The ongoing and debilitating energy crisis affecting the European Union (EU) is causing many of the bloc’s largest industries to cut back production, increasing the chances of the continent deindustrializing itself.
The energy crisis is forcing many of the continent’s largest and most energy-intensive businesses to curb their energy usage. As a result of these energy caps, many corporations are shutting down factories, downsizing workplaces or relocating outside of the continent where energy is plentiful and EU regulations on energy usage can’t reach them. One of the continent’s biggest losses is German conglomerate BASF, the largest manufacturer of chemicals in the world. In response to the energy crisis, rather than cut back on its production, the company said it would instead permanently downsize its workforce in its home country and expand in China.
“The European chemical market has been growing only weakly for about a decade [and] the significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains,” said BASF Chief Executive Officer Martin Brudermueller.
Many other industries are either idling their production capacity or curbing quotas due to higher energy costs.
“A tenth of Europe’s crude steel production capacity has already been idled, according to estimates from Jefferies. All zinc smelters have curbed production, and some have shut down. Half of the primary aluminum production has shut down as well,” noted Irina Slav, writing for OilPrice.com. “And in fertilizers, 70 percent of factories have been idled because of the energy shortage. Chemical plants are also curbing their activities, ferroalloy furnaces are going cold and plastics and ceramics manufacturing is shrinking as well.”
The United States is also receiving more European companies relocating to countries with wider availability of energy. Energy issues, along with an unfriendly investment environment and the desire to increase production, are making many manufacturers choose America.
Europe needs more energy to bring back its industry
In 2021, Russian natural gas flows into the EU was responsible for meeting about a third of the bloc’s gas demand. By the end of 2022, Russian energy flows into the EU will fall by roughly 80 billion cubic meters of natural gas, or around 20 percent of overall demand.
More imports of liquefied natural gas from the U.S. and increased natural gas production from Norway will help offset the shortfall, but not enough. If Europe wants to stabilize its prices, it will have to reduce demand for natural gas by roughly 10 percent.
According to Anne-Sophie Corbeau, global deliveries scholar at Columbia University‘s Center on Global Energy Policy, Europe can make it through this winter if it is “not too cold.” But to deal with the next winter, it will have to ramp up its natural gas imports exponentially.
Norwegian state-owned energy company Equinor has already ramped up the country’s gas production by 10 percent this year. But Eirik Waerness, Equinor senior vice president and chief economist, warned that the country does not have the capacity to raise output further.
Other major projects to help supply the EU with more gas aren’t scheduled to enter production until 2025 at the earliest. These include a major investment in Qatar’s North Field East project and the creation of U.S. liquefied natural gas export terminals. (Related: Qatar refuses to divert gas flows to Europe due to existing contracts with Asian customers.)
Furthermore, Europe may need to reduce energy demand more than currently anticipated as the continent is also bracing for sharp declines in energy generation from renewable energy sources like nuclear and hydropower.
“One thing has become crystal clear: Reduced energy consumption in Europe’s industrial sectors is really no cause for celebration,” wrote Slav. “If anything, it is a cause for concern and urgent action on the part of decision-makers.”
Learn more about the European energy crisis at NewEnergyReport.com.
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