Dr. Ken Rietz
November 30, 2023
Energy prices in Europe spiked when Russia invaded Ukraine, especially when the Nord Stream pipeline was blown up, adding more pain to Europe’s already climbing fossil fuels prices. From fall of 2022 until spring of 2023, households across the continent struggled to maintain minimal levels of comfort, even though the winter was quite mild in comparison to those in the recent past. It is no exaggeration to describe last winter as a crisis in western Europe. We are approaching another winter in Europe, so we want to give an overview of Europe’s current preparations.
There are some issues to be faced before we continue, though. What about renewable energy? What about nuclear energy? About half (57%) of the electricity in Germany comes from renewable sources. But to increase renewable energy requires the production and installation of a lot of expensive equipment, which is not easily done rapidly to address a crisis. Germany used to have 17 nuclear plants, but opposition to nuclear energy, particularly after Chernobyl and Fukushima, has reduced that number to three plants, all of which shut down in April of 2023 after the coldest weather had broken. They produced only 6% of Germany’s electricity. Eight of the closed plants could be restarted with reasonable amounts of work, but again, restarting a nuclear reactor is a very time-intensive process. So, none of these could reliably fill in any crisis-created gaps in energy production.
The market for fossil fuels has had a chance to adapt and adjust to the world situation, and Europe has had a chance to prepare for the coming winter, when energy consumption peaks. The fuels that we will look at today are natural gas, oil, and coal.
Natural gas production in the US has been growing, roughly doubling in the past 15 years, driving its price down. Exports of LNG from the US began in 2016 when the Sabine Pass terminal came online. The US exports to France, for example, more than tripled from 170 billion cubic feet (Bcf) in 2021 to 571 BCF in 2022. Similar increases occurred in Italy and slightly less in Spain. Germany started importing LNG from the US in 2023. Inflation-adjusted prices of year-ahead natural gas have decreased significantly from a high of 223 euros per megawatt hour in August of 2022 to 48 euros recently. This is still above the long-term average for Europe but is much more manageable.
The main suppliers of oil are OPEC and the US. I can’t comment on OPEC since their ministerial meetings are scheduled for the day this commentary is scheduled to be distributed, but the situation in the US can be laid out. As noted in a previous commentary, US crude oil production has been increasing and NYMEX WTI crude futures prices have dropped since the spike due to the Russian invasion and are close to the level now (See graph below). This indicates that supplies of crude oil are generally adequate and that the current balance of supply and demand should keep the crude oil futures fairly steady. Of course, OPEC considerations could change that considerably.
Figure 1: ICE Brent crude oil front month prices, USD per barrel
For Germany to even consider increasing coal-fired energy generation shows how serious the energy crisis was. While reiterating their commitment to phase out all such generation by 2030, Germany brought back several coal-burning generators, as did Austria. The Netherlands allowed coal plants to increase to full capacity last summer to conserve natural gas. Plans in Germany are currently to leave three power plants operating until March of next year, basically for security for the power-intensive manufacturing sector.
Overall, Europe seems to be taking prudent steps to avoid the crisis of last year. There are no indications that unusually high prices are likely for the coming winter. Europe’s crisis looks to be behind it. That, in turn, could calm the energy futures prices.