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Should We Stop Worrying about Europe’s Reliance on Russian Pipeline Gas?

by August 17, 2023
August 17, 2023

Justin Logan

Today, Cato released a new Policy Analysis by Scott Semet on the enduring consequences of cutting off Europe (and the world) from Russian natural gas. Last year, Europeans were very anxious about the winter of 2022–23; thankfully, the combination of an extremely mild winter on the continent, a deliberate decision to throttle industrial output, and frantic efforts to buy up liquefied natural gas (LNG) from other countries helped Europe muddle through better than most observers feared, although poorer countries, like Pakistan and Bangladesh, that would otherwise would have bought that LNG, experienced rationing and riots.

But Semet, an expert on East European energy and finance markets, argues that the underlying problem has not been remedied and is unlikely to be remediable any time soon. Much of the model for European (in particular, German) economic growth was built around cheap Russian pipeline gas that is now gone. Moreover, the extreme measures taken last winter have had deleterious consequences that may compound over time: Germany’s inflation and “demand destruction” has led its economy into recession; skyrocketing natural gas prices were a major driver of historic inflation in the United Kingdom; and these economic realities are beginning to radiate out into European politics. The bottom line is that in the short run, there is no alternative to cheap Russian pipeline gas for Europe, at least without major additional declines in people’s well‐​being and further deindustrialization, which Semet suggests could lead to more discontent and political instability.

Even beyond Europe, the paper argues that corking Russian gas would have significant effects. For example, many have pointed to U.S. LNG as a potential savior of Europe. Three points are important here: First, LNG is much more expensive as it requires considerable energy to liquefy the gas, to say nothing of the cost of liquefication and regassification facilities, and LNG carriers. These higher prices will put more pressure on the European economy. Second, despite frantic efforts to expand exports, there are hard constraints on liquefaction capacity and LNG carriers. Third, to the extent U.S. producers could liquefy enough natural gas to make up for Europe’s lost Russian pipeline gas and cash in on significantly higher prices in Europe, given flattish U.S. gas output, the price of natural gas for American consumers would rise, negatively impacting the U.S. economy.

He also gets deep into the weeds regarding the impact of higher gas prices on U.S. electricity and heating costs as well as a host of other seemingly‐​mundane‐​but‐​highly‐​relevant inputs to daily life, such as fertilizer and plastics. The paper also discusses the results of pressuring the Global South to sanction and embargo Russia.

The paper doesn’t argue that the political and economic consequences of corking Russian gas mean that Washington should force Kyiv to settle for peace on any particular set of terms. But it does call on policymakers to pursue an end to the war with a greater urgency and not ignore this set of “hard and mostly immutable economic realities” which “cannot be overcome by political will.”

Please give it a read.

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