This post is a continuation of my previous post about Europe’s dependence on Russian natural gas. After reading a recent Economist article, I am convinced that Europe’s addiction to Russian gas will remain strong in both the short and long term. The combination of (1) an already developed infrastructure, (2) a lack of viable alternatives, and (3) a growing European demand for gas reveals that a large enough economic incentive can successfully overshadow political conflict. Having analyzed the infrastructure point last time, I will elaborate on points 2 and 3 in this post.
2. Poor Alternatives
Even if European leaders were to overlook the infrastructure problem and tap into all the alternative sources of natural gas at their disposal, they would only have enough to cover about half of Europe’s gas demand. In order to see this more clearly I will elaborate on the main alternative sources Europe could use and the problems associated with each one:
- Gas from other European countries (i.e. Norway, Netherlands, Britain): Although Norway and the Netherlands combined have enough gas to provide about one eighth of Europe’s yearly gas demand, environmental concerns (carbon emissions and earthquakes) and negative public opinion create domestic political barriers.
- Shale Gas from European countries: Although tapping into local supply provides an effective hedge from international political risk, the problem with local shale gas is, once again, environmental. Many countries, such as France, the Czech Republic, and Bulgaria have banned shale gas extraction.
- Gas from Africa (i.e. Libya, Algeria): These sources have generally been unreliable due to political unrest and increased local demand. As the article points out: “Italy’s imports from Libya, once a reliable supplier, were down by 11.9% in 2013; supplies from Algeria (where local demand is booming) were down by 40%.”
- Liquefied Natural Gas (LNG): The main problem with LNG is its inelastic supply. Due to the cost of the plants that liquefy the gas and the steadily growing demand from China and Japan, Europe would not be able to attain the LNG for a reasonable price.
- Shale Gas from America: The lack of U.S. export facilities means that there would be large startup costs to begin importing, and even once the facilities were built, Europe would have to compete with the high prices China will be offering for the shale gas.
An interesting statistic to conclude and drive the point home: if Europe were to employ all of these alternative sources it would not only be short about half of its demand, but it would also spend $50 billion more on gas per year!
3. Growing European Demand For Gas
The final argument is a short, but important one– European demand for gas is expected to grow for the next ten years: “According to AT Kearney, a consultancy, imports are set to climb from 327bcm today to 413bcm in 2020.” A growing demand for gas would mean that gas from alternative sources would be even more expensive, making Russian gas that much more attractive.
In summary, the past two blog posts have developed a detailed argument for why European dependence on Russian gas will remain strong despite political concerns in Ukraine. The already developed infrastructure between Russia and Europe, the unjustifiably high cost of alternative gas sources, and a growing demand for gas has put European leaders in a tough position– a strong and expanding Russia is not in their best interest, but Russia’s cheap gas has chained Europe’s leaders onto the political sidelines until an economically viable alternative is found.