Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. In twenty twenty two, an unprecedented energy crisis caused by Russia's invasion of Ukraine left Europe with a bill worth over a trillion dollars. For in the middle of an energy crisis is not just oil markets, but gas market, electricity market. The lesson is you've got
to be energy independent. Don't put yourself in the hands of the dictator who's prepared to weaponize your provision of energy. Government's picked up much of that cost, and for a time at least it felt like the worst had passed. This oil price cup will help reduce Russia's revenues on one hand, and it will keep the global market for energy stable.
On the other hand, there is a need to as as possible cut the link between the price of gas and the price of decabonated pinage.
This year, by mid August, the European Union had filled ninety percent of its gas storage capacity preparing for the winter season. But for some even that might not be enough. So here's why Europe is worrying about the winter again. Joining us now is our senior energy reporter, Stephen Stapchinsky. Stephen, first of all, can you remind us how important our gas supplies to Europe's energy mix?
I mean, gas plays a key role in Europe's economy. It made up about fifteen percent of power generation last year and it's expected to play a larger role as dirtier coal plants are shut You know, they're not only is it needed for power generation, it's needed for industries and then during winter it's needed for heating. So gas has played a key role in before the war in Ukraine, Russia was a major supplier via pipeline of some pretty
affordable guest in. Their whole economy was kind of built around that.
So we're over two years now on from the start of Russia's full scale invasion of Ukraine. How have European countries reorganized their supplies in that time?
So there's the supply side and the demand side, right, So supply there has been a rapid rollout of renewables, been a big push to add more solar and win to the grid. There's a push to also increase offshore wind that has had some kurdles, and there's also been a push in most places except for Germany to also look at, you know, how can they expand nuclear power. On the demand side, consumers have really cut back consumption.
They're they're better at conserving energy, and that includes households and businesses, but also industries. There is something called demand destruction where gas was just too expensive for industries that depended on it, like fertilizer and other kinds of businesses that depend on gas as a feedstock. So they've essentially just shut down and gone to other places. So when you look at European gas demand, actually it has has dropped over the last few years compared to when they
were getting that cheaper Russian pipeline gas. Now they've turned significantly more to liquefied natural gas. Gas can be delivered either via pipeline from Russia or via liquified natural gas via ship. Some of that comes from Russia, but a large portion of it actually comes from the United States, and Germany built floating LNG import terminals and other countries are boosting imports of LNG to replace the Russian pipeline gas.
The one thing though, is LLERG is just more expensive than the pipeline supplies.
So this year the stockpiles are nearly full already. Why the concern.
So that's the thing. Just because European stockpiles are full, it doesn't mean that they won't necessarily run out of gas. Let me explain why the stockpiles will help Europe get through a mild or normal winter if they're one hundred percent full. We've seen that in the last two winters. Actually they've been relatively mild, with just small short spates of cold periods. Certain now falls as to what if
we have a really cold winter. Not only will that drain stockpiles in some places, but if it's also cold in other Northern Hemisphere places like North Asia, home to the world's biggest LNG importers, Suddenly you're draining your inventories very quickly. And then on top of that, you're not able to get those LNG shipments because LNG shipments go to where folks are paying the highest and if China, Japan, Korea want that LENG, they can pay more than Europe
to get it. So that causes a problem for Europe, essentially leading to a sort of a price competition between the Pacific at the Atlantic, increasing prices and risking potentially worst case scenario curtailment for some customers.
Today, though prices are still way way below where they were in twenty twenty two, what could trigger a spike?
Yes, Okay, first that first bit, prices are way below where we were at the record levels in twenty twenty two, But I have to also show that prices are higher than the ten years before twenty twenty two. So prices on average are higher than before the war in Ukraine, even though they're not as high as record high levels from twenty twenty two. Now, the global gas market is still in a bit of a careful balance. So things
that could trigger a spike. If there is a hurricane Atlantic and it disrupts LNG exports from a US facility from the US golf, that could cause a spike. Any sort of disruption to supply. If it's cold, as I mentioned before, that could also cause a spike. If there are any more issues with key choke points. You know you have the Sewis Canal is not being used for LNG trade. If that leads to more disruption to other parts of global trade, routes that could also lead to
price spikes. Likewise, if there's any disruption to supply in the European region, especially Norway which is essentially the largest supplier of gas to Europe, if there is a extended maintenance during their maintenance period, if they're unable to deliver the gas that they promise, that could also lead to a spike. That is to say, the two big things, disruptions and weather are going to be the things that could affect prices going forward.
Here that makes supplies alsound quite vulnerable. Is Europe any closer to long term solutions to try and address thus.
Now, the good thing is that wind and solar generation, as mentioned before, has been rising really rapidly. It hit a record twenty seven percent for the EU power mix in twenty twenty three, and it's continuing to rise. But the other goals, which is, you know, implement hydrogen supply chain green hydrogen. Also, dependence on coal means that gas is going to be needed more and it's just not
there at the moment. At the same time, different efforts to increase nuclear power generation is going to take years. It's not easy to put on a nuclear power plant and offshore wind has had a few hurdles, so that is to say European policy is in the right direction and wind and solar has definitely been deployed at a faster rate, but there's still more to be done before Europe can really reduce their dependence on gas and reduce this vulnerability.
Steven Stoptinski, our senior energy reporter, Thank you for more Xnations like this from our team of twenty seven hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business App. I'm Stephen Caroll. This is Here's why. I'll be back next week with more. Thanks for listening.