Europe’s Energy Crisis Is Reshaping Geopolitics

Europe’s energy crisis is about far more than just energy. It’s also the impetus for a major geopolitical reconfiguration at a global scale. No one knows exactly what the world’s energy and political landscapes will look like when the dust settles (which, by the way, will be years from now) but it’s guaranteed that it will be markedly different than it was the day before Russia – historically the largest exporter of oil and natural gas to the European Union by a long shot – illegally invaded Ukraine.

This year’s annual energy outlook from the International Energy Agency (IEA) warns that we are currently living through a “global energy crisis of unprecedented depth and complexity,” and that “there is no going back to the way things were” before the unprecedented dual shocks of the novel coronavirus pandemic and Russia’s war in Ukraine. Together, these events have already reconfigured the energy trade worldwide, but the shockwaves to the global economy are just getting started.

Many look at Europe’s current energy deficit as a kind of heroism, as the European Union has taken a huge economic hit in order to impose energy sanctions on the Kremlin – the one kind of sanction that could really cripple the Russian economy in the hopes of ending the war in Ukraine. “In the struggle to help Ukraine and resist Russian aggression, Europe has displayed unity, grit and a principled willingness to bear enormous costs,” the Economist recently reported.

But in addition to admiration, Europe’s actions are also cause for major concern. Gas prices are currently six times higher than average rates, and new modeling suggests that a 10% rise in real energy prices is associated with a 0.6% increase in deaths over a typical winter season – that equates to over 100,000 extra deaths of elderly people across Europe in the coming months.

It’s not only Europe that has to bear those costs. The financial vulnerabilities emanating out of Europe threaten to destabilize not only some of the more indebted European countries, but also developing nations and net energy importers around the world. As always, it’s the poor who will lose out the most, and the global south will inevitably bear an enormous burden from an energy war they had nothing to do with in the first place. While the devastating consequences of the pyrrhic energy war between Russia and Europe are already weighing heavily on consumers around the world, it’s only going to get worse in the next year.

The OECD’s recently released flagship annual forecast foresees “a significant slowdown” for the global economy in 2023, decreasing to 2.2%, and then a “little bit of a rebound in 2024” to about 2.7%. For the United States economy, which has been relatively sheltered from the crisis up until now, the outlook is even more grim. The OECD projects that the U.S. economy will grow by just 1.8% this year (compared to 2.2% for the global economy), and a paltry 0.5% next year before ‘recovering’ slightly to achieve a lackluster 1% growth in 2024. We’re clearly headed toward a “brutal economic squeeze” that will be a major stress test for Europe, its allies, and its enemies.

“There is a growing fear that the recasting of the global energy system, American economic populism and geopolitical rifts threaten the long-run competitiveness of the European Union and non-members, including Britain,” the Economist reports of the enduring effects of the crisis. “It is not just the continent’s prosperity that is at risk, the health of the transatlantic alliance is, too.” Many European leaders have sharply criticized the United States’ protectionist and nationalist energy strategies, including the recent Inflation Reduction Act, which earmarks $400 billion in incentives for U.S.-made energy, manufacturing and transport.

The current crisis has thrown Europe’s economic vulnerabilities into stark relief. A long-held reliance on cheap fossil fuels from a volatile and aggressive authoritarian turned out to be a dangerous dynamic, unsurprisingly. But the move away from Russian influence is already pushing many nations further into China’s arms, risking the same kind of vulnerabilities and future energy shocks should that nation decide to wield its power over the numerous rare Earth minerals and other clean energy supply chains that it controls almost entirely. The West has allowed China to out-compete and out-innovate them in terms of clean energy technology, and transitioning to clean energy cheaply will be all but impossible in the near term without cozying up to Beijing.

As both the United States and China circle the wagons and lean into protectionist, domestic-first policies, the Economist notes that Europe, “with its quaint insistence on upholding World Trade Organisation rules on free trade, looks like a sucker.”