Europe is bracing for a very cold winter, or at least a winter with very high heating costs. According to this Guardian article, if gas prices stay at current levels Vladimir Putin could keep exports to Europe at 20% of normal levels for the next two to three years, and could cut off supplies entirely for a year without adverse effects on the Russian economy. With the Russian-Ukrainian war raging on, it’s plausible that Russia could retaliate against the Western sanctions by cutting off gas supplies to Europe in the upcoming winter.
The utility prices have been skyrocketing in Europe. British households were told that their power and gas bills will increase from Oct. 1 by 80%. One of my contacts in Europe sent me the chart above, showing the electricity tariff at the European Energy Exchange (in € per MWh). The price has more than 10x from a year ago. As my contact explained to me, this is the price at which utility and industrial companies purchase electricity, if necessary, often years in advance. Although natural gas is only a fraction of the energy mix the electricity tariffs are bound to the most expensive energy source which is natural gas. 39% of Europe’s natural gas supply is through imports from Russia. It would be devastating if the supply gets cut off.
According to my friend, the energy crisis is real and everyday people are feeling the impact. Exploding energy cost is the main driver behind the high inflation in Europe in addition to rising cost for food. The energy crisis is also affecting the global supply chain. European car makers, bottle manufacturers and skyscraper builders are preparing for a possible glass shortage if the loss of Russian gas throttles production.
The USA seems to be in a relatively strong position compared to Europe or China. At least we don’t have a huge immediate crisis like the energy shortage in Europe or the real estate collapse in China. The world is going through a recession now. But chances are the recession/stagflation we are experiencing in the US right now is way milder than what’s happening in Europe or China.