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As Russia tightens gas supplies to Germany & Italy, Europe preparing for rationing, severe Recession

Gazprom, the Russian gas monopoly, said on Wednesday that it was further tightening natural gas supplies through a key pipeline to Germany. The company said flows through the pipeline, Nord Stream 1, would be cut by 60 %, a day after announcing a 40 % reduction.

Gazprom’s moves over the last two days have rekindled worries about a major cutoff of supplies to Europe. After a sharp rise on Tuesday, gas prices rose about 25 % on the TTF exchange to 121 euros a megawatt-hour, about six times the level a year ago.

Gas Rationing Is Getting Closer for Europe

Throughout the entire Cold War and in the decades since, Russia was a stable supplier of gas to Europe. That changed this week.

Fearing Russian cutoff, German industry braces for gas rations race

German big business is drafting a plan to use an auction system to help ration available supplies in the event Russia cuts off its gas, although some fear it could punish smaller firms.

German industry is particularly anxious about energy-intensive factories, such as glass, steel, food or drug manufacturing, as well as the chemicals sector, that provide many of the building blocks for industry.

Some in industry say the regulator will struggle to establish a coherent rationing list because manufacturing supply chains are intertwined and knock-on effects difficult to predict.

Germany makes ‘bitter’ decision to return to coal and Italy contemplates rationing as Russia cuts gas supplies to Europe

Italy may start rationing natural-gas consumption to certain industrial giants, after Russia’s Gazprom halved supplies on Friday.

German industry: Gas rationing plan would cripple economy

Disruption would spike unemployment

Business leaders and unions have warned that any disruption to gas supplies would be devastating for Europe's largest economy, as it has not yet fully recovered from the post-COVID supply chain crisis. The consequences would not only be reduced work hours and job losses, but also the rapid collapse of the industrial production chains in Europe — with worldwide consequences.

Once chemical plants are shut down, they remain silent for weeks and months, the disruption would have a "huge domino effect through almost all industries.

Natural gas is also used both as a source of energy and as a raw material by chemical producers. No other sector utilizes more of Germany's gas supply than the chemical sector, at about 15%.

Two years needed to cut reliance on Russia

Germany is highly dependent on Russian gas for its energy needs, with 55 percent of its supplies being delivered along pipelines from the country before the invasion of Ukraine. The figure fell to 40 percent in the first quarter of 2022.

Since the outbreak of the war, Germany has accelerated plans to wean itself off Russian gas and diversify its supplies. Habeck said Germany will not achieve full independence from Russian supplies before mid-2024.

Natural gas arguably is Russia's most important energy asset in the geopolitical scramble following the invasion of Ukraine. While the EU and other western allies agreed on an embargo on Russian coal and a far-reaching halt to oil deliveries, a ban on natural gas imports has been rejected by the bloc, despite numerous calls to implement it. Several member states, including heavyweights such as Germany and Italy, say they are too reliant on gas to cope with a sudden stop of supplies given that replacing Russian pipeline gas in the short term is much more difficult than finding alternative sources for coal and oil. Therefore, a collapse of gas trading with Russia would entail severe consequences for European economies. The Russian government already announced an end to gas deliveries to a range of countries, forcing Germany and the EU to prepare for a sudden supply cut.

What would be the immediate effects of a halt to gas supplies?

Natural gas accounted for nearly 27 % of Germany’s total energy consumption in 2021, mostly for heating and industry purposes and to a much lower extent (around 15%) for electricity production. Germany managed to quickly reduce its dependence on Russian gas since the invasion, from around 55 % in February to around 35 in May 2022.

What could be the long-term effects of a cut?

In a joint analysis of the country’s economic prospects in the energy crisis, Germany’s leading economic research institutes said halting deliveries would “threaten to throw the German economy in a severe recession.”


CA Harshad Shah, harshadshah1953@yahoo.com


Source: https://www.nytimes.com/2022/06/15/business/russia-gas-germany-italy.html

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