Europe's energy crisis: Low gas stocks pressure governments and fuel the rise of the right

Europe's delays in replenishing natural gas stocks, coupled with prices for diesel and other refined petroleum products approaching record levels, have increased pressure on governments as they try to contain popular discontent and the rise of the far right.

The problem is exacerbated in Germany, the largest economy in Europe, where the Alternative for Germany (AfD) party won a state election last week on a platform calling for peace with Moscow and the reinstatement of contracts for cheap Russian gas.

Additional gains for the Alternative for Germany party in the state elections scheduled for this week would increase pressure on conservative Chancellor Friedrich Merz, while he considers his options for taking costly measures to reduce fuel prices, according to Reuters.

The filling rate of gas reserves in Europe, which are supposed to act as a buffer against supply and price shocks during the winter months that witness peak demand, is 69 percent, that is, less than the average of 85 percent recorded at this time of the year during the past five years, according to the “Gas Infrastructure Europe” authority concerned with the sector.

Germany and the Netherlands, which together hold 35 percent of the European Union's storage capacity, are among the countries most lagging behind in replenishing stocks; High energy prices resulting from disruptions related to the US-Israeli war on Iran have led to private companies being reluctant to buy, and governments being reluctant to impose national storage targets.

Analysts said that estimates indicated that the war on Iran, which began at the end of February, would end quickly, and that prices would decline. This allows companies to refill stocks of Europe's most important fuel source at reasonable prices.

But this bet looks increasingly shaky.

“Every month that Europe delays replenishing stocks increases the pressure on prices as the peak of winter consumption approaches,” said Jonathan Schroer, a strategist at UniCredit.

Compared to the energy price shock that occurred during the period when Russia began its invasion of Ukraine in 2022; What prompted Europe to gradually dispense with Russian gas and implement policies aimed at storing gas in preparation for the peak in demand for heating in the winter, the current economic situation is less severe in some respects.

Countries have diversified their energy sources, and a weak labor market has limited workers' ability to demand wage increases. Which helped curb inflation.

However, governments are still hoping for a mild winter, with the European Central Bank raising interest rates last week and policymakers warning it may have to raise them again if energy price pressures do not ease.

As global oil prices rose above $100 a barrel in response to escalating conflict in the Middle East, gasoline prices across the European Union rose by 24 percent compared to the previous year, while diesel prices increased by 38 percent, partly due to attacks on Russia's energy infrastructure by Ukraine. Jet fuel costs also rose by more than 100 percent.

The benchmark price of gas is trading at 81 euros ($93) per megawatt-hour, an increase of 150 percent from its level a year ago, and exceeding the expectations of the “adverse scenario” of the European Central Bank, with risks tending towards higher levels.

Morgan Stanley expected the price to reach 100 euros per megawatt-hour, depending on weather conditions. Its analysts said: “Relying on the weather to ensure security of supplies is a risky bet.”

Other analysts said the risk was that storage levels would continue to decline and prices would remain high.

“I can see, even in a normal cold winter, not an exceptionally cold winter, that stocks could be severely depleted,” said Jack Sharples of the Oxford Institute for Energy Studies.

The subsequent need to replenish stocks in 2027 through imports could increase pressure on LNG markets for several months beyond.

Gas shocks may be severe and persistent

This scenario would be particularly bad for the economy.

Research by the Bank of Italy published in June showed that oil price shocks tend to cause short-term inflation, while gas price shocks generate much stronger and more lasting effects, spilling over into core inflation, which the European Central Bank closely monitors.

For this reason; Financial investors believe that the European Central Bank will have to raise interest rates another three or four times to a level that significantly restricts economic growth, by increasing borrowing costs, which limits consumer spending and discourages investment.

“My interest now is less on oil and fuel prices, and increasingly on gas and electricity prices,” said Peter Casimir, a policymaker at the European Central Bank.

Economists said the sectors most vulnerable to being affected were likely to be airlines, chemicals, automobiles and building materials, while energy companies, utilities and banks could be among the beneficiaries, even if higher interest rates tend to negatively impact lending growth.

As pressure increases on governments to reduce the cost of energy, Germany appears particularly vulnerable due to the size of its energy-intensive industries.

Other countries face risks as well; Its weak public finances limit its ability to act.

Italy's conservative ruling coalition, which is trailing its rivals in opinion polls, said this week that it would abolish the road tax imposed on 14.5 million cars and motorcycles starting next year, at a cost of more than two billion euros, in addition to reducing the excise tax on diesel, which has already cost 2.8 billion euros.

These measures may calm immediate popular discontent, but in the longer term they will increase the debt of Italy and other governments.

French Finance Minister Roland Lescure told reporters on Tuesday: “Comprehensive measures that include everyone, including those who do not need them, represent a false economy.” Why? Because we will eventually have to finance it.”