Citizens of both the U.S. and Europe are complaining about high energy prices to the point of political consequences and even civil unrest. There’s no mistaking a growing impact on supply chains — including increased costs in transportation, but also in manufacturing, which relies on oodles of fossil fuels and other forms of energy. Since mankind first harnessed the power of fire, fuel prices have affected everything. They’re certainly responsible for the lion’s share of current inflation rises across the globe. It’s tempting to think we’re all in the same boat.
But don’t be fooled — these two giants of the world economy may well be on very different economic paths, and the key is the price of energy. In short, the U.S. has secure access to cheap energy and Europe does not.
Right now, a gallon of gasoline in the U.S. is hovering around $4 per (U.S.) gallon, compared with just under $7 per gallon in the U.K. (let’s pretend the U.K. is in Europe for the duration of this article) and up to $8 in Northern European countries such as Denmark. Domestic electricity charges in Europe, from whatever source, show an even greater disparity. The household cost for a kilowatt-hour (kWh) in the U.S. is currently just over $0.16, and $0.32 in Spain. A reporter for the New York Times living in Belgium remarked during a podcast October 24 that her heating bill had increased three-fold over the last year.
While the cost of natural gas in Europe has fallen temporarily — mostly because of a loophole in sanctions that allows the import of (frozen) liquefied natural gas (LNG) from Russia — the prospects for Europe are grim. Led by Germany, which signed off on the ill-advised Nordstream I and II projects that made it critically dependent on Russia for affordable natural gas supplies, European nations have essentially given up the idea of being energy independent. Hydro-electric and wind energy projects just don’t fulfill their energy needs, and most countries abandoned nuclear power more than a decade ago.
The U.S., by contrast, is energy-rich, almost to the point of independence. Not only does it have a fulsome domestic supply of natural gas (albeit obtained through environmentally questionable means such as fracking); it also imports the majority of its gasoline from nowhere near politically dodgy allies such as Russia or even the Middle East. As of 2021, Canada provided 51% of U.S. gross total petroleum imports and 62% of gross crude oil imports. Next up are Mexico, at 8%, Russia at 8%, and Saudi Arabia at 5%. Most importantly, the U.S. is home to a huge capacity to refine crude oil into petroleum. In fact, the United States was a total petroleum net exporter in 2020 and 2021, according to the U.S. Energy Information Administration. That gives it extra leverage in the world energy market.
It is therefore perhaps no surprise that historian Tom Holland argued during a recent episode of The Rest is History podcast on the precipitous fall of short-lived U.K. prime minister Liz Truss, that Europe and the U.S. may be about to pull apart, economically, in a dramatic way. He reflected that, when the global economy became centered on oil rather than coal, the whole picture changed.
Oil overtook coal to become the world's largest energy source in 1964, with oil-rich nations such as Saudi Arabia emerging as the power brokers. But — the odd hiccup aside — international oil markets have been relatively peaceable up until now, masking Europe’s weakness. Furthermore, natural gas is now a major source of energy, and Russia — rapidly becoming a trading pariah — is still the king of that resource.
Holland’s co-host, Dominic Sandbrook, speculated that Western Europe would be “even more at the receiving end of globalization than in the 1970s and 1980s, and that communities in Britain that have become very dependent on foreign investment or on cheap manufacturing abroad… are going to face some pretty tough winters with energy becoming more expensive.”
“Essentially, it is more expensive for Europeans to make things,” Holland said, “because our energy is more expensive than it is for Russia or the United States. And we’re definitely back in that situation now.”
This observation should send a chill down the spines of industry leaders who rely on European manufacturing and have even doubled down on it since labor costs have risen in Asia, and political spats with China increased. Already, Volkswagen announced in September it is exploring ways to help its broad supplier network in Europe counter a shortage in natural gas, including making more parts locally and shifting manufacturing capacity. At the same time, Mercedes-Benz said it has been working to identify Germany-based suppliers that would be at risk in a gas-rationing scenario and is in talks with them about shifting production to locations outside of Germany. But the risk is not just from rationing: it is from cost, plain and simple.
“Is there a risk now, not just for Britain, but for the whole of Europe, that we’re going to go through a process of de-industrialization bred by the brute fact that we have less cheap energy than, say, the Americans do?” Holland asked.
“The United States is in a good position, because it’s energy rich, and its energy is cheap. Ours is very expensive,” Holland continued. “Conventionally, we like to think that all the West is in it together, that what happens in America is basically reflected in Europe. But… America and Europe may be going on radically different parabolas. If you have cheap energy… then your economy will grow. If you don’t, it will decline.”
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