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The Easing of Restrictions in China Means a Colder Europe

Staff writer Mehmet Temur examines the energy-supply consequences of China’s pandemic-related rules being relaxed. He suggests that while Chinese production might be expected to ease inflation, rising gas demand signals an upcoming crunch for Europe.

It has been more than a year since almost all pandemic-related restrictions have been lifted across the world. Trade has been normalised and supply chains have become smoother. But there is a notable exception from this trend: China. The Chinese Communist Party (CCP) decided to keep many of the restrictions and institute a ‘zero-Covid’ policy. The aim was to eliminate Covid-19 entirely from the country – a strategy which ultimately failed. Furthermore, these restrictions heavily impacted China’s economic prospects. While the official 2022 target of the Chinese government was 5.5% GDP growth, estimates put the real figure at only 3.2%.

Then the protests started. These were the largest since the Tiananmen Square protests in 1989 and even threatened the rule of Xi Jinping. In the end, having little choice, Beijing announced the lifting of the vast majority of the restrictions. While this is good news for supply chains, expecting inflation to immediately come down as a consequence would be a mistake.

The Approaching Crisis

Basic economics would tell you if the supply increases and demand stays the same, inflation would decrease. Therefore, some might expect that the easing of restrictions in China, a major manufacturer, would bring down global inflation. However, it is important to highlight that China is also the largest consumer of natural gas

After the invasion of Ukraine, Europe has imposed heavy sanctions on Russian businesses. This significantly increased natural gas prices in the region; before the war, Europe imported over 40% of its natural gas from Russia. To solve this problem, and reign in one of the largest contributors to high inflation, Europe turned to Liquified Natural Gas (LNG). This made the competition for LNG so intense that at one point an American LNG tanker ship, Minerva Chios, turned to Europe from near India without offloading any of its cargo, due to European outbidding. Thanks to the diversification efforts like this, and with China being under lockdown, natural gas prices have since fallen to roughly pre-war levels.

Yet that was before China began to lift restrictions. These restrictions had previously caused LNG imports to decrease more than at any other time. The reopening of China, the largest importer of LNG, means the competition will become even more intense. This would be nothing short of catastrophic for Europe. If nothing is done, it is expected that the Europe may have to introduce gas rationing in the near future. Obvious economic consequences aside, this may lead to thousands being unable to sufficiently heat their homes next winter, in the midst of an ongoing cost-of-living crisis. Can Europe prevent this doomsday scenario?

Possible Solutions

The key is to start the preparations for next winter as soon as possible. It is true that last year Europe prepared for the upcoming winter very well. However, many of the favourable factors which Europe enjoyed this winter, including warmer-than-usual weather and the absence of China in the international markets, are unlikely to repeat themselves. Consequently Europe must accelerate diversifying its natural gas sources and increase LNG imports from other countries, such as Australia. Apart from that, it must build more LNG terminals as a shortage has limited imports. This is especially crucial as LNG must be regasified before its use; if you physically cannot use it, then how much you can pay is meaningless.

Currently, Spain leads Europe in terms of LNG-import capacity, but as there is no pipeline between the Iberian Peninsula and the rest of Europe, it cannot directly export any to other European countries. Originally, the plan was to address this issue by building a pipeline connecting Spain and France, but this project was cancelled due to the French government’s financial concerns.

While it is unlikely to help alleviate the European energy crisis in the short-term due to the construction time, a pipeline between these two countries could be a major step towards diversification, even enabling Europe to import from sub-Saharan countries within a decade. Considering that there is no end in sight to the Ukrainian War, Europe must invest in long-term solutions like these as well as out-bidding its rivals in the immediate. Otherwise, it will have to fight – and pay a premium – for every drop of LNG to even meet the basic needs of its citizens.

While many hoped that the reopening of China might ease the supply-chain problems of Europe and bring down inflation, it is important to remember that the end of restrictions will increased demand for, and the price of, energy. Considering the choking-off of Russian supply, this could lead to a worsening of the cost-of-living crisis in Europe where already many cannot afford to heat their homes. As such, it is of utmost importance that European states accelerate the diversification of their gas supplies. Winter is nearly over – time to start getting ready for the next one. Investment in long-term projects must be part of the effort to alleviate the crisis; if you live like there is no tomorrow, there will be no tomorrow.

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