While oil grabs the biggest headlines, gas and power are of deep concern for Europe, which is at the epicenter of the current energy shock. The price of electricity on the continent is determined by the most expensive source – and right now that would be power plants fueled by gas imported from Russia. Short-term electricity prices rose to more than 550 euros ($597.46) per megawatt-hour, or 1,000% above pre-crisis levels, in some countries on Monday. At these levels, large parts of the continent’s manufacturing industries, especially energy-intensive companies such as aluminum smelters or paper mills, are simply not viable. The cost of natural gas on the wholesale market rose to a record €345 per megawatt hour. A year ago, the same gas cost only 15 euros.
The cost of coal, as measured by the API4 benchmark in South Africa, is nearly US$450 per tonne. A year ago it changed hands for less than $100 a ton.
The oil crisis of the 1970s largely affected the world’s transportation system: driving, hauling, and flying became prohibitively expensive. But this time the shock goes beyond transportation, to heating, cooking and electrification.
Ever since Russia invaded Ukraine almost two weeks ago, Western leaders have tried to squeeze energy and raw materials out of sanctions imposed on the Kremlin. The policy failed miserably. The flow of natural resources has been disrupted; Some markets, like wheat, are completely deadlocked. Politically, the commodity loopholes are becoming unsustainable: the West is paying more money to Vladimir Putin’s Russia today than it did before the invasion, probably more than $1 billion a day.
Western leaders faced an ugly choice. They could officially ban Russian oil and other commodities and see even higher prices, or let trade, however disrupted, continue to fund the Kremlin. They have chosen an impossible third way: talking openly about embargoes without actually implementing them. The result is higher prices for Western consumers and higher revenues for Putin.
The recalcitrant approach reflects the difficulties in decoupling Russia from global energy markets. Europe alone buys about 25% of its oil in Moscow; and another 50% of its coal and nearly 40% of its gas. Gas and coal are used to generate electricity, which thus comes indirectly from Russia.
A ban on Russian energy exports would require rationing in Europe. Policymakers would have to persuade the public to lower demand along the lines of 1970s-style conservation; Otherwise, rising prices would destroy energy demand, forcing the poorest families to buy less energy and plunging the economy into recession. But instead of implementing energy savings, they let market forces work. This will lead to what Europe suffered with the oil crisis 40 years ago: stagflation – the horrible combination of high inflation and reduced economic growth plus unemployment. Only in France do politicians make serious efforts to urge citizens to reduce demand.
Demand has to go down. Now. A ban on Russian energy flows cannot be compensated for by a higher supply from other countries. US shale and increased production from Saudi Arabia and others could result in more oil flowing into markets. But that’s not enough to replace Russian oil. There are even fewer compensations for gas and coal.
There are simple measures to take: reduce speed limits on motorways; ask consumers to turn their thermostats down a bit; Encourage the use of public transport by lowering ticket prices or free travel at weekends. The International Energy Agency has been preparing for a crisis like this for more than 40 years and has prepared a 78-page handbook “Save Oil in a Hurry”. Determination is the key. If politicians cannot determine the way forward, market forces will. And they are unforgiving.
More from the Bloomberg Opinion:
• There is a better solution to BP’s stake in Rosneft: Julian Lee
• All is not calm on Putin’s home front: Clara Ferreira Marques
• Requests to stop buying Russian oil go unheeded: Javier Blas
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the commodities editor at the Financial Times and a co-author of The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.