Russia’s decision to keep the Nord Stream gas pipeline indefinitely closed may not be as devastating as initially thought for Europe.
While the shutdown means that the continent won’t get any more supply from Russia, it had done a decent job of stockpiling gas before the cutoff. European Union countries might only have to reduce their energy consumption 2% compared with average winters to get through to spring and probably won’t need enforced rationing, according to Cedric Gemehl, an analyst at Gavekal Research.
That is certainly good news for the European economy, which was facing the prospect of not having enough fuel to heat homes when the weather turns colder. That could mean that the economic slump expected in the next few months could be mild, which in turn makes the global outlook a little stronger.
“Now that the nightmare has come true, Europeans may find that it is not quite as scary as they had feared,” Gemehl wrote in a Sept. 6 note. While gas prices are still causing demand destruction, especially in Germany, “it is a lot less dire than the likely worst case scenarios being considered just a month or two ago.”
Gas prices on the continent have already started retreating after having initially jumped just after Russia’s decision to keep the pipeline shut. They may have peaked, since there is nothing more Russia can do to choke off supply, according to Lawrence McDonald’s newsletter The Bear Traps.
“The tail risk has materialized, and Russia has little leverage from here,” the note said on Wednesday.
Make no mistake, Europe still faces a difficult period ahead. Russia’s invasion of Ukraine continues to fan inflation, driving rates to the highest in 40 years. The European Central Bank is responding by tightening monetary policy. It lifted interest rates by a half point in July.
is predicting a three-quarter point hike at the next decision on Thursday.
Still, governments have stepped up plans to help households cope. Germany unveiled an emergency program worth $65 billion that includes higher benefits, and tax rebates. New British Prime Minister Liz Truss will announce her plan on Thursday. It is touted to include more than $100 billion in relief for households through price freezes.
Ursula von der Leyen, the president of the European Commission, said Wednesday that the European Union will take radical measures to ease the burden on households. Leaders are meeting later this week to hash out a plan that could include price caps and a windfall tax on companies.
Eventually new sources of energy will need to be found. Russia used to provide 40% of Germany’s natural gas, which is used for generating electricity as well as for heating homes and cooking. Wholesale power prices in Germany are about 16 times higher than they were before the crunch.
But for the first time in months, it looks like things can’t get much worse. European nations have stockpiled enough energy to make the winter manageable and have made it clear they won’t leave consumers to shoulder the bill of skyrocketing prices.
That should increase their confidence and give them more money to spend on other things, which is very good news for U.S. companies selling into European markets.
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