Europe is waking up to its huge energy mistake

Javier Blas, the brilliant energy journalist at Bloomberg, posted the most astonishing tweet on Wednesday: 

As Blas went on to note in his Bloomberg column, the reason for the Russian oil producer’s failure to sell its oil is that market traders are “self-sanctioning”. Traders – even though they are allowed by Western governments to buy the oil – have made their own decision to boycott Russian oil whether it be on reputation grounds or indeed moral objections. 

The oil market, he adds, has not seen disruption like this since the outbreak of the Gulf War in 1990. Adding to the disruption is that Western ports – including those in the UK – are refusing entry to Russian tankers bringing oil (and gas) to the continent, although there are attempts to circumvent the blockades by changing the oil cargo to European ships. 

Right now, Russia’s Sovcomflot, the world’s biggest owner of medium-sized tankers, is being turned away from ports while Maersk Tankers and Torm are refusing new Russian oil shipping contracts while many banks are refusing to deal in Russian oil.

Blas adds that Russia exports about 5 million barrels a day of crude, plus nearly 3 million barrels of refined products. Analysts reckon that at least 2 million barrels a day of Russian oil exports – crude and refined productions – are at risk, equal to about a quarter of the total. Losses of the seaborne trade could be even larger if Russian oil doesn’t find buyers soon, with some estimates suggesting up to five million barrels a day could be lost. 

As Russia supplies around 40 per cent of Europe’s gas and oil – and one in ten barrels of the world’s oil – the impact on global supplies could be devastating if this situation continues. After the US, Russia is the world’s second-largest oil and gas producer, providing 17 per cent of gas output and 13 per cent of oil production globally in 2020. About 4 per cent of the UK’s supplies come from Russia. 

The result? The prices of Brent Crude oil – and gas – are rocketing sky high with Brent touching $119, a level not seen since 2012, while benchmark UK gas futures reached an all time high of 464p a therm earlier in the week although the price has dropped back since. Even so, the price of petrol and diesel on forecourts around the world is soaring while the cost of domestic – and industrial – heating and electricity is reaching new levels.

More pertinently, the price of oil in the futures market for May this year is now at $115 barrel. Yet the futures price for September is $97 a barrel, a phenomenon known as backwardation. This is when oil futures trade at lower levels than spot prices and near-term futures, suggesting traders are seriously worried about shortage of supplies if full-scale energy sanctions are introduced or if Moscow were to restrict supplies in retaliation. 

As Blas also points out, the price gap between a barrel of Brent delivered now and one in one year has widened to a record of more than $23.50 a barrel, way above the level after Saddam Hussein invaded Kuwait almost 32 years ago.

What does this mean for European countries – particularly for Germany which is so reliant on Russian energy imports – in terms of energy price but also continuity of supplies?  

Germany has the most to lose as it is by far the most exposed of EU countries: about 55% of its gas imports come from Russia, as well as approximately 50% of hard coal and 30% of oil. 

Chancellor Olaf Scholz has moved swiftly to try and reverse years of German dependence on Russia, made all the more acute by Angela Merkel’s extraordinary decision to phase out nuclear power and run down the country’s coal stations to meet carbon targets. 

Scholz has already ordered the pausing of Nord Stream 2, the proposed new gas pipeline from Russia, and ordered a review of how the country secures its energy which is due next week. 

The EU is also due to announce the results of its own review into future energy supplies. This review is said to include everything from looking at new supplies contingency planning to reduce heating and electricity demand, should the Russians turn off the taps despite the economic self-harm doing so would have on its revenues. 

Yet Scholz is not hanging about waiting for what happens next. He has also announced certain short-term legal steps to make changes in May for storage – for gas, storage facilities are to be filled to no less than 80% capacity by October, 90% by December, and still at least 40% by February of any given year.

According to Die Welt, in the short term, Robert Habeck, the economic affairs and climate action ministry is looking into buying more gas from other countries, including in the Middle East, and visited the US this week to discuss more liquefied natural gas imports to be delivered by sea. 

Over the longer term, Germany plans to build two terminals on the North Sea coast, in Brunsbüttel and Wilhelmshaven, as quickly as possible. But this project really is for the long term – just the approval process will take between two to five years.

In another move, Scholz has brought forward plans to reduce or even abolish the domestic energy levy which were introduced to subsidise renewables. They will now kick in in July this year to alleviate costs for consumers. 

While Germany is working flat out to increase energy sources from elsewhere, its politicians are all too aware of the consequences of banning all Russian energy imports and crashing the economy into the dark. 

Indeed, Habeck, who hails from the Alliance90/Green Party, warned earlier this week that he would not support a ban for fear of social unrest, saying: “I wouldn’t support an embargo on imports of fossil fuels from Russia. I would even speak out against it, because we would threaten the social peace in the republic with that.”

Which is why both national and regional politicians around the country are scrambling to come up with urgent alternatives in case supplies are restricted. The economics ministers of Germany’s sixteen federal states have called for an investigation into whether both coal-fired and nuclear power plants can either be kept open longer or, in the case of nuclear, repurposed. 

Andreas Pinkwart, the economics and energy minister of Germany’s most populous state, North Rhine-Westphalia (NRW), has been the most outspoken, demanding all options should be on the table. The NRW region has 52 power plants and the highest number of coal-fired power plants in all of Germany. It’s also one of four German states with large lignite mining areas.

Yet the crisis is also providing an opportunity for Germany’s powerful environmental lobby. Even the finance minister, Christian Lindner, of the FDP, has changed colour, describing renewable energies as “freedom energies” while Scholz has called them “crucial for our security” and urged the country to push ahead with expansion of renewables. This means an enormous push, say analysts, and in the case of wind energy, doubling capacity to 110 gigawatts by 2030 and tripling energy to 200 gigawatts.

Yet this does not solve the immediate problem, either in Germany or the UK. Germany is likely to burn even more coal in the short-term despite bringing forward its date for phasing out the black stuff, but it’s unlikely to extend the life of its nuclear plants because of problems getting specialist parts despite Habeck saying he was not ideologically opposed. But longer-term, the country might consider a new nuclear building programme. How times change. 

Here in the UK, the government is looking to speed up new oil and gas licenses for North Sea exploration. But it also needs to go further, and start by following Germany and reducing the renewables tax on energy. 

In the short term, coal stations can be fired up, more mines can be opened and more capacity can be built for storing  LNG while the decision to ban fracking in the north-west should be reconsidered by an independent examiner. 

At the same time, the politicians need to put their backs into the various nuclear plant proposals – at Wylfa in Wales in particular. They need to look again at the costs, and be prepared to explain why what seemed like sky-high financing a decade ago will actually work out relatively cheap compared to soaring oil and gas prices. And a price worth paying, rather than depending on the behaviour of war-mongering autocrats for our energy.

As I pointed out last week, Britain’s chaotic and ill-thought out energy policy is a scandal of spectacular magnitude, one which lies at the heart of successive governments. 

But we are not the only country that has made a fool of itself. The Italian and German governments – along with those of other European countries – have been importing electricity from France’s nuclear plants to meet their own needs despite having closed down all their nuclear reactors. The French got this one right. We need to take the same approach.