During the last two or so years of Russia’s war, energy relations between Europe and Russia have regressed at a furious pace. Moscow’s reduction of gas supplies to Europe and the European Union’s ban on Russion oil imports diminished trade between the parties to turnover levels roughly equal those of the late 1970s. Even if it is not obvious from Budapest, Russian pipeline gas and oil supplies are now only present in the south-eastern corner of the old continent, and have all but ceased in the rest of it. In the case of natural gas, Russia might even be willing to turn the tap back on, but today it lacks the infrastructure to do so. Lifting the Western sanctions on oil supplies seem to be unlikely unless the war but more plausibly the Putin-regime itself ends.
Post-war Oil
Many draw parallels with the 1973 oil crisis. Then, too, war apparently triggered a major restructuring of the sector, changing its geopolitical relations, accelerating oil and fuel replacement, and opening Western European doors to Soviet oil and gas. Just as the current energy crisis ended the half-century Soviet/Russian energy era, the 1970s crisis marked the decline of the almost century-long US oil era. Up until the Second World War, Western Europe had been supplied—if not exclusively but predominantly—directly from America. During the war, every second ton of shipments from the US in the lend-lease framework was oil or an oil product, enabling the relatively quick defeat of Nazi Germany. Until the 1970s, this would later be replaced by Arab oil operated by US and Western concessions, the production and supply of which Washington controlled and for many years successfully guaranteed. This post-war oil order is justly regarded as the third pillar of the emerging transatlantic system of security, alongside the Marshall Plan and the establishment of NATO. It was only after this model became untenable and the US dominance on the global oil markets collapsed that the long march of West Siberian oil and gas across the old continent could accelerate—a situation that ended in 2022.
Part of the Soviet Union’s Domestic Energy Strategy
By comparison, the socialist bloc of Eastern Europe was dominated by Soviet energy policy after the Second World War. “Eastern Europe is part of the Soviet domestic fuel-switching strategy”, as Thane Gustafson, the distinguished scholar of late Soviet hydrocarbon exports, put it. The conditions of Comecon plan economy determined steeply increasing consumption dynamics, which were sustained by, first, Soviet oil, and then, from the late 1960s onwards, by other energy carriers offered by Moscow, nuclear power plants, natural gas, and electricity exports. In practice, only Soviet energy could be imported, and the energy policies of the Soviet bloc countries were differentiated only by the availability of resources. In resource abundant countries with huge domestic coal (Poland and, to a lesser extent, Bulgaria) or hydrocarbon reserves (Romania), import dependence remained lower, while the other countries with scarce domestic deposits—the GDR, Hungary, and Czechoslovakia—relied increasingly on Soviet imports for all their energy. These patterns hardly changed after 1989. No Soviet nuclear power plant was built west of the Elbe, and, despite increasing its export, Russia could not rely on its dominant market power in either oil or gas in Western Europe. In contrast, gas markets east of the Elbe were dominated by the one and only Gazprom and oil markets defined by Russian Urals until the late 2010s. In this sense, no single European market has emerged after the reunification of the continent; the embeddedness of Russian energy remained fundamentally different in the two halves of the continent.
Alternatives Become Available
But, like all analogies, the comparison between 1973 and 2022 is vague. The dual oil price shocks of the 1970s were global. They lasted well over a decade and were triggered by a sectoral conflict, not by the Arab-Israeli war. By contrast, the dramatic endgame to Russian energy supplies to Europe was politically-security motivated, and the sectoral conditions themselves would have resulted in a much slower and more consolidated disengagement. The energy crisis of the 1970s triggered fuel replacement, with oil substitutes proliferating. In the process, which took more than a decade, infrastructure, new power plants and networks had to be built. By contrast, the gas market drama of the 2020s was a diversification shock—the same fuel having to be imported from elsewhere—which was primarily confined to the gas sector alone and limited to about two years. The impact was almost exclusively restricted to Europe, with little spillover to Asian and US markets. Above all, whereas in 1973 there was no quick and easy sectoral solution, half a dozen oil producer countries playing foul with the powers of the developed world, the alternative to replace Russian energy was available, even if only half-complete.
Three factors helped Europe to survive the unexpected farewell to Russian energy. The most important of these was the shale oil and gas revolution. Spreading mainly in the United States since the second half of the 2000s, fracking has been able to access geological reserves previously thought to be untappable. The US has seen its oil production rise 2.5 times, its gas production double in a decade and a half. Today, US production is one and a half times that of Saudi Arabia in oil and one and a half times that of the entire Russian sector in gas. Due to these dramatic changes, contrary to earlier expectations, the North American continent has stopped importing energy. Thus, the production coming from past Qatari, Saudi, Australian or Russian development projects originally destined for the US market has been diverted to Asia and Europe.
Fantasizing a Frozen Europe
The other paradigmatic technological change was the penetration of liquefied natural gas (LNG) transport solutions. Since the turn of the millennium, this market has grown almost fourfold, easily overtaking long-distance pipeline gas transport volumes between continents by 2020. Unlike in the 20th century, when natural gas trade was confined to the geographical boundaries of continents, LNG is now a global commodity, physically transportable intercontinentally, between any point of the globe. Perhaps this momentum was underestimated by Moscow when its memorable Gazprom video fantasized an unmanageable heating crisis in Europe as a result of its gas embargo. On the contrary, we have been able to save enough gas due to high prices and divert LNG from Asia to the old continent to weather us through 2022–2023 and replace Russian gas.
Weak European Fossil Demand
The third factor was the weakness of the European market in the 21st century. While before the 2008 financial crisis many had expected a golden age of natural gas, with the International Energy Agency predicting consumption of 700 billion cubic metres in the EU-28 in 2020 (eventually reaching but 380 billion in the EU-27), the reality has been, to use Jonathan Stern’s turn of phrase, “a dark age of European gas”. There were many reasons for this, but certainly not the price of gas. The latter was unreasonably cheap in the second half of the 2010s, even if not as cheap as in shale-gas-rich America. The weakness of the European economy, including the relocation of energy-intensive industries to the US and China, EU climate policy, the emphasis on the expansion of renewables in line with overall emissions reduction targets, and the warming winters have all played a part. The only dynamic that enabled Russian gas to spread further was the shrinking of European internal gas production, which brought the EU’s import dependency to ninety per cent by the eve of the war. Similar developments, even more dramatic in terms of falling demand, were also taking place on the European oil market. For both energy sources, the EU’s share of world consumption is now only around ten per cent, raising some doubts regarding its status as one of the three major global markets.
Supply-security Self-Confidence
Sectoral changes of this scale also have had implications for international politics. The importance of the Middle East in US policy has diminished, and its focus has changed. The international boycott of medium-size oil producers such as Iran in 2012, its unilateral US boycott in 2018, and the US disinterest in Libya would have been unthinkable without Washington’s self-confidence in terms of supply security. Without relaxing gas and oil security and technological patterns, the sharp management of energy security fears in Lithuania and later in Poland, and their getting independent from Russian energy imports in the second half of the 2010s would have remained a pipe dream. And indeed, in transatlantic debates on energy security, there was a genuine American offer for replacing Russian imports again for the first time in a long time. America was undoubtedly more assertive on European issues than it would have been otherwise, although as an explanation of the outbreak of the Russian-Ukrainian war this would still suffice as blatant conspiracy theory.
Permanent Savings
What was similar in both 1973 and 2022 was their unexpected nature, the unprepared sectoral policy, and, as a result, the adaptation process driven by painful market forces. Market adaptations mainly work through price crises. Whereas the price curve of the oil shock of the 1970s showed a forty-fold increase in roughly six years, here we had a fifteen-fold increase in the price of natural gas in a single year. The Hungarian gas and electricity import bill rose from three to eleven percent of the GDP in 2022. It goes without saying that regional countries cannot afford such energy prices in the long or even medium turn, especially the poorer and more import dependent societies. This type of prohibitive pricing, especially if the fuel is partly substitutable, can lead to extreme demand adjustment, as it was demonstrated in the Hungarian case with a twenty-four per cent drop in consumption in two years. Painful as it has been, a significant part of this has made permanent savings—a welcome development from a national energy policy angle.
Prospects
What will we face on energy markets in the coming decades? On the one hand, Europe is left without a basic energy supplier. There will no longer be a single dominant exporter, as there was in the past with the United States, then US-controlled Arab oil, and then Russia. As far as possible, a diversified, multi-player system can be built up, with nations taking responsibility for their own import portfolios. This, it should be added, is more feasible than it had been in recent decades, thanks to today’s technologies and the decline in European fossil fuel consumption due to decarbonization. The big issues of European energy policy revolve no longer around security of fossil fuel supply but around internal bottlenecks of renewable electricity generation.
Even if Russian oil and gas remain present in some corners of Europe, they are unlikely to regain their former importance. Both the Gazprom-provoked gas crisis and the oil boycott announced by the Western powers have been endured and implemented on the continent, with their costs dwindling year by year. European energy supply can be secured without large-scale Russian involvement, while the trust between Russia and the West has eroded to an all-time low. These wounds are unlikely to heal completely in the foreseeable decade or two, as long as large-scale fossil fuel use remains with us. The Russian supply security file in European energy policy has thus probably been closed, and all sectoral attention will now turn to the climate policy segment.
The author is an economist and Russianist, a fellow at the John Lukacs Institute of the Ludovika University of Public Service, Budapest
Translation by Péter Pásztor
Cover photo: “We hijack LNG” , German protestors await the arrival of LNG shipments in the Bay of Pomerania in 2023
