In a post earlier this week, I said that Europe’s energy crisis isn’t over – contrary to what some other commentators have argued recently. Here I thought I’d go into slightly more detail as to why I don’t buy their arguments.
The optimists’ basic contention is that markets will solve the problem. When gas becomes scarce, this sends a ‘price signal’ to the market, prompting people to change their behaviour. Consumers use less, and substitute into alternatives like diesel, which reduces demand. Meanwhile, producers bring online new sources like LNG, which enhances supply.
As the Telegraph writes:
Putin failed to appreciate the power of free markets. Understandably for someone who spent his early career as a KGB operative … he didn’t understand that, for all their faults, free markets have two core strengths. They are adaptable and innovative.”
And according to the Financial Times:
No one should feel delighted they are paying more for energy this winter, but the price signal has done its job. It has forced Europe to adapt. Advanced capitalist economies are remarkably successful in this regard.
The problem here is that the numbers don’t add up. Yes, consumers have reduced their consumption, and producers have replaced pipeline gas with LNG. But even after these ‘adaptations’, prices are six times higher than normal.
Markets for some products – soft drinks, say – are highly efficient. When a Pepsi factory gets shut down, it’s not long before lorries full of Coke arrive to replace the lost inventory. And it all happens so quickly you barely notice any change in the sticker price.
The market for gas doesn’t work like this. You can’t just build a new pipeline overnight. (It took four years to build Nord Stream 2.) And LNG is more expensive, so even if we could replace Russian pipeline gas overnight – which we can’t – we’d still be paying a lot more for energy.
Europe’s problems are illustrated by a recent survey of German manufacturers, the results of which are shown below:
![](https://dailysceptic.org/wp-content/uploads/2022/12/Manufacturers-1024x408.png)
About 20% of manufacturers said they needed to reduce or halt production over the past six months. Yet more than 50% said they will need to do so over the next six months. There are only so many ways you can adapt to high gas prices before cutting output becomes unavoidable.
The analyst Javier Blas says it’s “likely” Europe will go back to buying Russian gas. “If it’s going to keep its chemical, food and heavy industries competitive,” he notes, “it will need some cheap gas. And there isn’t cheaper gas for Europe than Russia’s.”
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