‘A Mild Winter Alone Can’t Save’ Europe, Energy Crisis Accelerates Region’s Deindustrialization

Steam leaves a cooling tower of the Lichterfelde gas-fired power plant in Berlin, Germany, on Mar. 30, 2022. Michael Sohn/AP Photo

Europe’s energy crisis is now threatening to ramp up deindustrialization on the continent as many firms face persistent struggles with high energy costs.

Russia’s war against Ukraine and Moscow’s subsequent decision to cut energy supply to Europe has compromised the region’s energy security situation, pushing up fuel costs for commercial entities. Companies in Europe are now paying almost five times the price for natural gas when compared to the United States.

For decades, European firms have been shifting production to other regions, citing labor costs. The recent spike in energy prices could accelerate this trend.

“If the energy prices stay so elevated that part of European industry becomes structurally uncompetitive, factories will shut down and move to the United States, where there is an abundance of cheap shale energy,” Daniel Kral, senior economist at Oxford Economics, told Reuters.

Kelheim Fibres, the German company which supplies Procter & Gamble, has already cut down output two times at its Bavarian factory.

Yara, a fertilizer manufacturer from Norway, has reduced its European ammonia production by two-thirds. Swedish steelmaker SSAB plans to cut down capacity during the fourth quarter.

According to the International Fertilizer Association, over half of Europe’s ammonia production has already shut down. For the first time, Europe became a net importer of chemicals this year. In October, eurozone manufacturing activity hit its lowest level since May 2020.

“A mild winter alone can’t save the day in Europe. Growth is slowing, the European Central Bank is tightening, while the single currency remains weak,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said to Reuters.

A Troubled Winter?

Last month, the International Energy Agency (IEA) warned that Russia’s political motivations create a risk of supply shortfalls of gas in Europe and possible rationing this winter. Gas deliveries from Russia to the European Union (EU) had fallen by almost 40 percent in the first half of the year.

If energy costs remain high, governments could also face social unrest as people demand cheaper solutions. Several EU nations have already seen citizens hitting the streets protesting against the rising cost of living.

During an interview with Euro News, Agata Łoskot-Strachota, a senior fellow at the Center for Eastern Studies in Poland, warned that the energy crisis situation might continue for several years.

Though this winter might not see the worst-case scenario play out, things could get ugly once countries start drawing gas from reserve storage tanks and then scramble to fill them up.

“I’m pretty sure this is a crisis which could last at least three years, and the next year will be very challenging because we are very likely to see gas storage being fully depleted, coal reserves as in Poland fully depleted, financial reserves by countries, by households, shrinking,” she said.