How dependency keeps energy trade afloat

Published on: 7 June 2023

Deglobalization? According to APG’s chief economist Thijs knaap, slowbalization is more of a thing. The question is whether this trend can be observed in all sectors in which APG is active. Like the energy market. Things are a bit more nuanced there, according to Martijn Olthof (Expert Portfolio Manager Energy Transition at APG). “It’s very much an international trade.”

In summary
• Europe in particular, and to a lesser extent China, still depend on other countries for their energy supplies. As a result, international trade in energy is still essential.
• The Inflation Reduction Act seems to have given the US a lead in terms of investments in the energy transition. This also seems to be the only development that indicates slowbalization of the energy trade.
• The transition is making Europe less dependent on foreign energy than it was in the era of fossil fuels.

The economic trading blocs of China, the United States and Europe seem increasingly self-absorbed. It seems, judging by figures on world trade, that there’s no talk of deglobalization (yet). However, the globalization trend has lost momentum. This applies only to a limited extent to international trade in energy. Just after COVID-19 shut down a large portion of supply chains from China, the Russian invasion of Ukraine and President Biden’s Inflation Reduction Act ensued. “These are factors that require more self-sufficiency in several areas, but in the energy sector – certainly in Europe – that’s not fully feasible,” says Olthof.


The war in Ukraine forced Europe to face the facts: the continent had become too dependent on relatively cheap energy from Russia. “Still, the idea that Europe could become completely self-sufficient in terms of energy is a total utopia. So, when the gas supply from Russia was lost, Europe had to get its energy from somewhere else. This ended up being mainly liquefied natural gas (LNG), primarily from the United States and Qatar. And while Moscow was looking for other markets for its oil, Europe also started hunting for alternatives for that energy source. Russia now exports its gas and oil to India and China, and Europe gets its energy elsewhere. So it’s still very much an international trade.”

However, more and more countries are striving to become more autonomous in their energy supply and make it more sustainable. For example, the European Union is emphatically looking at hydrogen. “Brussels has ambitions to produce hydrogen in Europe but there are also big plans for importing this fuel. For instance, the production of green hydrogen requires solar energy, which is easier to generate in North Africa or Middle Eastern countries than in the Netherlands or England. We don't have that much solar energy here. That’s why there’s a plan to set up solar and wind farms in Morocco and to transport the energy generated there via a gigantic cable to Spain, France and England. There are also plans to produce hydrogen in North Africa, the Middle East or Australia and then transport it to Europe. Both of these options are very expensive, though.”


Europe isn’t the only one that imports large amounts of energy; China also does. “China itself has a large stock of coal, but they also import it, just like gas and oil.” The country is at the base of the supply chain for batteries that store electricity. “We’ll need a great deal more of these in the coming years. So, Brussels has plans to start production of these batteries in the EU as well. This indicates that Europe wants to become more self-sufficient in its energy. The same can be said for Europe’s ambition to produce hydrogen. But for now, those plans are a drop in the ocean compared to what Europe imports in energy.

The Inflation Reduction Act has put the EU at a disadvantage

And then there’s the United States. About ten years ago – with the discovery of shale gas and shale oil – it became much less dependent on other countries for its energy. “Biden’s Inflation Reduction Act, which limits subsidies only to companies if they produce in the United States themselves, can be seen as an example of slowbalization. Thanks to the subsidies provided for by that law, it becomes more attractive for investors – including non-Americans – to invest money in energy transition projects in the US.” So European politicians were wary that a lot of capital would flow to the US. Then Brussels came up with solutions like the Net-Zero Industrial Act, which is aimed at boosting the competitive position of European companies.


Olthof feels that the fears in Europe are at least partly justified. “Subsidies in the US are better and it’s easier to get permission to build there. There are now seven hydrogen projects in the Netherlands that have received approval for subsidies from Brussels, but so far only one of those projects has begun construction. The rest are still waiting. This is partly because we still don’t know what the hydrogen market and related policies will look like. Is the necessary infrastructure ready and will the Dutch government issue the permits on time? And will construction be allowed in view of the nitrogen issue?”

The process is moving faster in the US, and, in that sense, the Inflation Reduction Act has put the EU at a disadvantage, Olthof continues. “Every effort’s being made to catch up, but it’s proving difficult, not least because so many countries have to work together within the EU. Europe must act quickly, or it will miss out on considerable investments – investments that it really needs because it costs an enormous amount of money to get rid of fossil fuels. There must be a good business case for a company to invest in. If there isn’t one and indecision persists, then the renewable alternative to fossil energy won't be interesting enough to users and investors.”

Energy prices

Nevertheless, according to Olthof, Europe isn’t necessarily struggling when it comes to the energy trade. “We’re more dependent on other countries than the US or China, but that was also the case when fossil energy was all there was. A continent that’s short of its own energy resources isn’t necessarily worse off. And now with the energy transition, Europe will generate more of its own energy. This secures the supply of energy and contributes to the reduction of CO2 emissions.” European companies are also leading the way when it comes to wind energy. “It’s mainly European companies that are active in the production of both onshore and offshore wind energy, as well as in the US and elsewhere.”

The energy transition will eventually cause energy prices to fall. “That isn’t happening yet, partly due to the disruptions in the supply chains from China. In the long run, costs for wind and solar power and its storage will indeed come down as economies of scale continue to emerge. For the time being, fossil fuels will remain the most efficient due to the amount of energy they yield per kilo or cubic meter. If we don't tax CO2 emissions or subsidize renewable energy, fossil fuels will continue to be cheaper for consumers than renewable alternatives for some time to come.”