Lhe Russian decision to cut off natural gas supplies to Poland and Bulgaria marks a serious escalation in Russia’s attempt to use energy as a weapon against Europe. More disruptions could soon take place, turning into reality what until now has been only a theoretical doomsday scenario for Europe.
In the face of this rapidly deteriorating situation, European governments must finally take oil and gas demand reduction seriously and take two steps: stop subsidizing oil and gas universally and ask people to consume less . Although politically difficult, both measures are now urgently needed, both from an energy security and public finance perspective, and can no longer be postponed.
Because Europe must seriously tackle reducing its consumption of oil and gas. Since the onset of Europe’s energy crisis in the summer of 2021, European governments have heavily subsidized oil and gas consumption, through a wide variety of interventions ranging from direct subsidies to tax cuts. Initially designed to provide a quick fix to what was supposed to be only a temporary problem of high energy prices, these measures have now become structural and much more important.
Lump sum transfers and rising energy prices
Since September 2021, major European countries such as Germany, France, Italy and Spain have each spent around €20-30 billion to artificially lower gas and electricity bills, as well as gasoline and diesel prices. Such large oil and gas subsidies are not only unsustainable from a public finance point of view. They are also detrimental from the point of view of geopolitics and energy security, not to mention the environment.
As Europe imports 40% of its gas and 25% of its oil from Russia, these are essentially subsidies to Mr. Putin. And since Europe has to import most of the oil and gas it consumes, European governments must understand that, in the current situation, rising energy prices must be an essential part of the solution, because the Reduction in demand for oil and gas is essential for Europe to increase its resilience in the face of a possible interruption in Russian flows.
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