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American LNG was a real salvation for Germany after the European Union decided to reduce its purchases of Russian gas to the maximum extent possible after the start of the conflict in Ukraine and to completely abandon it by 2027. Of all European countries, Germany, the main buyer of energy from Russia for many years, has seen the most significant reduction. If earlier Berlin’s dependence on Russian gas reached 55% of Germany’s total energy imports, a year ago the share of this gas in German imports had dropped to 20%. Therefore, American gas, which replaced Russian gas, turned out to be a real salvation for European economies – and especially for the German economy. After all, Europe has always realised that dependence on Russian supplies creates a dangerous dependence on Moscow’s mood swings and political interests. But is Germany now secure from a repetition of such a scenario, if it relies only on Washington’s support?
Hurricanes in the Atlantic and turbulence in Washington
In a very short time, the US has gained a significant share of Germany’s LNG supply. According to the industry association BDEW, US LNG accounted for almost 85% of German LNG purchases at the end of 2023. This share is expected to increase even further because it will take a long time for Germany to fully replace the previous large-scale pipeline gas supplies from Russia.
Such significance for European and, in particular, German consumers is a huge success for the US, which started exporting its shale gas only recently, in 2016. There is therefore no doubt that the US economy has benefited from the current situation in Germany. However, will Berlin benefit from the new energy partnership?
One of the problems of the new US–German co-operation, according to experts, is that Germany does not receive US gas under long-term contracts like other countries – Japan in particular – but buys it on the spot market. While long-term contracts guarantee regular deliveries at contractually fixed prices, the spot market is volatile, so buyers there are more dependent on fluctuations in global sales, notes Massimo Di Odoardo, vice president of gas and LNG research at Wood Mackenzie. He warns of a risk of energy bills in Europe rising sharply again, and links this to spot purchases meaning that LNG can be diverted to the highest bidder. Di Odoardo points out that if increase in Chinese demand exceeds expectations or Japan’s nuclear phase-out prompts it, more US gas could be delivered to Asia than Europe. For consumers in Germany, this could lead to further increases in energy costs, and for the national economy, to lower growth and stagnation.
Another problem is that there could be too many virtually unpredictable obstacles in the path of LNG from the US to Germany. Berlin’s decision to phase out Russian gas and replace it with US gas still does not guarantee stable supplies, as there are several factors that could jeopardise them. These factors can range from hurricane seasons in the Atlantic to political games in Washington. An example of this is US President Joe Biden’s decision to suspend issuing licences for the development of new LNG fields.
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Therefore, doubts have long been expressed as to whether reorientation towards US LNG will solve all of Germany’s problems. As early as January 2023, Investigate Europe researchers warned that LNG imports from the US would create a new dependency to replace dependence on gas from Russia, with all the same complications.
The future of Germany’s relationship with the US
The moratorium on licences imposed by Joe Biden in January, which was motivated by the demands of environmental organisations, has made it clear that Germany’s reliance on US gas carries serious risks for its own consumers. Even the timeframe of this moratorium is not yet clear. According to experts, the suspension of licence approvals could last at least until the end of 2024. The moratorium imposed, they note, was not agreed by Washington with either Berlin or its other closest European partners.
The US decision predictably provoked a negative reaction in the German Bundestag. Thus, members of the faction of the right-wing Alternative for Germany (AfD) party sent a parliamentary enquiry to the federal government. “A US moratorium on the export of liquefied natural gas could seriously hit European gas consumers and thus gas supplies to the Federal Republic of Germany. According to the American industry association Center for LNG, the energy supply of LNG calls into question the reliability of the US itself,” the request reads.
In turn, MP Steffen Kotre warned that the current situation calls into question the reliability of the US as an LNG supplier for Germany. “The current US president is putting the eco-socialist ideology of climate hysteria above reliable international trade relations,” he said. However, at least as of now, Berlin will not go back to buying gas from Russia, no matter how cheap that option may seem.
The validity of German parliamentarians’ negative reaction to the US moratorium is confirmed by Charlie Riedl, the executive director of the Centre for LNG, a liquefied gas trade association. He characterises the US presidential administration’s decision to postpone authorising additional LNG exports unnecessarily as an undoubted matter of concern for America’s allies, and raises the theoretical possibility that this could compel those allies to turn to ‘rogue players’ such as Russia for LNG supplies.
Risks to the German economy
However, unstable supply is not the only potential complication that Germany may face if it relies on US LNG. The current situation is likely to have a negative impact on Germany’s industrial potential and its entire economy, warn experts and politicians alike.
One of the reasons for this is the very high price of US gas, which will cause a lot of complications for the European and, in particular, for the German economy. French Economy and Finance Minister Bruno Le Maire has already accused Washington of seeking to make money out of its partners. According to him, the Americans sell their LNG to European companies at a price “four times higher than the price at which they sell gas at home”.
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Several German politicians note that this situation has become one of the reasons for the sharp rise in energy prices. And this entails a “threat of deindustrialisation” for Germany and could deal “a serious blow to its economy”.
The negative effects of the new dependence on US LNG are already being felt by German industry. The chemical industry is in a deep recession that was partly caused by the loss of cheap Russian gas, which is an important raw material for fertilisers and a source of energy for heavy industry. As Bloomberg notes, the chemical industry in Germany is under recessionary pressure precisely because of the loss of cheaper Russian gas. Even when the cost of gas on world markets has fallen, the agency emphasises, German industrial companies have had to cut jobs. It turns out that by buying US LNG, Germany is essentially investing in US production capacity. This paints “a bleak picture for Europe’s largest economy,” Bloomberg said in an analytical report.
Ogan Kose, managing director at consulting firm Accenture, explains that the cost of LNG for Europe’s chemical industry is nearly three to four times that paid by US consumers and compares the price of European spot purchases with forward prices in the US.
Germany confirms these discouraging assessments. The German Institute for Economic Research (DIW Berlin) points out that whereas the US economy grew surprisingly strongly by 2.5% in 2023, the European economy, by contrast, remained flat due to extremely high energy prices and a restrictive monetary policy. With its 0.5% growth, the eurozone made a minimal contribution to global economic growth in 2023. As far as Germany itself is concerned, the negative effects of sharply rising fuel costs were even stronger there. In the first quarter of 2024, experts from DIW Berlin point out, the stress factors for the German economy remain unchanged, so its output is expected to fall by an additional 0.1%. This means that the German economy will record a decline for the third consecutive quarter.
Sanctions for the German economy?
All of this – from the further LNG import contracts in Germany being called into question as a result of the licence moratorium to the strain that the German economy is bearing as a result of the US choosing to be a near-monopoly supplier of this fuel – suggests that Washington’s gas policy for Germany has become, in effect, a sanctions policy.
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As a result, under the conditions of a difficult macroeconomic environment, the chances of the German industrial sector maintaining its competitive advantages are levelled, and the prospect of partial deindustrialisation of some of the country’s key industries is becoming more and more real. It is unlikely that the US intended to create this situation by putting Germany on the hook for LNG. However, it is clear that this side effect will surely be welcomed by Russia, which would likely be inclined to return to the European gas market after the end of the war in Ukraine.
German businesses have shown flexibility and German citizens self-discipline by responding to the government’s calls to start saving energy, especially gas. However, these savings have been achieved in part because the country’s energy-intensive industries have cut back on production. Together with record inflation, which has reduced consumer and investment activity, this is increasingly threatening to send Europe’s leading economy into recession. And the government’s ability to improve the situation remains very limited.