MADRID – At first, everything seemed to indicate that the new energy crisis, caused by the Russian invasion of Ukraine, would not have major consequences for Spain. This is because of the limited trade relations between Spain and Ukraine.
Nevertheless, Spain is already one of the countries most affected by the price shock that has arisen in the energy market. The high dependence on energy from abroad makes the Spanish economy vulnerable. This is shown by data from the Bank of Spain (BdE).
Price increases in international markets
Spain imports about 75% of its total energy consumption. Although Spain does not source a very high percentage of its gas from Russia, it does feel the effects of the gas and oil price increases on the international markets.
The BdE has calculated the differential impact of the price increases per country. The outcome is clear: for Spain, the blow is three times greater than for the eurozone as a whole. This calculation was made using the macro-econometric model NiGEM.
The price increases are so intense that the effect on Spanish GDP is significant. For every 10% increase in the oil price (average over a whole year), GDP decreases by 0.15% in the first year and another 0.07% in the second year. In the eurozone, on the other hand, GDP declines by 0.06% in the first year and 0.04% in the second year.
Spain among worst-hit countries
This shows that Spain is one of the European countries hardest hit by the energy crisis. The figures also explain why Spain, together with Portugal, recently submitted a proposal to the European Commission to set the maximum price of gas at €30 per megawatt-hour. Spain and Portugal, the so-called ‘Iberian energy island’, want to significantly reduce electricity bills with this proposal.
If the oil price remains around USD 100 until the end of the year, this represents a 40% increase compared to 2021. For Spain, this amounts to a contraction of 0.6% if the Spanish Bank calculation is applied. In the eurozone, on the other hand, this is less than 0.25%.
Rising gas prices
The price increase of gas has less effect on GDP because it is used less. However, the rise in gas prices was much more intense than that in oil prices.
In gas contracts in the Netherlands, the reference market for Europe, the average price paid this year is more than double the 2021 average. This is an increase of 110%. That equates to a decline in GDP of more than 0.4%. In short, if gas prices remain at current levels, the Spanish economy will lose a percentage point. And if the energy crisis continues into 2023, GDP will decline by almost another percentage point.
Investing in sustainable energy
Spain’s problem is not just that due to its geographical location it has fewer energy connections with the rest of the European continent. Spain also needs to make a significant investment effort to develop renewable energy sources and electrify systems that now use gas. Its dependence on fuels makes Spain one of the losers of the energy crisis and thus one of the losers of the war in Europe.
Raw material prices are unpredictable
The development of raw material prices is closely related to the capriciousness of the war and is therefore unpredictable. If the battle continues, prices could remain high all year round. However, if Russia and Ukraine reach a peace deal or a ceasefire, prices could also fall.
Europe wants to reduce dependence on Russian energy
The Spanish Bank considers it unlikely in all scenarios that prices will return to the level of a year ago. Indeed, Europe has learned its lesson and is determined to reduce its dependence on Russian energy. Therefore, the long-term goal is the transition to sustainable energy. However, in the short term, other gas and oil suppliers must be sought.
Crisis with Algeria
In addition, Spain faces another challenge: the diplomatic crisis with Algeria due to the changed attitude of the Spanish government on the Sahara issue. The Algerian energy multinational Sonatrach emphasised last week that it “does not rule out a recalculation of prices for Spanish customers”.