For a year Europe has lived under the shadow of an energy blockade as Vladimir Putin threatened to turn off the gas taps to the continent. Now the threat has become reality and the prospect of a cold, dark winter is hitting home. On Sept. 5, Russia said it will shut down its Nord Stream pipeline for as long as Western sanctions are in place, sending benchmark gas prices surging by another 30%; they currently stand at the equivalent of around $400 for a barrel of oil. At today’s futures prices, annual spending on electricity and gas by consumers and firms across the European Union could rise to a staggering $1.5 trillion, up from $224 billion in recent years, reckons Morgan Stanley, a bank.
The energy shock is now a full-blown political and economic crisis. Already 14% of families in Britain are behind on their utility bills. ArcelorMittal, a steelmaker, will shut down a plant in Bremen.
As consumers and businesses reel and a recession looms, behind the scenes there is chaos in energy markets. Because Europe’s power prices are set by the costs of the marginal producer, which is often gas-fired, the gas surge has become an electricity shock, too. With prices haywire some generators are facing a cash crunch as counterparties demand more collateral: utilities from Düsseldorf to Vienna are seeking bail-outs. Meanwhile renewable and nuclear firms with low marginal costs are eyeing hundreds of billions of euros of windfall profits.