An energy crisis is affecting almost every part of the globe, marked by record-high energy prices, tight supplies, and power blackouts. Some of the world’s richest countries and U.S. states such as California have been struggling to keep their electricity systems stable.
The first energy crisis in decades has come as a shock to many, who seem to have forgotten how energy insecurity reverberates onto every major sphere of public life: the economy, national security, the environment, and public health. As the world’s most traded good, energy is involved in everything we buy and consume, so energy prices and shortages significantly impact economic growth. Because energy is the most important input in manufacturing, stable prices and supplies are key to economic competitiveness. Electricity and fuels for heating, cooking, and transport are major items in every household budget, and price increases disproportionally affect the poor. Similarly, government institutions and infrastructure need stable and affordable energy supplies to function, putting public safety and health at risk when electricity supplies aren’t steady. Energy security has to be treated like national security, and governments need to ensure it.
The current energy crisis is particularly acute in Europe. Prices for natural gas, coal, and electricity have exploded, leading to protests over household power bills in Spain, 1970s-style gasoline shortages in Britain, and worryingly low supplies of natural gas across much of the continent as a possibly very cold winter is fast approaching.
Europe’s example can be especially instructive for other countries. No other place has invested so much money and made such policy efforts to reconstruct its energy markets. Yet nowhere have the failures been as great. How did Europe create its energy crisis, and what are the lessons for others?
Much of the debate over Europe’s energy troubles blames either renewable energy or fossil fuels, depending on one’s standpoint in the culture wars into which energy and climate policies have been drawn. Critics of reliance on renewables point out their dependence on intermittent wind and sun (which were lacking across much of Europe this year), while their proponents point to the volatility in fossil fuel prices and lower gas imports from Russia.
In reality, Europe’s energy policy failures are much more complex and have little to do with the debate over renewables and fossil fuels. Achieving energy security requires carefully balancing market forces, technologies, policies, and geopolitics, which doesn’t fit into ideological templates. The truth is that both the right’s market ideology and the left’s reflexive market suppression have contributed to the current energy crisis.
Consider how Europe has designed its energy markets. As part of its energy trade liberalization, the European Union encouraged member states to move to gas delivery contracts based on the daily spot price instead of negotiating fixed, long-term prices with suppliers, such as Russia’s Gazprom. This view was based on market ideology more than a thorough analysis of how to achieve security of supply and lower prices. This policy created several negative outcomes. First, relying on spot markets with their daily ups and downs increased Russia’s ability to sway gas prices. As Europe’s biggest gas supplier with a lot of spare capacity, it can release or limit supplies and thus effectively set prices. In addition, eliminating fixed-price contracts mitigates against stable supplies. Natural gas production and new pipelines are very expensive, requiring billions of dollars in investments and many years of development. This creates a disincentive for a more diverse set of producers to invest in supplying gas to Europe, increasing Russia’s power over the market. A factor in the current crisis is Russia’s unwillingness to rev up gas shipments to Europe.
With less gas supplied by pipelines, Europe has had to rely increasingly on imports of more expensive liquified natural gas, where it competes for shipments with East Asia, which is used to paying much higher gas prices than Europe. During periods of high demand, Europe thus has to pay Asian prices for additional supply, instead of the cheaper price of pipeline gas from its own regional suppliers.
But while the EU is formally committed to relying on market forces, it has often subordinated those to pursue political goals. With European governments mandating a greater share of renewables in the energy mix, utilities are not allowed to select the most economically viable fuels. Moreover, most governments limit the electricity and natural gas prices they are allowed to charge consumers, so utilities control neither the prices of fuels nor what they can charge customers. Moreover, because the main renewable sources of energy—solar and wind—are highly variable depending on the weather, utilities must maintain an entire second network of always-ready backup power plants using natural gas, coal, or other sources in order to ensure a stable electricity supply and prevent blackouts. Maintaining this spare capacity, which sits idle when the sun shines and the wind blows, naturally costs a lot of money. It is not paid by the renewable energy producers but by the power utilities, which pass those costs on to the public. In response to rising energy prices, governments in the United Kingdom, France, Spain, and elsewhere have stepped in with new price ceilings, abandoning all semblance of a market.
Europe also hasn’t resolved how it deals with major spikes in energy demand, such as during an extended cold spell. No price is going to move energy to another market if it requires turning out the lights on one’s own people. During a brutally cold winter in early 2010, some European governments ignored contractual obligations to transit gas in order to provide heat to their own publics. With gas supplies at their lowest levels in many years going into the winter, this problem could exacerbate Europe’s energy crisis further.
Even as Europe invests trillions of dollars in building out renewable energy, it has neglected crucial investments in its electrical grid. Stable electricity and natural gas provision requires complex systems of storage, backup, infrastructure, and supply redundancy—which the private market on its own does not provide. Government either needs to require that energy providers maintain adequate storage and backup mechanisms or provide them itself. Worse, governments pushing electricity use with lavish subsidies for electric vehicles without a reliable electricity system to meet that increased demand are setting the stage for further systemic blackouts.
Lastly, Europe’s policymakers have stopped engaging in the geopolitics of energy. In the past, the EU successfully improved energy security by building out the bloc’s internal gas pipeline grid and welcoming new supply projects, such as the Southern Gas Corridor from the Caspian Sea. All these increased the security of Europe’s gas supply and broke Russia’s monopoly in many places. However, the current European Commission has turned energy policy into a mere subset of climate policy, with little attention paid to supply security or energy affordability. While major new sources of natural gas have been found in close proximity to Europe—in the Eastern Mediterranean, for example—European leaders have bowed to activist pressure and not seriously pursued any of these newly available sources. And the systematic closing of nuclear power plants in several European countries (including almost the entire German fleet) following the Fukushima Dai-ichi accident has removed a secure and steady source of clean energy and is one of the main factors behind the current energy crisis.
Will the United States go down the same path and soon experience a European-style energy crisis? There are many parallels, and both the February electricity crisis in Texas and rolling power blackouts in California give a preview of what could lie ahead.
For the first time in decades, Washington seems to be ignoring energy geopolitics, too. Just like Europe, the Biden administration has made energy policy a subset of climate policy. The administration’s policies have held back a revival of domestic oil and gas production after the pandemic-induced collapse of demand. Private-sector investment in oil and gas has also been held back by pressure to divest from fossil-fuel companies, perceived public opposition, and investor pressure to conserve capital. Beyond U.S. borders, Washington seems content with asking OPEC to pump more oil, though it remains unclear how it helps the environment (let alone energy security) if fossil fuel production simply shifts from the United States to OPEC and a few other countries. If Washington continues to inhibit domestic energy production, the world will return to the energy geopolitics of the 1970s, with OPEC back in control of prices and supplies. This would bring few climate or environmental benefits but increase geopolitical challenges.
The Biden administration has also canceled several energy pipeline projects that could improve domestic security of supply. This is particularly significant for gas, where high global demand for liquified natural gas will likely be met with more U.S. gas exports, leading to higher prices for U.S. industry and consumers.
And while a wise policy would seek to diversify energy sources, the federal government and many U.S. states are pushing to transition transportation and other sectors to electricity. The largest U.S. energy markets—California, New York, and Texas—already have systemic electricity supply problems, yet Washington is incentivizing increased electricity demand. It’s not just a matter of power sources: Just as in Europe, the power grid to accommodate the higher electricity demand doesn’t yet exist.
The United States—and other countries around the world—should take a close look at Europe’s failed energy policies and take the current energy crisis as a warning not to slide down the same path. While private companies can produce, transmit, and sell energy services, it’s government the public turns to when the lights go out. No government—in Europe, the United States, or elsewhere—will be able to succeed with any of its policies without stable and affordable energy.