Energy prices in Europe are soaring to record levels – a consequence of both poor planning and sanctions against Russia.
The EU’s ban on Russian oil – to be phased in over the next few months – has made oil and oil products more expensive. European sanctions have also provoked what look like counter-sanctions from Russia. Since June, Russia has cut gas supplies to Europe drastically, prompting huge price spikes.
Assuming no deal is struck between the West plus Ukraine, and Russia, Europe is unlikely to buy much Russian energy for the foreseeable future. Russia may keep sending oil to Hungary (a “friendly” country), and may continue selling small quantities of gas at exorbitant prices. But apart from that, it looks like the country will cease to be Europe’s main energy supplier.
Which raises the question: where’s Europe going to get its energy from?
In the short term, it will have to buy a lot more oil from the Middle East, and a lot more LNG from places like Algeria, Qatar and the United States.
Although the Middle East has plenty of oil to sell, there will be some transitional costs associated with establishing new supply routes. However, the real problem comes with LNG: there simply isn’t enough to replace Russian gas.
As analyst Sarah Miller notes, “it’s unlikely that alternative gas supply in anything like the volumes Europe takes from Russia will ever materialize at affordable prices”. Consequently, “Europe’s choice is basically to keep buying Russian gas or make do with a lot less gas”. And since Russia may not keep selling Europe gas, that leaves making do with a lot less.
Of course, the EU’s long-term plan is to transition to renewables. But it’s exactly that: a long-term plan. And at the present time, renewables can’t work without fossil fuel back-ups due to the problem of intermittency (the sun isn’t always shining and the wind isn’t always blowing). Unfortunately for Europe, gas is the least polluting back-up.
So what about nuclear?
Investing in nuclear clearly makes sense, but there are several challenges. First, it takes at least five years to build a nuclear power plant. So nuclear isn’t going to help during what may be the most painful transition period.
Second, the cost of building nuclear plants has actually increased over time. Some people claim this is due to excessive regulation, but as economist Noah Smith points out, “it keeps happening in every country”. Which suggests that whatever is causing costs to rise is very difficult to overcome. Perhaps, as Smith notes, “the safety regulations imposed by governments are a common, stable political-economic equilibrium”.
Third, building a nuclear plant incurs huge up-front costs – to the tune of twenty or thirty billion dollars. This makes private investors reluctant to stump up the cash, since there’s a risk they won’t get it back. Even before “environmentalists started freaking out”, to quote Smith again, nuclear required massive government assistance.
If nuclear were a panacea, as some people claim, France would be enjoying much cheaper energy than most of its neighbours. (The country gets more of its electricity from nuclear than any other – about 70%, compared to only 15% in Britain.)
Yet French electricity prices are currently among the highest in Europe. There are several reasons for this, such as the discovery of “stress corrosion” inside plants, and the fact that Europe’s unusually hot summer has pushed up river temperatures, making plants harder to cool.
Now, this isn’t a wholly fair assessment of France’s energy system; in a typical year, the country is a net exporter of energy. But it does illustrate that relying on nuclear presents some challenges.
So while expanding nuclear capacity is clearly sensible, it’s not going to solve Europe’s problems. And certainly not in the next five years.
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