How serious is this crisis?
If you listen to energy experts: super serious. This is the biggest energy crisis ever, according to Fatih Birol of the International Energy Agency. Worse than the oil crises of the 1970s and the energy crisis of 2022. The energy markets are on the brink of disaster, wrote The Economist this week.
Then economists sound mild. Yes, this is a big shock, but there is no question of a serious economic crisis, not even in the most severe scenarios that economists calculate.
Take the calculation by the Central Planning Bureau. In their worst scenario, oil prices rise further to $160 per barrel ($105 this week) and remain high until the end of 2027 ($125). The gas price will rise to 110 euros per megawatt hour (45 this week) and will remain high until the end of 2027 (65 euros).
Those are really high energy prices. And yet the economic damage was not too bad.
In 2026, the economy would still grow by 0.3 percent (after a slight contraction in the second half of the year). By 2027, growth would be virtually zero. Without the high energy prices, growth would have been 1.4 and 1.3 percent, but the CPB does not foresee a sharp contraction, even if energy prices are very high for a long time.
In the worst scenario, the purchasing power of an average Dutch person drops by 1.4 percent. Inflation rises above 5 percent. That is still lower than the 10 percent inflation during the 2022 crisis.
How can this be the worst energy crisis ever and at the same time cause less inflation than then?
A big difference: this is a global energy crisis, the 2022 crisis mainly affected Europe. Europe was extremely dependent on gas coming from Russia via pipelines. When Russia cut off gas supplies, Europe had few alternatives. The gas price was much higher than now.
“2022 was a systemic crisis for Europe. We were symbiotically linked with Russia and suddenly had to switch to a different type of gas, LNG,” says Lucia van Geuns, energy expert at research agency HCSS. “We didn’t have the facilities for that.”
Now the supply of LNG from the Middle East is halting. But before the war against Iran, an oversupply of LNG was predicted, because many production facilities have been built around the world. The price of gas will therefore rise less sharply than that of oil.
Van Geuns also believes that we are experiencing the biggest energy crisis ever. But above all it is an oil crisis. Even more specific: there is a shortage in particular of diesel and kerosene, two oil products.
The drop in oil supply is greater than in the 1970s, but that does not mean that it causes the same amount of economic damage. Van Geuns: “The energy intensity of our economies is much lower. Cars, for example, drive much more efficiently.” What could have broader implications: according to Van Geuns, diesel is the workhorse of the economy, because many farmers work with it and trucks drive on it.
Which softens the blow
An energy crisis is therefore not yet an economic crisis. But that nuance is lost among the gloomy news, notes Marieke Blom, chief economist at ING. When the boss of an industrial company asked her whether this could be as bad as the corona crisis, she thought: something is going wrong here. “During Covid, the economy shrank by almost 4 percent, even after the enormous government support packages. That is an economic crisis, this is not.”
There are many things to soften the blow. Blom: “The labor market is tight, which means companies are less likely to fire people. The Dutch saved a lot. They can use that money instead of cutting back.” Europe uses less gas than in 2022.
There is also a big difference in purchasing power, according to Blom: in 2022, the energy bill of households will rise sharply, now the prices at the pump. “Everyone has an energy bill, not everyone has a car. This is more of a transport crisis. People can more easily cancel a flying holiday or an outing than turn off the heating.”
Petrol has also become cheaper in relation to income, says Blom. After 2022, benefits and the minimum wage were increased. “By almost 30 percent. While petrol has remained below 2 euros all these years.” So today’s 2.5 euros is not that unaffordable.
Everyone has an energy bill, not everyone has a car. This is more of a transportation crisis
The 2022 crisis offers a hopeful lesson: economies can adapt quickly, even to a seemingly insurmountable energy shock.
At the beginning of 2022, a group of German economists were ridiculed because they… had calculated that the German economy would shrink by at most 3 percent after a sudden stop of Russian gas. According to critics, the blow would be much greater, because energy is not just a market, energy is fundamental. “Irresponsible”, mentioned government leader Olaf Scholz made the calculation.
Eventually the economic damage was not too bad. Not only because the government quickly built terminals for LNG and supported the economy. Market economies have great adaptability. That happens often underestimated.
If oil becomes extremely expensive, the first easily replaceable demand will disappear, for example for plastic rubber ducks made from oil. explain economists Tyler Cowen and Alex Tabarrok. Children simply get different toys.
But 2022 had another lesson: misery can pile up. The summer turned out to be exceptionally dry, less energy came from hydropower, French nuclear power stations were under maintenance and governments competed against each other to fill gas supplies. In August, gas prices became higher than high.
This time, Donald Trump could cut off the supply of American gas, countries could start hoarding energy. Economists’ worst-case scenarios may also prove too optimistic.
The word crisis has no gradations, but there are degrees.
