European Nations Have Boxed Themselves Into A Corner As Trump Warned. Now, They Will Pay for Not Listening.

Guest Post from the Institute for Energy Research.

President Volodymyr Zelensky of Ukraine did not renew a transit agreement that allowed Russia to send natural gas to Europe through a pipeline that crosses its territory. According to some analysts, the pipeline closure could cost Russia about $6.5 billion a year in revenue, possibly affecting Russia’s ability to fund its invasion of Ukraine. Ukraine will lose up to $1 billion per year in transit fees, according to Reuters.

Although Zelensky had already signaled his plans, European energy markets were still surprised. Europe’s benchmark gas prices spiked to levels not seen since October 2023. Following Russia’s shutdown of the supply pipeline on New Year’s Day, natural gas prices in Europe remained near a 14-month high.

The continent is now grappling with an energy crisis, even as parts of the eurozone manage to narrowly avert a recession. By the end of 2024, European gas storage was at its lowest year-end level in three years, and the recent price surge is expected to fuel inflation further and exacerbate ongoing deindustrialization tied to the rising cost and scarcity of energy.

Source: NYT

Europe’s electricity producers depend on natural gas for more than 25% of the region’s power generation. This trend benefits liquefied natural gas (LNG) exporters, particularly in the U.S., the world’s leading supplier. In 2024, the U.S. exported a record 87 million tons of LNG, with companies like Cheniere Energy and Venture Global announcing expansions to their export facilities.

On the final day of 2024, U.S. LNG exports hit an all-time high of 15.2 billion cubic feet and are expected to break further records in 2025, especially with the incoming Trump administration reversing President Biden’s moratorium on new permits—referred to as a “pause”—which is likely to open the door for additional export capacity and higher gas production. U.S. natural gas prices saw their most significant annual increase since 2021 last year, driven by the surge in LNG exports and the completion of projects that began before the Biden administration’s pause.

The closure of transit routes from Russia could push the EU to increase its LNG purchases from U.S. facilities. Former President Trump has urged the EU to buy more natural gas from the U.S. or face tariffs on their exports. On Truth Social, Trump wrote: “I told the European Union that they must make up their tremendous deficit with the United States by making large-scale purchases of our oil and gas. Otherwise, it’s tariffs all the way!”

Such tariffs could substantially impact EU growth due to heightened uncertainty surrounding trade policies. While Europe’s economy is forecast to grow in the coming year, Chief European Economist Sven Jari Stehn has warned there’s a 30% chance of a severe recession. Trump’s tariff threat comes years after he criticized Europe, particularly Germany, for relying too heavily on Russia for energy supplies before the invasion of Ukraine.

According to Goldman Sachs, “Europe’s manufacturing sector also faces structural headwinds. Energy prices have fallen markedly from their peak, but European gas prices remain notably above pre-2022 levels and are materially higher than in the United States. China has emerged as a key competitor to European goods production, gaining material market share in industries that have seen cost increases.”

The EU imported a record amount of LNG in 2024, mainly from Russia. While the EU imports LNG from the United States, U.S. LNG is more costly than Russian LNG. Despite its availability and friendly source, the EU cannot afford to buy more U.S. LNG. Here again, the EU is in a paradox regarding cost. The EU wants cleaner LNG, so it should buy from the United States, which has one of the cleanest environmental quality indexes, but Russian LNG is cheaper.

Background

Many European countries began to reduce their reliance on Russian gas after Russia invaded Ukraine in February 2022. At its peak, Moscow’s share of European gas imports stood at 35 percent but has fallen to about 8 percent.

According to Al Jazeera, the latest contract between Russia and Ukraine for gas transit was signed in 2020, under which Ukraine was paid transport fees. The European Union received less than 14 billion cubic meters of gas from Russia through Ukraine as of December 1, down from 65 billion cubic meters per year when the contract began in 2020.

The gas was sent through the Soviet-era Urengoy-Pomary-Uzhgorod pipeline from Siberia through Sudzha, a town in Russia’s Kursk region, now under the Ukrainian military’s control. The gas is shipped via Ukraine into Slovakia, and then the pipeline splits into branches, which take the supply to the Czech Republic and Austria.

Russia, which has transported gas to Europe via Ukrainian pipelines since 1991, says EU countries will suffer the most from the supply shift. Russia still uses the TurkStream pipeline via the Black Sea to export gas. The pipeline has two lines, one feeding the domestic market in Turkiye and the other supplying central European customers, including Hungary and Serbia. TurkStream has a limited annual capacity of 31.5 billion cubic meters for both lines combined.

Source: Aljazeera

Conclusion

President Zelensky did not renew the natural gas pipeline contract that sends natural gas from Russia through Ukraine to Europe. The supply cut-off has raised European natural gas prices to a level last seen in October 2023.

The EU has been purchasing LNG to supplement its pipeline gas imports from Norway and Russia, with most LNG purchased from Russia. President-elect Trump has threatened Europe with tariffs unless they buy more oil and natural gas from the United States. However, LNG from the United States is less affordable than that from Russia.

Since the EU is focused on clean energy, it should buy LNG from the United States, which has a higher environmental quality index than most competitors. This is in keeping with Trump’s general theme that NATO partners should abide by their commitments to contribute more towards their collective obligations regarding mutual defense, which LNG purchases from the United States would assist in doing.

#EU #LNG #Trump #Gas #Ukraine #Tariffs #Exports #NaturalGas