Embrace the new reality: showering at work, limited oven use, no ironing…
This is what many Europeans may have to deal with this winter.❄️
As European gas and electricity prices skyrocket, millions of people are now forced to spend a large chunk of their income on energy.
According to Goldman Sachs Research, a typical European family could face energy bills of €500 per month by early 2023, up 200% from 2021!
💡In this article, we explain:
- Why energy costs are rising in Europe
- What the energy crisis means for the economy
- How it can affect your savings
Let’s take a look.
Energy prices in Europe: what's happening?
Looks like there may be an “eat-or-heat” situation brewing in Europe as high energy prices have started to disrupt people's lives.
In the U.K., energy bills are expected to rise by 80% from October to 3,549 pounds on average. Gas, electricity, and domestic vehicle fuels will cost Britons about 10% of their household income this winter, twice as much as in 2021, according to Carbon Brief's calculations of official data.
The average Italian family's energy bills have risen to 5% of total household expenses, up from 3.5% in 2019. In Germany, gas bills more than doubled from 2021.
🤔 The numbers tell quite a story, right?…
Apparently, the current energy crisis is more serious than those of the 1970s and 1980s. The 1979 Iranian revolution and an oil embargo caused blackouts and long queues at petrol stations in the West, but the situation was not as bad as today.
Take a look at the graph below:
As you can see, gas prices in most top European economies in early 2022 surpassed the peak of previous crises in the 1970s, 1980s, and 2000s, according to the data provided by the International Energy Agency (IEA).
And there are fears that things will only get worse.
So what caused Europe’s energy crisis?
For the most part, Europe’s power prices have skyrocketed for three reasons: the aftermath of the Covid-19 pandemic (do you still remember it?🙃), the war in Ukraine, and extreme drought.
Let's take a closer look at each one:
- Covid-19: gas prices started going up last year as countries reopened from their pandemic lockdowns, causing a global spike in demand. Power generators that were shut down during the pandemic couldn't ramp up quickly enough to meet this new demand, thus driving the prices up.
- A halt in Russian gas supplies: Russia’s invasion of Ukraine in late February only made things worse. European Union sanctions and Russian retaliation choked supplies of Russian natural gas, which heats buildings and powers generators in many European countries.
As Klaus Muller, head of Germany’s energy regulator, said: “Putin has played everything to the hilt. So every cut in Russian gas supplies has brought us price jumps. That is the price of this war.”
💡Did Russia cut off gas to Europe?
Europe used to get around 40% of its natural gas from Russia.
In early September, Russian state-owned energy giant Gazprom stopped all gas flows through its key Nord Stream 1 pipeline, citing maintenance works.
Some of the Russian gas still flows to Europe through a pipeline passing through Ukraine and Slovakia, and another crossing the Black Sea to Turkey and Bulgaria.
But Russia cutting back gas through the main Nord Stream pipeline was enough to send gas prices sharply higher.
- Drought: Weeks of baking drought this summer brought major rivers across Europe to their lowest levels in years, limiting the amount of river water used for cooling power plants and undermining coal supplies to generators. It's all bad for energy prices.
💡Did you know?
Waterways like the Rhine are used to ship coal into German coal-fired power stations. And French nuclear plants rely on rivers to cool down.
If hydropower, coal, and nuclear production go down, all Europe has left is wind and solar energy, which are both weather-dependent. And, of course, natural gas.
So, the effects of the Covid pandemic, Russia’s gas squeeze, and drought are among the key reasons behind Europe’s energy price spikes.
As a result, European governments are scrambling to find new energy supplies and bring household energy bills down.
The energy crisis will have some major effects on the global economy as well.
How does Europe's energy crisis affect the economy?
This energy crisis impacts more than just your energy bills and energy-intensive industries. It’s also spilling over to food and drink supplies, adding to the supply shortage and sending prices even higher.
Here’s how this energy shock could affect the world economy looking ahead:
Many European countries may see even higher inflation
In 2022, inflation became a global phenomenon.🌍
In the Eurozone, a surge in household energy bills continues to fuel inflation to record highs: in August, it hit 9.1%.
Besides natural gas, gasoline has been a major driver of inflation over the past few months, and it doesn’t look like relief is on the way yet as crude oil prices continue to rise.
💡What's the role of energy in inflation?
Let’s take the U.K. as an example.
In 2021, energy’s contribution to total inflation was around 1.5%. Following Russia's invasion of Ukraine, gas prices rose around 97%, causing electricity prices to rise by 54% as a result. This pushed energy’s contribution to annual inflation to 1.9% in 2022.
The rise in energy prices could drive U.K. inflation up to 18% next year, the highest rate in nearly 50 years, economists say.
Read our SPOTLIGHT to learn more about how rising gas prices are fueling inflation.
In the Eurozone, inflation is expected to hit double digits in the autumn due to higher gas prices, economists have warned:
“The surge in gas prices deals a new severe blow to the European economies. Higher prices for consumers and higher costs for companies will […] worsen the inflation outlook,” said Holger Schmieding, chief economist at financial company Berenberg.
What does inflation mean for your savings?
If you keep your money in a savings account, it essentially means one thing:
Inflation will make your money worth less over time if it's higher than the interest rate on your savings account.
Solution: You can put some of your savings in assets that will hold their value and won’t depreciate with time.
As Warren Buffett says: “If you own one ounce of gold for eternity, you will still own one ounce at its end.”
Although he might have meant this as a joke, for us, it’s actually one of gold’s big advantages compared to bank savings. 😉
Discover more ways to fight soaring inflation in our article: How to Fight Inflation? The Central Bank Edition
Europe could go into recession if the energy crisis gets worse
A recession in Europe is another likely consequence of the energy crisis, in addition to high inflation. Or at least that’s what analysts from BlackRock are saying.
"The energy crunch will drive a recession in Europe, as we've argued since March. The crisis has worsened since then as Russia has halted gas supplies," analysts warned, citing the indefinite shutdown of Russia's Nord Stream 1 pipeline.
Obviously, E.U. leaders think they can avoid recession if they agree on effective measures to reduce energy costs. One such measure was the ECB issuing its first-ever 75-point rate hike in August to control prices. Analysts remain skeptical, though:
"The European Central Bank isn't acknowledging how it will crush activity further by trying to fight high inflation, in our view. We think the ECB will wake up to this sooner than markets expect – but not before it inevitably faces a severe recession," BlackRock said.
💡What does a recession mean for your savings?
During a recession, the economy slows, and businesses often go into survival mode, resulting in cost cuts and layoffs. As a result, you may end up spending your savings sooner than you expected.
Solution: start an emergency fund, pay off your debts, or invest in recession-proof assets such as gold and Treasury bonds.
Here is what else you can do to protect yourself from a possible recession.
So what’s the bottom line?
Europe is now experiencing its worst energy crisis in 50 years.
Covid-19, the war in Ukraine, and Russia's gas squeeze are among the key factors driving up your energy costs. Moreover, skyrocketing energy prices are fueling inflation and could push Europe into a severe recession.
Even though you can't control rising energy prices, there are some things you can do to protect your savings.
Here are a few:
- Track your spending and cut out unnecessary living expenses
- Keep growing your emergency fund
- Start building your gold and precious metals savings
In the end, if your finances are well-protected, the energy crisis and economic downturn aren't as frightening as they seem.🤓