The war between Ukraine and Russia has led to an energy crisis, which has been so disruptive that it could harm the status of both the European Union and Russia as great powers. This energy crisis appears to be taking us to a bipolar world dominated by two superpowers—the United States and China. The ongoing energy conflict between the West and Russia means that the era of multipolarity is finally over. The energy crisis has a small effect on the U.S economy – however, the European problem will lead to a fall in power in the United States.
Effect Of The Energy Crisis On The Developed Economies
Cheap energy sources are the solution to the energy crisis for the modern economy. Even though the energy sector contributes a small fraction of the total GDP for the Developed economies, it has a large-scale impact on input costs and inflation for all sectors. European natural gas and electricity prices have increased to 10 times their original price in 2020.
The rise in prices is because of Russia’s invasion, which was accompanied by drought and extreme heat in summer. Until 2021, Europe’s 40% imports of natural gas and a proportion of oil and coal were from Russia. Russia began manipulating the energy markets months before its invasion. According to the International Energy Agency, this is what drove up the prices of natural gas.
Europe’s energy costs 2% of the normal GDP in normal times but has increased to 12 percent. Such high costs would mean that many industries will shut down their operations completely. Fertilizer producers, aluminum manufacturers, glass makers, and metal smelters are more responsive to high prices of natural gas.
As a result, Europe is expected to experience a deep recession in the coming years. However, its intensity will vary. French and Germany have nationalized their major utilities at a huge expense to minimize the energy disruption. The real risk waiting for the continent is the loss of economic competitiveness due to slow economic growth. Cheap gas was previously accessible from Russia, but now this is a dream that is far from reality. The industry will slowly adjust to the transition, but it will take time and also has some painful economic effects.
The economic woes are not related to the clean energy transition or the EU’s immediate response to the market disruption caused by war. Instead, it’s because of Europe’s high dependency on Russian natural gas and fossil fuels. Even though other renewable sources like solar power can replace fossil fuels to generate cheap electricity, such sources cannot replace natural gas used for industrial use. Also, liquified natural gas is an alternative to pipeline gas which is more expensive.
The Energy War Is Affecting Europe
According to the World Bank, the EU’s GDP annual growth was at an average of 0.48% between 2009 and 2020. However, the growth rate for China and the US was much more than the EU’s average GDP growth rate. If the EU economy shrinks by 3 percent in the coming year, then the EU will resume its pre-pandemic growth rate of 0.5 percent while the rest of the world develops at 3 percent.
