Europe Can Survive a Bad Winter

Europe is in the middle of an energy crisis. Uncertainty over the flow of natural gas owing to Russia’s war in Ukraine has caused a spike in prices. The price of natural gas has soared to as much as $500 per barrel of oil equivalent, 10 times the normal average, fueling fears of winter shortages and cold homes.

Key commodities have already been affected. Fertilizer production, which requires large inputs of natural gas, is being shut down due to high prices. Manufacturers are hoarding glass in anticipation of future shortages. Climate change has made the situation worse, as a historic drought is drying up Europe’s rivers and cutting into hydroelectric capacity. The rising cost of energy has driven a spike in inflation in the United Kingdom, while Germany has suffered the worst inflation since the 1970s energy crisis.

The supply disruptions that struck Europe in the winter of 1973-1974 provide a useful parallel to the current crisis. Europe faced a partial embargo on oil imports, a massive increase in the global price of oil, and the threat of energy shortages.

Just as the 1970s shock proved less disastrous than predicted, this winter may not generate blackouts, rationing, or collapse on the scale some fear. But even if calamity is avoided, the current predicament brings home the reality of Europe’s fragile energy security and the need to add resilience, against both future shocks and the looming threat of climate change.

In the 20th century, European energy security, formerly sitting snugly upon the continent’s rich veins of coal, was complicated by the rising importance of oil. While Great Britain, France, and the Netherlands used their imperial holdings to supply domestic oil needs, Italy and Germany launched costly wars of conquest, partly designed to seize foreign oil fields.

After World War II, Europe’s dependence on imported energy became a political and economic reality. Middle East oil fueled Western Europe’s reconstruction through the Marshall Plan. By 1972, Western Europe depended on oil for 59.6 percent of its energy consumption, with nearly all of it imported from oil fields in the Persian Gulf and North Africa.

In October 1973, Syria and Egypt launched a surprise attack against Israel. When the United States offered Israel aid, Saudi Arabia and other Arab oil-producing states placed an embargo on oil shipments to America. The Arab oil states also gradually cut production by 25 percent between October 1973 and January 1974. They extended the embargo to include Portugal and the Netherlands. In late October, OPEC used the war as an excuse to approximately double the price of oil, more than doubling it again in early January.

The “oil shock” and Arab embargo are associated in the United States with long lines at the gas station, inflation, and an economic malaise that persisted through the 1970s. But the shock was of even greater significance to Europe, which depended heavily on imported oil. In the winter of 1973, Arab oil accounted for 72 percent of total Western European oil consumption. While not directly targeted by the Arab embargo, such states as France, West Germany, Italy, and the United Kingdom faced supply shortages due to Arab production cuts, while the price spike threatened to drain currency reserves and throw the continent into a recession.

The Arab embargo on the Netherlands had rippling effects. Oil entered at the port of Rotterdam and passed to Dutch refineries to be made into gasoline and other products. The area accounted for 10 percent of Western Europe’s refining capacity and 75 percent of the products were exported. The embargo bottlenecked supply at Rotterdam, cutting off markets and potentially creating shortages all over Europe.

All this looked disastrous. As the United States grappled with the effects of the embargo, production cuts, and price shock, estimates of the immediate impact of the crisis were grim. Predictions suggested Europe would lose roughly 15 to 20 percent of its oil supply. The price shock would force up inflation and produce a deep recession by mid-1974. “There is very little the West Europeans can do,” one CIA report concluded.

But the worst fears never panned out. While West German media offered grim predictions of winter blackouts, by mid-December cuts amounted to a little over 6 percent of total oil supply, according to historian Rüdiger Graf. The Netherlands introduced energy rationing, but interruptions in the flow of oil were mitigated by Western oil companies, including Royal Dutch Shell, which “rescheduled” shipments from Arab sources in order to get around the embargo.

Europe possessed the resources to diversify its energy needs. France accelerated an expansion of its nuclear fleet. The United Kingdom sank more capital into developing oil fields in the North Sea, a costly venture that nevertheless turned Britain into a net oil exporter in the early 1980s.

Most of OPEC’s new oil wealth was “recycled” by Western banks. In 1974, 14 percent of OPEC’s financial surplus ended up in British banks, 40 percent in the currency markets of the European Economic Community, and 20 percent in the United States. The long-term effect of the oil shock was the expansion and enrichment of the European financial sector.

In contrast, lacking the resources of Western states, the non-oil states of the global south faced massive import costs due to higher oil prices. States took loans or aid from OPEC, the World Bank, or private Western banks to cover the cost of higher energy imports. These loans laid the foundation for a series of debt crises that rocked the developing world in the 1980s and 1990s.

The scale of Europe’s energy crisis today matches that of the 1970s. But as with its predecessor, it’s important not to give in to apocalyptic predictions.

There’s no doubt that prices are incredibly high. Yet blackouts and serious heating or electricity shortages can be avoided through careful cuts to consumption, though the situation in the U.K. and Ireland looks more serious than that of the mainland. Germany, the continent’s largest economy, has filled its natural gas inventory to 80 percent of capacity. Compared to 2021, Germany’s inventory position appears strong. While European governments will probably enforce price caps to limit pain to consumers, high regional prices will make Europe an extremely attractive market for liquefied natural gas exporters.

As in the past, Europe retains advantages over other regions due to its wealth, level of development, and integration in global financial markets. Sri Lanka suffered a near-total collapse this summer when its foreign exchange reserves ran out, leaving it incapable of importing more energy. Pakistan has been rocked by protests over daily blackouts. Much of the developing world already suffered energy insecurity. The global energy shock has made those problems even worse. The most grievous impacts will be felt among some of the world’s poorest people.

But Europe is still facing a dire challenge. As in the 20th century, the continent’s developed, industrial consumer economies remain heavily dependent on imported energy. This leaves the continent vulnerable to external shocks, diminishing its energy security. European states, particularly Germany, proved overly confident in the reliability of Russian energy. Despite its considerable resources and advantages, Europe faces a dark winter.