Home / Opinion / Views /  Mint Explainer: How Nord Stream leaks will hit the world

The news of gas leaks in Nord Stream 1 and 2 spells further trouble for Europe’s fraught energy market. Nord Stream 1 is an underwater pipeline through the Baltic Sea that carries natural gas from Russia to Germany. Its twin, Nord Stream 2, whose commissioning got cancelled after Russia’s invasion of Ukraine, had been filled with gas, in anticipation of exports commencing from the fully built pipeline.

Not that Nord Stream 1 is pumping much gas now, after Russia claimed it had to shut down the plant pushing gas through it for repairs. A new Norwegian pipeline runs to Poland, via Denmark and the Baltic Sea, to provide an alternative to Russian gas. If Nord Stream can be damaged, by accident or design (Russian President Vladimir Putin has talked of freezing Europe this winter), so can be the Norwegian pipeline. This is not a happy prospect for Europe’s energy consumers. Nor for gas prices in the rest of the world.

How Europe will be impacted

The average gas price in July for the 27 members of the European Union was already more than double the average for Jan-June last year, says the Economist, quoting a report by thinktank Bruegel. The average masks the extreme impact in some countries: about 140 per cent in Spain, about 160 per cent in Germany, nearly 300 per cent in Greece and more than 400 per cent in Latvia.

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Natural gas is used both as a feedstock for fertilisers and some petrochemicals, and for heating homes and running power generators. The rising price of gas pushes up electricity prices and substitution of gas, wherever possible, with other fuels. France is experiencing a shutdown of half its nuclear power generation capacity, for maintenance and repairs, and has no power to export to the rest of Europe, adding to energy shortage on the continent. But France has capped the price of power for consumers, at the cost of nationalising its main electricity producer and forgoing energy efficiency.

Germany and Britain have announced generous energy subsidies that would raise taxes in Germany and borrowings in Britain. The British pound has declined by 20% against the dollar, briefly touching parity for the first time. Higher energy prices are a factor in pushing up inflation across the EU, forcing central banks to raise rates. Energy subsidies will force European governments to borrow yet more from the market at ever higher costs, pushing up yields across the board. This contributes to the likelihood of a global recession in 2023, forecast by the World Bank.

More governments might as well attempt to shelter their citizens via subsidies or price caps — the more than 100% increase in the price of gas, among other things, was a salient factor in the popular discontent with mainstream parties that has persuaded Italians to vote to power a right-wing coalition, headed by the Brothers of Italy, a party with its roots in neo-fascism, whose leader Giorgia Meloni, tipped to be the next prime minister, has praised Benito Mussolini in her more brazen past.

Sweden, too, has elected a right-of-centre coalition, whose main constituent, Sweden Democrats, is considered too toxic to be represented in the government.

The sanctions placed on Russia are, in effect, damaging the economies and polities of Europe, more than they are hurting Russia.

Impact on rest of the world

The effect of high gas prices is not restricted to Europe. All energy prices go up, as Europe tries to grab whatever fuel can substitute gas from anywhere in the world. This benefits the producers of oil, gas, and coal around the world, including Russia and Iran, which circumvent the sanctions placed by the US and Europe. The United States is a major beneficiary, as a major supplier of LNG and coal to the world. The petrostates of the Middle East are huge gainers. Places that send migrant workers to the Middle East can expect to see a revival in migrant remittances, including Kerala in India, although the skill profile of workers in demand would change, given the more sophisticated economies the petrostates seek to build, in anticipation of a post-hydrocarbon world.

However, for all energy importers, rising oil and gas prices and an appreciating dollar translate into higher inflation, pressure on central banks to raise rates, resulting in slower growth. Recession in the US and Europe would hurt exports to these markets from emerging economies such as India and China.

Long-term contracts in LNG are not insulated against a price increase; rather they guarantee only quantities. Prices are typically specified as a fraction of a crude benchmark in dollars (Brent, in India’s contract with Rasgas of Qatar and the Japanese Crude Cocktail, for Japan) plus a negotiated premium.

A little under 40% of the global trade in LNG is in the spot market, the rest tied up in long-term contracts. Europe will try to buy up all the available LNG in the spot market, pushing up those prices for all consumers of spot LNG across the world, including in India. Higher crude prices will push up even the price of supplies under contract.

Impact on environment

The methane leaks from Nord Streams 1 and 2 are unlikely to cause any major damage to the environment, even though the heat trapping potential of methane is ten times as large as that of carbon dioxide. This is so, as most of the leaked gas is likely to be absorbed in the water.

But the overall impact is negative for climate change. With shortage of gas, Germany, which had forsworn even clean nuclear power, is now burning lignite, the dirtiest form of coal. The gas crisis in Europe is reversing the clean energy transition in the short run, even as it incentivises greater efforts towards the clean energy transition.

The gas leaks underline the validity of India’s demand for an early, negotiated end to the war in Ukraine.

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