EU to Let Markets Deal with Russian Oil Crisis

Written by | Thursday, October 23rd, 2014

The European Commission warned member states last week that “a price increase is not a supply crisis and not a justification for intervening in the market under the pretext of security of supply” when speaking about how markets would be effected if Russian gas deliveries were cut this winter as a result of the dispute between Moscow and Kiev. Despite the general trend of falling oil prices worldwide, the EU believes that gas prices could double if transit shipments through Ukraine were shut down. The European Commission also insists that prices must be allowed to go up to encourage fuel switching, decrease non-essential demand, and attract additional LNG cargoes to make up for lost supplies from Russia.

Brussels has already modeled the possible impact of a half-a-year shutdown in Russian deliveries during an average winter but with a fortnight-long cold snap in February when demand is standardly the highest and gas stocks would be likely depleted. Naturally, the worst-hit countries would be in Eastern and South-Eastern Europe, who are traditionally dependent on Russian gas for the vast majority of its energy needs. Yet, Finland and the Baltic states would also be struck if all Russian exports to the EU were ceased due to the transit dispute. In contrast, Central and Western European EU members would not have to face a major disruption.

Therefore, the EU Commission encourages member states in Central and Western Europe to let the “invisible hand” of the market work and prices rise, even under the scenario of East and Southeast countries being forced to impose non-market measures to tame consumption and designate scarce supplies for priority customers. “Where the market works, price signals will attract new deliveries of gas, mainly LNG, to the EU and within the EU to those countries where scarcity is greatest,” the EU Commission argues. All EU member states and neighboring countries have prepared action plans for dealing with an eventuality of a severe interruption in gas supplies this winter.

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