe, OIES 08/22; Demand response to high gas prices in Europe in 2021 and early 2022, OIES 06/22 and the podcast series Impact of Russia-Ukraine War on Energy Markets, OIES; Natural Gas in Europe – The Potential Impact of Disruptions to Supply, IMF 07/22.
[3] North Africa is not defined more precisely in the OIES study, but it can be assumed that it is mainly Algeria and Libya.
[4] This could ease somewhat in the future, for example if there is an expansion of infrastructure between Russia and China. It is possible that China would then have to buy less LNG, which would reduce demand on the world market.
[5] Belgium, the Netherlands and Luxembourg
[6] Special Impulse Energy Prices and Security of Supply, Leopoldina, acatech, UDAW 07/2022.
[7] Europe’s Infrastructure and Supply Crisis, Oxford Institute for Energy, 09/2022.
[8] In the following, we always refer to the prices at the European wholesale points, especially the “TTF Front-Month prices”, a pan-European comparative value. How the price is presented in detail depends on the trading and delivery point. For example, there is also a large trading point in Leipzig, the EEX. The price, which we are currently shocked to read on our utility bill, is not only influenced by the exchange prices, but also by grid charges, taxes, etc. See for example:
Gasmarkt & Gaspreis: Definition & Zusammensetzung | EnBW
[9] There are different explanations for why Russia supplied less gas already in 2021: because it consumed more gas itself due to a cold winter, because it wanted to artificially increase gas prices or because the war against Ukraine was already planned
Insight-120-The-Impact-of-Nord-Stream-on-Russian-Gas-flows-in-Europe.pdf (stackpathcdn.com)
[10] REPowerEU: erschwingliche, sichere und nachhaltige Energie für Europa
[11] Qatar, the VAR, Egypt and Azerbaijan are not only dictatorships in which serious human rights violations occur, but are also regularly involved in wars that violate international law, e.g. in Yemen or Nagorno Karabakh, each with thousands of deaths.
