Europe natural gas: Facing a winter freeze
Soaring natural gas prices in Europe have delivered a significant blow to the region’s economy, but potential gas shortages in the winter months threaten a very severe recession. With such a grave threat hanging over the region, the investing landscape in Europe looks much less favorable than that of the U.S.
Europe and U.S. natural gas prices
US$ / MMBtu, 2021 – present
The energy crisis in Europe is escalating. With natural gas flows from Russia to Germany through
the Nord Stream 1 pipeline having fallen to just 20% of capacity, the threat of a gas supply
shortage has become meaningfully more acute in recent weeks.
The increase in European gas prices has been particularly sharp. Since January 2021, natural gas
prices have risen almost 760%, significantly more than the 240% increase seen in the U.S. The
surge is deeply impacting Europe’s economy, pushing inflation to record highs, driving up
household bills, and straining Europe’s industrial sector.
Price increases are not Europe’s only problem. Germany, which imports 55% of its gas from Russia
(compared to the 40% EU average), also faces a potential gas supply shortage.
- The European Commission estimates that, if supplies are sustained at 40% of capacity,
Germany could narrowly scrape through the winter without shortages.
- At 20% of capacity, Germany would face shortages, therefore needing some notable
rationing, with clear negative growth implications.
- If Russian gas flows stop entirely, the Bundesbank estimates that the necessary rationing
of gas would lead German GDP to slump 5%.
As with any geopolitical risk, the situation elevates uncertainty for investors. However, with such
a grave winter threat hanging over the region, the European investment proposition looks
considerably less enticing than that of the U.S.
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