Lessons to be learned from Russian gas supply squeeze

The potential need for emergency gas supplies to shield Europe from the fallout of rising tensions with Russia over Ukraine is a timely reminder of the havoc that an energy shock can deliver to ordinary people and the world economy. Russia already has cut pipeline gas deliveries to Germany by 50 per cent, prompting a spike in prices and unsettling industry and households across the continent. The EU sources about 40 per cent of its supply from Russia and the price already has climbed to three times the price in January last year and six times the typical pre-pandemic level.

The supply squeeze from Russia has combined with unpredictable supplies of wind power and resurgent demand in Asia as recovery from the pandemic has built momentum. To date, liquefied natural gas exports from the US have helped to fill the shortfall of Russian supplies. But the call has been made for other gas majors, including Australia, to be prepared to keep energy flowing to Europe should conditions deteriorate further. Trade Minister Dan Tehan and Resources Minister Keith Pitt said Australia was ready to ship LNG exports to Europe if needed.

There are several lessons that must be taken from the current circumstances. First of all is the foolishness of Germany, in particular, in allowing itself to become so dependent on Russian gas. Another lesson is the ill-considered push by President Joe Biden to discourage the US domestic shale oil and gas industry in the name of fighting climate change. There has been a change in approach by Mr Biden in response to the political pressure caused by rising petrol prices for consumers as well as evidence that electricity producers are switching back from gas to coal, lifting US coal use by 20 per cent last year. More important is recognition of the geostrategic benefits that the shale revolution has given the US in lessening its dependence on imports from the Middle East for energy.

European leaders should use the crisis as an opportunity to reflect on their shortsighted rejection of developing shale gas resources within their own borders. The EU finally has woken up to the reality that gas is an essential tool in the transition to a lower carbon emissions future, listing it – along with nuclear – as a green fuel for investment purposes. The listing is recognition of the difficulty of kicking fossil fuels completely, as well as the geopolitical risks inherent in the green transition. It is not yet certain that Russia will continue to tighten the screws on energy to Europe, given fossil fuels make up a large part of Russia’s exports.

But if Australia is called on to help pick up the slack in gas supplies in future, the impact inevitably will flow through to prices and availability of gas on the domestic market. Global demand for Australian gas is already at its highest, with LNG export earnings forecast to increase from $30bn to $63bn in 2021-22.

The global impact of rising gas prices will be felt well beyond the cost of heating and electricity. Natural gas is essential to the production of fertilisers. Rising prices already have affected fertiliser production and soon will be apparent in falling crop yields in some of the poorest countries.

Events confirm the wisdom of current domestic policies to encourage the development of Australia’s abundant gas resources, offshore and on. It demonstrates that environmental campaigns being waged against the opening up of the world-class Beetaloo gas field in the Northern Territory are misguided. With inflation on the rise and geopolitical tensions heightened across multiple fronts, an energy price shock is the last thing the world needs as it navigates its way out of the pandemic.