Europe’s heat wave magnifies energy woes

Europeans didn’t need another reminder that they’re living through an energy crisis — but, boy, did they get one, Axios’ Kate Marino writes.

• The historic heat wavepummeling the continent this week sent power prices to new record highs; in France and Italy, average weekly prices have more than tripled over the last five weeks, according to Rystad Energy.

Why it matters: The strains on Europe’s ability to power its economy will not only hurt its growth but could also drag on economic partners like the U.S.

The big picture: Russian natural gas flows to Europe have already fallen to below one-third of their level a year ago, according to Eurasia Group.

• German chemicals giant BASF among others has warnedthat it has “no short-term solution” for replacing Russian gas as a power source if it gets entirely cut off.

The International Monetary Fund now projects that the worst-case scenario — a complete cutoff of Russian gas — could shave more than 2% off the EU’s gross domestic product.

• Some countries would be worse off than others: Hungary, the Slovak Republic and the Czech Republic could see GDP impacts of up to 6%, the IMF estimates (see the chart below).

A total cutoff hasn’t happened — yet. But analysts at Goldman Sachs already forecast heightened odds of an EU economic downturn, including a full-on recession in Germany, due to the deteriorating outlook for Russian gas supply.

• “A sustained decline in these vital energy inputs would significantly weigh on European manufacturing production, particularly for energy-intensive industries like chemicals, machinery, and food and beverages,” Goldman wrote in a recent research note.
• “The spike in home heating costs will weigh on European consumption, as higher inflation crowds out consumer purchases of non-energy goods and services,” the analysts wrote.

Go deeper: Goldman sees a risk of a substantial spillover into the stateside economy since 28% of U.S. exports find their way to Europe — representing 3% of U.S. GDP.

What to watch: Russia today resumed sending natural gas at a reduced volume via the key Nord Stream pipeline to Europe after a weekslong shutdown for maintenance — but that could prove fleeting, the WSJ reported.

Bracing for the worst, the European Commission yesterday took the extraordinary step of asking member countries to voluntarily reduce their gas consumption by 15%.

The bottom line: Europe’s heavy reliance on external energy supplies, and the lack of alternatives — problems that have been flagged for years — are about to come home to roost in a big way.

• And the growing possibility of a real energy crunch later this year may be felt way beyond its borders.

Πηγή: axios.com