Expert insight

Europe's energy woes could spill over to the global economy

August 18, 2022

Jumana Saleheen, Ph.D.

Vanguard European Chief Economist

Eliminating Russian oil and gas would create a huge supply shock
The top three oil producers are the United States, 20%; Russia, 11%; and Saudi Arabia 11%. The top three natural gas producers are the United States, 21%; Russia, 15%; and Iran, 6%.
Recession triggers
Economic outlook for euro area based on different scenarios for Russian gas exports
The base case scenario shows Nord Stream 1 gas flows of 30% to 60% of normal over the second half of 2022; projected average prices of 125 to 175 euros per megawatt-hour for natural gas and $90 to $130 per barrel in U.S. dollars for Brent crude oil; Euro area GDP growth of 2% to 3% for 2022 and 0.5% to 1.6% for 2023; and Euro area inflation of 8% to 8.5% in 2022 and 4% to 4.5% in 2023.  The downside scenario shows Nordstream 1 gas flows of 0% to 30% of normal over the second half of 2022; projected average prices of 175 to 250 euros per megawatt-hour for natural gas and $100 to $150 per barrel in U.S. dollars for Brent crude oil; Euro area GDP growth of 1% to 2% for 2022 and -0.5% to 0.5% for 2023; and Euro area inflation of 8.5% to 9% in 2022 and 4.5% to 5% in 2023.  The upside scenario shows Nordstream 1 gas flows of 60% of normal over the second half of 2022; projected average prices of 75 to 125 euros per megawatt-hour for natural gas and $75 to $100 per barrel in U.S. dollars for Brent crude oil; Euro area GDP growth of 2.5% to 3.5% for 2022 and 1% to 2% for 2023; and Euro area inflation of 7.5% to 8% in 2022 and 3.5% to 4% in 2023.
Spillover effects for the global economy
The spillover from EU natural gas prices is highest in Europe and Asia
Compared to Euro area natural gas prices, the correlation of U.K. natural gas is 0.9; Asian liquefied natural gas, 0.8; coal, 0.7; wheat and Brent crude oil, 0.3 each; iron ore and West Texas intermediate crude oil, 0.2 each; and U.S. natural gas, 0.1.  Compared to U.K. natural gas prices, the correlation of Asian liquefied natural gas is 0.8; coal, 0.6; wheat, 0.3; Brent crude oil and iron ore, 0.2 each; and West Texas intermediate crude oil and U.S. natural gas, 0.1 each.  Compared to Asian liquefied natural gas prices, the correlation of coal is 0.; wheat, Brent crude oil, iron ore, and West Texas intermediate crude oil, 0.2 each; and U.S. natural gas, 0.1.  Compared to coal prices, the correlation of wheat, iron ore, and West Texas intermediate crude oil is 0.2; Brent crude oil, 0.4; and U.S. natural gas, 0.1. Compared to wheat prices, the correlation of Brent crude oil and West Texas intermediate crude oil is 0.4 each; iron ore, 0.3; and U.S. natural gas, 0.2. Compared to Brent crude oil prices, the correlation of iron ore is 0.3; West Texas intermediate crude oil, 0.9; and U.S. natural gas, 0.2. Compared to iron ore prices, the correlation of West Texas intermediate crude oil is 0.3; and U.S. natural gas, 0.1. Compared to West Texas intermediate crude oil prices, the correlation of U.S. natural gas is 0.3.
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