Europe’s energy problem explained

The European Union is short of oil and gas on its own territory. This creates a headache for politicians – and is impacting energy prices in the region.

| 5 min read

With oil and gas prices at high levels, the dependence of the European Union (EU) on fossil-fuel imports is creating market stress and political difficulties.

Although the EU claims to be well on the road to net zero from the rollout of domestic renewable power, it is still dependent on imports for 60% of its total energy needs, mainly of oil, gas and coal. Two thirds of the imports are oil, with Russia supplying more than a quarter, Kazakhstan 7% and three leading OPEC countries another quarter. A significant 27% of the imports are natural gas, with Russia supplying just under a half of the total. Coal is the smallest of the imports, at around 6% of energy imported, but again Russia accounts for almost half of the supplies.

Chart 1: EU fuel imports (2019)

The EU is short of oil and gas on its own territory. The Dutch have some good reserves offshore, but the larger number of oil and gas fields in the North Sea are shared between Norway and the UK, non-members of the EU, whilst the other good oil and gas fields lie to the east of the continent beyond the EU’s borders in Russia and its satellite states. Germany and Poland have good coal reserves which they are still mining, but Germany is now pledged to phase out coal by 2030.

Chart 2: EU energy import dependency by Member State (2020)

Europe was an early adopter of civil nuclear power. France still has a large reliance on its ageing fleet of nuclear power stations – but has not yet started work on the replacements which will be needed. The current stations are experiencing more downtime for repairs and maintenance as they age.

Germany has decided to close all its remaining nuclear stations this year, exacerbating the shortage of reliable power for the country’s grid. The EU has awarded green status to nuclear power but is short of countries amongst the membership wanting to build new stations. Some of the Green party representatives in the European Parliament and governments disagree with the use of nuclear power.

The EU has also now classified gas as a green fuel, on the grounds that natural gas makes sense as a transition fuel and may in due course be replaced by green hydrogen. The case for gas is as a replacement for coal where it burns with less pollutants and CO2. As Germany comes off coal, it will need more gas whilst investing in more renewables and gradually electrifying its economy.

The energy transition is a long process

This decade will see continuing EU reliance on gas to heat homes, fuel factories and even to generate some electricity. Germany will be a large user and has, for that reason, encouraged the construction of a second direct pipe from Russia to its coast to enable increases in imports when needed.

Germany is going to need substantial imports of gas from somewhere this decade to keep the homes heated and the factories turning.

The long argument with the US and other allies over whether Germany should finally sign a contract for gas through the new Nord Stream 2 pipeline reveals the strategic worries of NATO over contracting yet more Russian dependence. The underlying reality is Germany is going to need substantial imports of gas from somewhere this decade to keep the homes heated and the factories turning.

Greens say this all shows how the EU needs to accelerate its drive to net zero, putting in much more renewable power and speeding the transition of home heating, vehicle propulsion and industrial power away from fossil fuels. This may well find favour with governments, but the market reality is it will take many years to complete this vast transition and, in the meantime, gas is needed.

Single market for fuel

The EU is actively promoting a single European energy market, with plenty more interconnectors for gas and electricity to allow transfers of power as required and as available. They are hoping that windmills will be put in in many different locations, increasing the number of days when at least some of them are experiencing good wind to generate power. They are still up against the worry that people may not switch quickly enough to electric cars and electric heating. It is also taking time to get a breakthrough in storage of green electricity from overnight generation and during periods of good wind strengths which would ease the shortages.

It is likely there will be more disruption in East Ukraine and further exchanges in the information war between the US and Russia, as neither side is willing to compromise sufficiently yet for a diplomatic settlement. France and Germany want to achieve a breakthrough over devolved government for the two eastern provinces of Ukraine that are breaking away from Kiev government. Europe will continue to take a softer approach to Russia, aware of the vulnerability to energy interruptions were the conflict to escalate to much wider sanctions.

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Europe’s energy problem explained

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