The case for a common European energy supply is compelling
Echoing the 1970s, the world is in the throes of an energy price shock of geopolitical origin. This decade is rightly remembered as a painful period for Western economies. But high oil prices have also brought unexpected benefits. The end of cheap energy and the clear need for long-term energy security spurred a successful energy efficiency campaign.
After Vladimir Putin’s assault on Ukraine, the need for the EU to remove the national security risk of relying on Russian energy is a new opportunity to turn necessity into a virtue.
EU leaders have already asked the European Commission to draw up plans to wean the bloc from Russian energy dependence. Germany says it will largely end its dependence on Russia for oil and coal this year, and natural gas by 2024.
Europe can also transform energy policy into an active tool of external influence. The EU is testing – not before time – its ability to form a cartel of buyers. Some member states have resisted calls for joint EU supply of natural gas. Putin’s aggression cleared their doubts: on Friday, the European Council pledged to work on a common purchasing platform.
It is a capital gesture. Consider the global effects if EU countries collectively purchased and managed the gas needed to fully replenish the bloc’s gas storage each year. This would mean buying up to 100 billion cubic meters of gas annually, or about one-tenth of the world’s annual trade. If purchased entirely as liquefied natural gas, it would represent one-fifth of the LNG market. If it were largely concentrated in the summer, the temporary market share would be even higher. Alternatively, if a joint purchasing company purchased in the winter at the same price as it needed to replenish storage in the summer, market share could remain higher throughout the year.
That wouldn’t quite reach OPEC levels – oil producer cartels account for more than half of global crude oil exports. But a European cartel of natural gas buyers could still wield significant market power.
The most obvious advantage is mercantile. The muscle of collective purchasing would surely eventually allow Europe to offer lower prices than otherwise. It would also change the incentives guiding energy choices far beyond European shores. In the short term, joint EU purchases in a stressed LNG market would raise prices for others, especially Asian economies. In combination with carbon tariffs at European borders, this would stimulate demand for carbon-free energy.
In the long term, joint purchases would make it easier for EU countries to announce plans to reduce gas use in advance – which, by its influence on the world market, would cast doubt on the wisdom to invest elsewhere in long-term gas development. The overall effect would be a boost to the incentives for global renewable energy investments today.
Then there is the geopolitical gain. If strategic autonomy means anything, it is surely that the pursuit of European values and interests should not be hampered by the stranglehold of Russia or other powers on the energy supply of EU countries. Moscow has already cut the gas supply for geostrategic reasons. And Gazprom’s reluctance to fill its German tanks before last winter worsened the EU’s strategic position when Putin launched his war.
It’s not new. There has been interest in an EU energy union, including joint purchases from Russia, over the past decade. German complicity with Russian energy interests stood in the way. But the tragedy of the post-2015 Polish government’s anti-European turn has also done the same. He failed to collaborate Europe-wide on such a program due to internal disputes with Donald Tusk, the former Polish Prime Minister, who in his later post as President of the European Council could have rallied a coalition countries behind this vital Polish interest.
But better late than never. Conditions are right for Europe to make up for lost time. Germany was shocked out of complacency. The EU has some experience of pooling a public good: its purchases of Covid-19 vaccines during the pandemic have been more successful than one might think, and innovative vaccines are a much bigger market. more difficult to penetrate than natural gas.
The EU is not ready overnight to become a large-scale gas buying cartel. It will have to strengthen its expertise and strengthen its regasification and domestic pipeline capacities. But it happens. And setting up a common purchasing platform will speed up the process.
The shocks of the 1970s came from young OPEC flexing its muscles. The shocks of the 2020s should give rise to a European anti-OPEC.