Nearly a month into 2023, Europe’s energy outlook is far more positive than many analysts predicted at the onset of winter.
Unseasonably mild winter temperatures across the continent and a successful pivot by the European Union away from Russian pipeline gas has seen supplies stabilize and prices fall from a previous peak.
Also helping to defy the gloomy predictions of energy shortages and stalled economic growth in the EU were increased imports of liquefied natural gas (LNG) and a new Baltic pipeline from Norway – developments that have allowed the continent to begin to replenish its gas reserves.
But European leaders are already turning their attention to next winter, where they could face a perfect storm of extreme weather, a reopened China with greater energy demands, and more volatile prices for consumers.
“When the Chinese economy picks up, it will not be easy to buy the planned volumes on the world market,” Fatih Birol, the head of the International Energy Agency (IEA), warned in a late January interview with the German magazine Handelsblatt. “No Russian gas, China’s comeback as an importer, little supply growth: these three factors make next winter a challenge.”
China, reopening after years of COVID lockdowns, will be competing for a limited supply of LNG in an already tightening market, analysts forecast, which when coupled with rising global prices for energy -- from oil to coal -- will likely hit consumers hard and contribute to soaring food and services inflation.
This leaves the world’s second-largest economy as a crucial but unpredictable wild card for the next European winter that leaders and officials will be watching closely.
“The situation is more about uncertainty and how hard next winter is to plan for,” Agathe Demarais, global forecasting director for the Economist Intelligence Unit, told RFE/RL. “There is concern about Chinese demand, the weather, and how to refill gas storage in Europe -- all of which can be difficult to predict. But the main concern here is about prices.”
A 'Lucky' Europe
Europe moved quickly following Russia’s February invasion of Ukraine to buy up global supplies of LNG as the EU pledged to cut Russian gas imports. According to the Oxford Institute for Energy Studies, European countries increased LNG imports from 83 billion cubic meters (bcm) in 2021 to 141 bcm in 2022.
In hopes of shielding consumers, governments across Europe have taken up vast energy bill support payments to consumers and businesses -- totaling a whopping $768 billion, according to Bruegel, a think tank focused on European policies.
Consumption within the 27-country bloc has also dropped due to rising prices and a warm winter. Europe has so far used about half as much gas from storage facilities at this point as in the preceding two winters, with forecasts pointing to continued mild temperatures ahead.
Yet, even with replenished storage facilities, concern is still high for next year.
Asian -- not just Chinese -- demand for gas is increasing, and will rise further as China’s economy -- and its consumption of LNG -- returns to its former pace. Timera Energy, a global consultancy, says the gas market is still operating on the edge of supply capacity, meaning sharp price fluctuations and volatility are still in the cards.
As Demarais notes, Europe has been “extremely lucky” so far in terms of weather and has successfully moved to buy up LNG and replace its dependency on Russian gas with pipeline supplies from Algeria and Norway.
But questions around Chinese demand could be a key factor for determining inflation and pricing that could make next winter “crunch time” for Europe, she adds.
As gas prices spiked last year after Moscow cut supplies to Europe following its invasion, the bloc began to import record amounts of LNG that in turn pushed Asian spot LNG prices to historical highs.
This places China in a unique position to impact Europe next winter.
If China recovers relatively quickly from its COVID lockdown economic slump that saw its gross domestic product (GDP) growth slow to 3.3 percent last year, its demand for commodities will quickly pick up.
China is responsible for almost one-fifth of global oil consumption and surpassed Japan in 2021 as the world’s largest importer of LNG. The country also fills more than half of the world’s demand for copper, nickel, and zinc.
If the Chinese economy recovers rapidly, it could put commodity prices under intense upward pressure and keep inflation high in Europe and elsewhere in the West.
The Chinese Wild Card
But analysts also contend that there are many variables related to China that could determine what kind of ripple effects will be felt in Europe.
Alicia Garcia-Herrero, the chief economist for Asia-Pacific at the investment bank Natixis, says China has and will continue to buy energy resources and the country's economy is poised to grow at a far faster rate than in recent years, with Chinese government targets sitting above 5 percent of GDP for 2023.
But she adds that China has managed to secure its energy supplies through discounted deals with countries such as Russia, Malaysia, and Qatar that could lessen the impact that its resurgent energy appetite could have on Europe in 2023.
“There will no doubt be competition, but perhaps less than is being feared, especially for the impact on prices,” Garcia-Herrero told RFE/RL.
China is currently grappling with natural-gas shortages due to a mix of unusually cold temperatures and weak energy regulations and infrastructure, including provincial and municipal officials reducing gas subsidies that used to keep heating bills in check.
In response, Beijing has told local governments to supply heat, but hasn’t provided extra funds to pay for it. This has led to rationing, with many households receiving only enough for cooking needs.
With domestic interests in mind, Garcia-Herrero adds that Beijing will be cautious to avoid pushing up the price for gas, which could have less of an effect on Europe next winter than some are predicting. With COVID infections still spiking across the country, the full reopening of the Chinese economy is also not imminent.
This may give Brussels added time to insulate itself from potentially severe shocks next winter.
“In the long run, Europe may be in a much better position due to all the steps that the EU is taking now to get rid of its dependency on Russia and invest in renewables,” said the Economist Intelligence Unit's Demarais. “But from the short-term perspective, there is lots of concern about the wider impact on inflation and price.”