Europe’s industrial sector could be wiped out by the energy crisis

Rising energy prices

As we enter in the second year of record-high energy prices in Europe, it is increasingly obvious that the industrial sector’s energy demand is starting to crumble. The IEA estimated that gas demand in key European countries dropped by a whopping 30 percent in August 2022. There is hardly any reason to rejoice that we are finally starting to achieve the much-needed energy demand reductions that were called for in the Save gas for a safe winter – that demand and its corresponding industrial output may never come back.

Impact on industry

Europe is facing both a gas and a power crisis and many industries have to face significantly higher energy costs. After one year of high prices, any solution that would preserve industrial activity – energy efficiency, switching to cheaper refined products – is likely to have been largely used. What we are seeing now with fertiliser producers such as Yara reducing their output, aluminium factories (Norsk-Hydro) closing down is pure demand destruction. It reflects the impossibility for these companies to either fully pass through their costs or remain competitive in global markets.

But the worst may be still to come: Europe’s industry will likely face the double whammy of sustained high energy prices and energy supplies cuts. As Russian gas pipeline supplies have reached an historical low, governments are putting pressure on all users to reduce their consumption. To protect vulnerable consumers, the industrial sector will be the first to be cut in case of shortage. There is no immediate solution to Europe’s energy supply issues – additional gas and LNG supplies, alternative energies will likely take years to come to the market in significant quantities. The gas supply picture looks brighter only post 2025. One can wonder how the industry could survive three years of high energy prices and supply cuts.

The role of alternative energy

Moving to alternative energies – such as hydrogen – has been earmarked as a solution. But again, time is of essence. Hydrogen won’t be ready immediately. Europe has not even finalised its regulatory framework, leaving many investors in the dark and moving slowly forward. Ironically, while industry was expected to be a pillar of future hydrogen demand, there might not be that much left to decarbonise.

Not many outside of Europe will shed a tear on the fate of Europe’s industry. Russia – which is raging an economic war against Europe – will certainly exult. China will continue to try to dominate existing and new sectors – reshoring critical industries such as batteries and electrolysers won’t work for Europe if there is no energy to power these installations. The Middle East, getting record oil and gas revenues, will seek to expand its industrial base and export hydrogen-based clean products in the future. Even Europe’s ally – the United States – will benefit from its abundant and cheaper energy sources.

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