Europe can heave a sigh of relief – for now. Thanks to an exceptionally mild winter and a well-designed strategy of supply diversification and consumption-reduction measures, the continent avoided a catastrophic energy crisis following Russia’s invasion of Ukraine. The European Union’s untapped gas-storage capacity is at around 60 per cent, and the benchmark Dutch Title Transfer Facility (TTF) price has fallen by more than 85 per cent from its peak last August, from €340 per megawatt hour (US$360/MWh) to less than €50/MWh. But there is a risk of significant repricing in the coming months, which would weigh heavily on energy bills. The tightness in European gas markets is likely to become more apparent as summer approaches, possibly pushing prices back towards €100/MWh or higher. The European Central Bank’s fight against inflation is not over. Before Russia’s invasion, European natural-gas consumption amounted to just under 500 billion cubic metres per year. Add today’s stockpiled gas, domestic production and current imports of both natural gas and liquefied natural gas, including from Russia, and you get 440 bcm. Thus, Europe will need to cut consumption or increase LNG imports by 60 bcm to fill the demand-supply gap. But implementing such a strategy is easier said than done. Although Europe did manage to reduce gas consumption to roughly 430 bcm in 2022 (13 per cent below the 2021 level), the unseasonably warm weather played a key role, and there was substantial cross-country variation. Assuming that weather patterns return to relative normality next winter, European governments will need to aim to cut consumption by 10 per cent from their 2021 levels to keep the total below 450 bcm. Though the EU set a voluntary target of 15 per cent last year, that would not have been achieved without the anomalously warm weather. The reduction will come partly from industries such as chemicals, metals and glass, which use natural gas intensively and will have experienced some scarring from 2022. Meanwhile, European firms and households will probably maintain prudent energy-saving practices, and mandated consumption caps, such as for residential heating, are likely to remain in place. If so, 50 bcm of the 60 bcm gap can likely be filled through consumption cuts. The remaining 10 bcm will require Europe to import more LNG from global suppliers. According to the International Energy Agency, global LNG production in 2023 is expected to increase by about 23 bcm. But that means Europe will need to seize almost half of the overall increase. And since it will find itself in fierce competition with recovering Asian economies – not least China – the demand for LNG are likely to push the TTF price above current levels, probably setting a floor at around €80/MWh. The situation will get more challenging if imports of Russian natural gas and LNG are halted completely, which remains a distinct possibility. Overall, these shipments currently amount to around 45 bcm, a mere 20 per cent of their pre-war levels. Combined with the 10 bcm shortfall, this loss of supply would create a gap of around 55 bcm, more than twice as much as the expected increase in global LNG supply. And since only a fraction of Russian gas can be diverted away from Europe and sold internationally, the global LNG market would be severely undersupplied. In this scenario, the TTF price would be pushed well above €100/MWh – more than 10 times its pre-war price – and governments might need to resort to rationing. Moreover, even if there was enough global LNG supply, Europe would lack the necessary regasification capacity . It would need to process around 190 bcm in this extreme scenario, but its current capacity is only around 157 bcm , though more facilities are under construction. If the consumption cuts were lower than 10 per cent, the gas shortages would be significantly higher, creating even more intense upward price pressure. That said, natural gas prices in Europe are not likely to exceed €200/MWh for three reasons, beyond the fact that the EU has a €180/MWh price cap. First, high prices last year were partly due to the lack of preparation for such an unprecedented shock. Compared to a year ago, Europe is in a much stronger position to deal with gas shortages. Second, joint purchases of natural gas at the EU level will help control prices. Third, the EU is in the process of introducing its own price benchmark for LNG contracts. Currently, LNG prices in Europe are pegged to the TTF price, which is directly influenced by disruptions to the flow of natural gas to the continent. The new benchmark will make LNG prices in Europe more responsive to dynamics in the global LNG market than to natural-gas deliveries through pipelines. No coal comeback: Europe’s renewable energy transition is in hyperdrive Although Russia’s role as a gas supplier to Europe has been reduced substantially , its shipments will remain essential for balancing supply and demand in the European market until new regasification capacity is built, or until alternative energy sources are brought online. LNG is undoubtedly more important in Europe’s energy mix than it was just a few years ago, but there are limits to the relief it can provide. Consumption cuts and solidarity mechanisms (in case of extremely low supply) will remain necessary to avoid an energy crisis next winter. Edoardo Campanella, senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School, is co-author (with Marta Dassù) of Anglo Nostalgia: The Politics of Emotion in a Fractured West. Copyright: Project Syndicate