The Economics of Protectionism and Panic: The European Natural Gas Disaster 2021–2022 (So Far)

08 December 2022
Dr. Jeff D. Makholm

In the January issue of the Wiley journal Climate and Energy, NERA Managing Director Dr. Jeff D. Makholm explores the European gas disaster from 2021–2022. Europe is living through a disaster in its natural gas industry that is harming energy consumers and businesses across the continent.

Using levers of market power that European regulatory and legislative institutions unwisely gave it over the prior two decades, with the cooperation of Europe’s member state natural gas companies, Russia manipulated exports to Europe in the late 2021 run-up to its invasion of Ukraine. That manipulation has not only caused panic pricing of Russian supplies but also for natural gas coming from other countries to Europe.

The spread of panic pricing occurred because purposeful actions in Europe placed most natural gas import pricing on an unstable knife’s edge, institutionalizing the ability of such panic pricing to permeate all energy import prices and disrupt the European energy markets as electricity market models picked up those panicked internal gas prices. Such disruption has caused heavy state subsidization of energy prices throughout Europe, insolvency, the crippling of European exporters including Italy’s highly regarded ceramics industry, nationalization of some energy businesses, and increasing member state abandonment of the European Energy Charter Treaty.

Dr. Makholm notes that regulatory history readily shows how often powerful interest groups hijack industry regulation to protect their members’ short-term interests. The European natural gas disaster illustrates the difficulties of regulating any major continental industry that constitutes, or depends upon, reliable transportation. Dr. Makholm emphasizes that regulation of complex infrastructure businesses in democracies is, and always has been, about collective political action as much as economic efficiency or adequate services to businesses and consumers.

In response to the ongoing European natural gas disaster, Dr. Makholm offers suggestions for the market and supply security problem Europe has failed to correct for the past decade, leading to the current energy crisis.

Makholm, Jeff D. (January, 2023). “The Economics of Protectionism and Panic: The European Natural Gas Disaster 2021—2022 (so far),” Climate and Energy, 39/4, ©2023 Wiley Periodicals, Inc., a Wiley Company.