This week Russia announced that it was cutting off gas supplies to Poland and Bulgaria, reducing the supply of gas to all of Europe by about 8 per cent. The remaining part of Europe’s gas supply which flows from Russia – to countries such as Germany and Italy – must now be in serious doubt. Even if the EU does not ban such imports, Russia may itself cut supplies.
However, even an 8 per cent reduction in supply will have major consequences, as is manifest in the rise in the wholesale price of gas following the announcement. The fact that we are interconnected within Europe by pipelines means that what is a problem for Poland is potentially also a problem for Ireland.
We have already seen a major rise in gas prices as a result of the war in Ukraine. To some extent, we have been temporarily spared its full effects because much of our gas is bought on medium-term contracts. However, when these contracts run out and we are exposed to the latest price hike, things are going to look significantly bleaker.
Because gas is so essential to the EU economy, even the reduction in supply announced this week will have a very big price effect. Should all Russian gas be cut off this year, the effects could be dramatically greater.
While we don’t import any Russian gas directly, through the effects on prices we will, to a significant extent, share in Europe’s misery. The one upside would be that Russia would suffer a huge loss of income from an ending of gas sales, which would impact its ability to prosecute the war.
Economic shock
The German Bundesbank estimates that if Russian gas supplies are cut off, Germany will suffer a dramatic economic shock. It will cut gross domestic product by 5 per cent, pushing Germany into a recession. The knock-on effects from the reduction in gas supply and a German recession would ripple around Europe, affecting us all.
Initially the response of businesses and countries losing gas supply will be to try and source it elsewhere. In the absence of a co-ordinated policy response by the EU, this will see prices rise to exceptional levels as countries like Norway, and UK North Sea producers, have a queue of firms at their door pleading for supplies at any price. The only constraints on competition for the limited supplies will arise through limits on pipeline capacity, and where supplies are committed under long-term contracts.
In the case of Ireland, things may be slightly more complicated as 70 per cent of our gas comes through Britain, with the other 30 per cent coming from Corrib. In turn, about half of British gas comes from UK North Sea fields, a quarter from liquefied natural gas terminals in Britain and a significant part of the remainder from a Norwegian field connected to Britain.
If the UK shares in the misery, in solidarity with the rest of Europe, things will play out as I have described, with a very big price rise driving poor households and companies out of the market.
Winter of 1947
However, the UK might decide not to share in the misery and restrict sales of gas to the rest of the EU. This could be complicated in the case of the Norwegian gas, which is shipped through Britain. Either by imposing an export tariff or restrictions on exports, the UK could ensure a lower gas price for its consumers at the expense of the rest of Europe.
There is a precedent in the distant past: during the exceptionally cold winter of 1947, the then Labour government in London banned sales of coal to Ireland. However, there are a range of reasons, including legal contracts, which will probably see the UK participating in finding solutions.
One German economic institute has suggested that moderate savings, spread across all European consumers, could help deal with the problem. They cite the example of Cape Town’s response when it faced a complete drought – people cut water usage. However, persuading all European consumers to significantly cut back on consumption of gas seems challenging.
Governments across Europe are sending the wrong message, spending lots of money trying to insulate the public from the reality of gas prices. This suggests to the wider public a lack of true urgency.
An EU response is the best way of tackling the crisis. Germany has major gas storage which could help all of Europe next winter if the storage can be filled over the summer through a co-operative effort. However, in turn, that will require cutting consumption across Europe over the summer.
