EconomyFinancialRussian gas shakes the thriving German industry 100 days...

Russian gas shakes the thriving German industry 100 days after the invasion

Europe decided to put all its eggs in one basket and that bet has already taken a heavy toll on it.

The European Union, a small producer of oil and gas, maintained its strategy of supplying energy sources from Russia for years. The country that today maintains an offensive against Ukraine was a great ally: it had a sufficient quantity of gas that Europe needed and its geographical location facilitated the development of infrastructure for its transportation for years.

European countries decided to say goodbye gradually to coal and nuclear power plants. For years they have led the discourse in favor of clean energy and have remained at the forefront of the energy transition. And in search of the latter, they chose gas as a transition fuel – a natural option because it is a less polluting fossil fuel and until a few months ago it was still cheap. But Europe has very little gas, and its plans to complete a move away from fossil fuels came at a high price: becoming dependent.

Today Europe hangs on the decisions of Russia, which although it still seems a remote possibility.

And here are some more vulnerable than others: in this scenario, the largest economy in the European Union has become the weakest link. Germany is the largest buyer of Russian gas , about 50% of its gas consumption is supplied by shipments from the country today at war, according to data from the International Energy Agency.

For years the relationship was beneficial. The purchases of gas from Germany –and other European countries– allowed Russia to grow economically by having energy production as its main source of foreign currency, and allowing the nation that Olaf Scholz heads today to have a strong industrial growth that spread to the rest of the world. Europe.

Today the scenario is different, European purchases of Russian energy are one of the main sources of financing for the advancement of the armed conflict . Germany is receiving increasing criticism from its neighbors for not taking drastic steps to curb purchases, but the high degree of dependency has left the Germans with their hands practically tied.

Ceasing purchases of Russian gas would bring about a slowdown in the recovery in the German economy, which could spread to the rest of the European Union. Historically, German economic performance has depended on the chemical industry and manufacturing. The first has Russian energy sources as inputs and the factories that are part of the second link depend on gas as fuel.

The industry has already begun to resent the fear of an embargo on Russian exports and has taken action. As an example, it is the leading car manufacturer in Europe, and has already prepared to diversify its fuel sources at its plants in Germany. In a note, Reuters says the automaker has decided to upgrade its power plants to coal in case fears become real.

Thus, Germany is ambivalent: it has promised Ukraine to send weapons for its army, but its purchases of gas and oil continue to benefit the Russian government, especially in the face of an environment of high prices that will not give way in the short term. The German governments have spoken for years to stop purchases from Russia, but the solidity of the commercial relationship had not found any element that would make it falter.

“We always knew as Europeans, at least since 2014, that we should diversify our energy imports. But we didn’t really take any action at the time and now we are seeing the consequences of this in a very tragic way,” Annalena Baerbock, the German foreign minister, said at an event in Berlin last April.

The 138 kilometer gas pipeline

Until before the war in Ukraine, the plans had not changed. The Nord Stream 2 gas pipeline was being built, but the armed conflict left 6% – or 138 kilometers – unfinished. The most controversial gas pipeline in recent times crossed the Baltic Sea and would bring more Russian gas to European territory.

Olaf Scholz’s government has already begun to take stronger steps to eliminate Russian imports, but all of these will take time. The latest announcements indicate that Germany will end imports of Russian crude by the end of this year and coal purchases in the following fall. The brake on gas acquisitions will take a little longer and the most optimistic scenario points to mid-2024.

The latter will take longer since Germany had not paid much attention to building infrastructure to supply gas from other regions. The principle of all fuel transportation infrastructure is the importation of gas from Russia and immediately there is no other country that can supply it with such quantities. The German government has begun to negotiate with other countries to strengthen its trade. Qatar, Azerbaijan and Australia are strong candidates to supply Russian sales. But this will be in the medium term.

Until now, liquefied petroleum gas has become a more immediate option. European countries, including Germany, have increased their purchases of this fuel mainly from the United States, the world’s largest gas producer. Europe and the country chaired by Joe Biden have agreed to increase the exchange.

In a longer commitment, Germany will speed up the inclusion of renewable power plants in its system and has set itself a very ambitious goal: by 2030 it will double its onshore wind power generation capacity and quadruple its offshore wind power generation capacity by the same year. and photovoltaic. The invasion of Ukraine has accelerated the energy transition. It has also reversed a plan that had been announced years ago: it will keep its coal-fired power plants on in the event of a stoppage of gas shipments from Russia. The Germans had made the decision to close their coal-fired power plants as part of efforts to mitigate climate change.

Green hydrogen has also crept into the conversation. The one that has been dominated as the fuel of the future is positioned as one of the main elements of the German matrix, but again it will not be in the short term. “When we talk about how green hydrogen could make a real difference, we have to know that it’s not that hydrogen is not going to be competitive, it will be competitive in a short time. But we must think of it in the way we talked about renewables ten years ago,” Francesco La Camera, the director of the International Renewable Energy Agency, said during a conversation in the German capital.

But Germany could once again face a dependency problem. The great European economy does not have hydrogen in its territory and is already in negotiations with Chile, Morocco, Namibia and other African nations. However, this horizon is still far away.

For now, the German government has opted to save every kilowatt possible. It has asked its citizens to reduce their use of electricity and more recently has urged them to make a food reserve if an emergency occurs and the power goes out. It has also raised the public transport subsidy and removed the tax on renewable energy with an eye toward lowering bills.

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