“The challenge is to square the circle between sanctions, inflation, debt and social conflict”

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In an interview with The European Scientist, taken over by Brussels Report, energy expert Philippe Charlez, associated with French think tank Institut Sapiens, discusses the rapid increase of energy prices, the impact of the war in Ukraine, Europe’s dependence on Russian gas and the consequences for the EU’s plan for an energy transition.  

The European Scientist: «On several occasions you have warned for soaring energy prices. Could you briefly remind us why?»

Philippe Charlez: «Between February 2021 and February 2022, the price of a barrel of oil and a ton of coal more than doubled, while on the European markets the price of natural gas increased fivefold. Finally, on the electricity spot market, the MWh has regularly traded around 250 euros, i.e. six times more expensive than a year ago.

To avoid any social explosion, the French government has once again had to reach into its pockets: by mid-January, all the government measures taken since September 2021 already costed the French state a whopping 22 billion euros.

As early as 2020, I have warned about the worrying situation on the hydrocarbon market, which is subject to a declining supply of gas due to a lack of investment in the exploration and development of new fields on the one hand, and on the other hand to a growing demand (in Europe, but especially in China) to support renewable energies that are largely insufficient to meet the increase in my electricity demand.

By solving the problem with subsidies that could quickly get out of control, the French government is attempting to keep this out of the presidential election debate, however putting the future president in a potentially explosive situation in the fall of 2022. This is a situation that could haunt the new five-year presidential term before it has even begun.

Which candidate will risk transparency towards the public by daring to proclaim loudly and clearly that to finance the energy transition, French citizens will need to generously reach for their wallets? Gradually, the “whatever it costs pandemic” is morphing into a “whatever it costs energy crisis”.

TES: «Will the war in Ukraine worsen this increase? How do you analyze the situation?»

P.C.: «In addition to the energy crisis, which has its origins in a structural breakdown in supply and demand, there is a military crisis linked to the Russian-Ukrainian conflict. In the medium term, this will have major consequences for global energy markets.

While the price of European gas had relaxed slightly since the beginning of February (the MWh had fallen back to 72€ on February 21 from 100€ at the end of the year) following the Russian invasion, it has become uncontrollable, peaking at nearly 200€ on Friday, March 3, which is to say…312$ per barrel equivalent.

As for oil, which was hovering around $90 per barrel in mid-February, it rose to $118 on March 3. Even if this is partially a panic reaction of the markets, the key energy position of Russia (which is the 3rd largest oil producer, with 12% of world production and the 2nd largest natural gas producer, with 17% of world production) leaves little doubt as to the devastating effect of this conflict on energy markets.

A double (or even triple, if we add coal, for which Russia is also one of the world’s main producers) embargo, intended to “finish off” the Russian economy would, paradoxically, merely serve to highlight the already present supply-demand disruption and it would lead to stratospheric prices.

The gas price could reach $300 and the oil price $150, which would double France’s foreign trade deficit, which is already largely in deficit. Systemic interventions by the French state to avoid serious social unrest will increase French sovereign debt, already at 116% of GDP at the end of 2021, in a limitless manner.

The inavoidable inflationary spiral will significantly increase interest rates, making the public debt burden unbearable. The challenge is really to square the circle between sanctions, inflation, debt and social conflict. While the Russians are likely to pay dearly for their Ukrainian madness, the collateral damage in Europe will still be painful.

TES: «Can Europe cope without Russian gas?»

P.C.: «Europe is Russia’s main customer (40% of European gas comes from Russia) and Russia its main supplier. If Europe were to impose an embargo on Russian gas, the latter would not be able to find a buyer (unlike oil, which easily sails on all the oceans of the planet) insofar as the main gas pipelines (Ukrainian Brotherhood, Belarusian Yamal and Russian/German Nord Stream 1) point exclusively towards Europe. Russia would then see its gas income reduced to nothing. In theory, this gas embargo is very effective, but is it really feasible? In other words, could Europe do without Russian gas and at what price?

The only credible substitute is called Liquefied Natural Gas. Transported on the oceans with LNG tankers, it follows the same logic as oil: to import LNG, all one needs is access to the sea, dedicated port facilities and regasification equipment.

Many European countries have LNG terminals on the Atlantic coast (Portugal, Spain, France, Belgium, Netherlands), the Baltic (Poland) and the Mediterranean (Greece, Italy, Spain). France has four terminals in Fos (2), Dunkirk and Montoir-en-Bretagne. Once regasified, the gas can then transit through the network to supply European countries without maritime access such as the Czech Republic or Slovakia, which are also the most dependent on Russian gas (85% for Slovakia and 100% for the Czech Republic, compared to only 17% for France and 10% for Spain).

Unfortunately, when we analyze the quantities, Russian gas imports into Europe represent one third of the world’s LNG production. This production comes mainly from Qatar, Nigeria, Malaysia, Australia and the United States, but is mainly transported to South-East Asia (China, Japan and Korea) which consumes more than 70% of the world’s LNG production. Additional LNG imports to Europe could therefore only partially make up for the Russian import deficit, unless a trade battle between Europe and Asia were to break out, leading inexorably to stratospheric prices that we can hardly imagine.

That is a juicy situation for the Americans selling us “generously” their liquefied shale gas at high prices. Unless we accept painful energy poverty or prices that are two or three times higher, the gas embargo is therefore very difficult to implement. It is therefore not surprising that the SWIFT system has been shut down for all financial transactions except…gas.

TES: «In your opinion, political ecology has played a significant role in this gas addiction. Could the conflict sound the death knell for this ideology?»

P.C. : «If war is first and foremost a source of brutality and oppression, it is also very often reveals latent situations that are hidden in peacetime. Our excessive dependence on Russia for gas has certainly increased over the last few years as a result of the structural decline in production in the North Sea and the Netherlands, but also and above all because of absurd and purely ideological energy choices.

Although representing a negligible political weight, the ecological movement has, for more than twenty years, exerted a determining impact on European energy choices. Promoting a utopian green growth made of 100% renewable energy, it has pushed Europe to invest more than 1000 billion euros into wind and solar energy while imposing an anti-nuclear ideology.

Having emerged from the pacifist movements of the 1960s, the ecological movement is still unable to distinguish between military and civil nuclear power. In his speech in Lyon on January 29, 2021, French green MEP and Presidential candidate Yannick Jadot confirmed that “opposition to nuclear power is neither technical nor climatic, it is political as well as moral. Two days ago, the Belgian green deputy PM Georges Gilkinet signed an article in the newspaper La Meuse entitled “nuclear power can be used as a weapon, unlike the wind and the sun”.

This attitude has become even less sustainable today, given how some environmental NGOs, like WWF, BUND Friends of the Earth Germany and Naturschutzbund Deutschland (NABU) have been partly financed by Gazprom in exchange for positions hostile to nuclear energy but also to shale gas. This guilty duplicity benefits the Russian giant and highlights European gas dependence.

In this regard, it is important to recall that WWF was led by Pascal Canfin between 2016 and 2019. Today, he is an MEP for LREM as well as the chairman of the Environment Committee in the European Parliament. And what to think of former German Chancellor Gerhard Schröder, the founding father of the German «Energiewende» and since his retirement from politics an influential member of Gazprom’s board of directors, or Tinne Van der Straeten, the current Belgian Minister of Energy, who is in favor of the nuclear phase-out but was previously a lawyer in a firm where Gazprom was a client?

Let’s hope that the Ukrainian conflict reveals Europe’s energy fragility and contributes to redefine a new joint strategy. Let’s hope that it also sounds the death knell for the ideology of the ecological movement.

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