Europe is heading toward another difficult winter for its energy system, but this time the problem comes at a particularly sensitive moment. European natural gas prices have more than doubled over the past year, driven by disruptions linked to the Iran war and the prolonged closure of the Strait of Hormuz.
Benchmark European gas prices reached €75 per megawatt hour, their highest level since late 2022, when Russia’s invasion of Ukraine triggered a major European energy shock. The difference now is that Europe is simultaneously trying to strengthen its defence capabilities, compete with China, and close the gap with the United States and China in artificial intelligence.
The immediate question is whether Europe will have enough gas to get through winter. The larger economic question is whether it can afford the gas it needs.
Europe Enters Winter With Weak Gas Reserves
European gas storage facilities are currently around 66% full, the lowest level for this point in the year in 15 years and about 12 percentage points below last year.
Stay ahead of the geopolitical week.
MD Briefing delivers expert analysis across five global fronts — the Indo-Pacific, energy, geoeconomics, European security, and the Middle East — every Monday morning. Free.
Storage normally peaks around early November. Last year, European inventories reached 83%, equivalent to around 85 billion cubic metres. This year, estimates suggest storage could peak at only 70% to 75%.
The situation is particularly concerning in Germany and the Netherlands. Germany’s storage facilities are only 54% full, while Dutch facilities are at 48%.
That leaves Europe’s largest economies more exposed to spot LNG purchases and pipeline imports as winter approaches. If countries need to compete more aggressively for available supplies, prices could rise further.
Why the LNG Shortage Could Persist
The central problem is the disruption to Middle Eastern LNG supplies.
LNG exports from the Gulf, mainly Qatar and the United Arab Emirates, fell by more than 85% between March and August compared with the previous year. With shipping through the Strait of Hormuz still constrained, there is little indication that these supplies will return quickly.
QatarEnergy has already extended its force majeure suspension on LNG deliveries until early November.
But Europe is not facing the kind of complete LNG supply collapse seen during the worst moments of the 2022 crisis.
Rapid production growth in the United States and Canada has provided an important buffer. LNG production outside the Gulf increased by 18%, or around 27 billion cubic metres, in the year to June, offsetting roughly three quarters of the Middle Eastern losses.
That explains why European gas prices remain painful but are still far below the extraordinary levels of 2022, when they briefly exceeded €300 per MWh.
The Real Problem Is the Cost
Europe may therefore be able to secure enough gas to avoid an immediate physical shortage. But securing supplies could come at a considerable economic cost.
Europe’s gas import bill already reached €117 billion in 2025, despite consumption remaining around 17% below pre-crisis levels.
With prices now significantly higher, Europe’s import costs are likely to rise again.
This creates a difficult policy problem. Governments can attempt to intervene in the market, but previous interventions, including Germany’s, have sometimes distorted incentives and delayed storage refilling.
At the same time, reducing dependence on gas through renewables and nuclear power cannot happen quickly. It requires years, and in some cases decades, of investment.
Europe Cannot Easily Repeat the 2022 Response
Another major difference from the previous energy crisis is Europe’s fiscal position.
Governments previously responded to soaring energy prices with massive subsidy programmes designed to protect households and businesses.
Repeating that approach would be difficult.
Higher gas prices therefore risk being transmitted directly into the wider economy, particularly energy intensive industries. Manufacturers will have to either absorb higher costs and accept lower profits or pass those costs to consumers and risk becoming less competitive.
Either outcome creates economic pressure.
The Worst Possible Timing
The energy crisis is arriving at precisely the moment Europe is attempting to pursue several expensive strategic objectives simultaneously.
The continent is increasing defence spending amid rising tensions with Moscow and pressure from the Trump administration to take greater responsibility for its own security.
European governments are also trying to expand production of ammunition, military equipment and defence technologies.
At the same time, Europe is attempting to catch up in the global AI race.
That requires enormous amounts of electricity because data centres are highly power intensive. Expanding AI infrastructure therefore increases Europe’s need for reliable and affordable energy at the same time that energy prices are rising.
The third challenge is industrial competitiveness.
European manufacturers are already struggling against lower cost Chinese competitors. The automobile industry provides a particularly visible example, with Volkswagen recently announcing the largest restructuring in its 89 year history.
Higher European energy costs could widen that competitive gap.
The China Problem
Energy costs are particularly important because Europe’s economic competition with China is not taking place on a level playing field.
Chinese manufacturers already benefit from lower production costs in several sectors. If European companies face substantially higher electricity and gas prices, their ability to compete becomes even more difficult.
Companies then face two choices: absorb the additional costs and sacrifice investment, or increase prices and risk losing market share.
That means an energy shock can eventually become an industrial competitiveness problem.
Europe’s Strategic Ambitions Are at Risk
This is where the gas crisis becomes more than an energy story.
Europe wants greater strategic autonomy. It wants to strengthen its defence capabilities, develop its own AI infrastructure and maintain a competitive industrial base.
All three require enormous investment and reliable energy.
A prolonged period of expensive gas and electricity could therefore work against these ambitions by increasing production costs, reducing corporate investment and placing additional pressure on government budgets.
The irony is that Europe needs to spend more precisely when higher energy costs are making that spending more expensive.
Key Stakeholders
European governments: They must balance energy affordability, fiscal constraints and security of supply without repeating the distortions associated with previous interventions.
European Commission: The Commission says there is currently no immediate risk to security of supply this winter, shifting attention toward the economic consequences of elevated prices.
Germany: As Europe’s largest economy and the holder of the region’s largest gas storage network, Germany is particularly exposed to low inventories and high energy costs.
Qatar and other Gulf LNG producers: Their disrupted exports remain central to the global supply situation.
United States and Canada: Growing LNG production outside the Gulf is helping compensate for lost Middle Eastern supplies.
European manufacturers: Energy intensive industries face the direct economic consequences of higher gas and electricity prices.
China: European manufacturers are already competing with Chinese companies, making Europe’s energy cost disadvantage strategically important.
What’s Next
The immediate focus will be on how much gas Europe can add to storage before winter and how much it will have to pay for additional supplies.
If Hormuz disruptions continue, European buyers could face sustained competition with Asian importers for LNG.
The bigger issue will emerge after winter.
Even if Europe avoids a physical shortage, prolonged high energy prices could weaken industrial investment, increase production costs and further undermine European competitiveness.
Analysis
Europe’s gas problem is increasingly becoming a competitiveness problem rather than simply a supply problem.
The continent may have enough LNG and pipeline gas to keep homes and businesses operating through the winter. But that does not mean the economic consequences will be limited.
Europe is trying to rearm, build AI infrastructure and protect its industrial base while competing with China. All of those ambitions require capital and affordable energy.
The danger is therefore not necessarily that Europe runs out of gas.
It is that Europe pays too much for it for too long.
That could force governments to divert money toward energy costs, push manufacturers to absorb losses or raise prices, and make European industry less competitive just as the continent is trying to rebuild its economic and strategic strength.
The European Commission may be right that there is no immediate threat to winter energy security. But the deeper question is whether Europe can maintain its ambitions in a world where energy has become structurally more expensive.
Europe may get through the winter. The bigger question is what the winter will leave behind.
With information from Reuters.
