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As you may have heard, the Nord Stream 1 and 2 gas pipelines are no longer available.

It is possible to foresee the most probable economic outcomes of that events to the Eurozone area? My main focus is industrial production, employment and demand.

Has there been a similar situation? Can we use data from 1979 oil crisis?

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    $\begingroup$ can you be more specific? $\endgroup$
    – user253751
    Sep 27, 2022 at 18:49
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    $\begingroup$ @user253751 I want to know things like will there be mass unemployment, will there be hyperinflation or will the euro-zone economy stabilize? $\endgroup$
    – Vitaly Olegovitch
    Sep 27, 2022 at 18:52
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    $\begingroup$ suggestion to add "macroeconomics" tag then (you'll have to remove one, perhaps "aggregate-demand") $\endgroup$
    – user253751
    Sep 27, 2022 at 18:54
  • $\begingroup$ @user253751 thank you! I added it. $\endgroup$
    – Vitaly Olegovitch
    Sep 27, 2022 at 19:26

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Has there been a similar situation? Can we use data from 1979 oil crisis?

There were several situations that were somewhat similar. Oil crisis of 1979 is good example of similar shock (although OPEC only produced about 7% of world oil whereas Russia produced last year 13% of world natural gas - see the link in next paragraph for sources), although of course history never repeats itself it just rhymes.

This being said Hamilton (one of the top energy economists) argues that 1979 oil crisis would be more or less valid comparison (see his Princeton Bendheim Center for Finance lecture).

However, one of my past professors, Benjamin Moll with coauthors wrote quite a good paper on this exact topic, and his numerical simulations showed that the impact on Germany would be only about the size of COVID-19 recession (about 1-3% of German GDP). From all the large EU economies (e.g. France, Spain, Italy), Germany is the most exposed to Russian gas. Thus, other large economies should fare better, and only small very exposed countries like Slovakia are expected to fare significantly worse. This is shown to hold even if elasticity of substitution for natural gas is very low in the short run.

This being said, a problem with numerical simulation is that they always have to make a host of assumptions. For example, politicians might not respond to the issue optimally, or maybe elasticity of substitution for many firms in the economy might happen to be not just close to but actually zero because of complex production chains where everyone has to stop just because one company downstream had to stop completely.

But it is fair to say the macro effects would likely be something in between the 1979 oil crisis in the US (which was milder) and something slightly less worse than the COVID-19 recession where many countries contracted by something in the ballpark of 4.5% (average for OECD members).

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    $\begingroup$ Good answer, although the paper by Moll and co-authors is, in my opinion, a perfect illustration for what is going wrong with modern Macroeconomics. They model an energy shock without an energy sector... and believe their results!? Bachmann admitted on Twitter he wouldnt have expected the strong price hikes we recently saw. Imagine what would have happened if Germany followed their simulations half a year ago... $\endgroup$
    – Papayapap
    Sep 28, 2022 at 9:15
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    $\begingroup$ @Papayapap I agree about that hence my 4th paragraph. I even had an argument about it with him in the class, but I still think the paper makes some good point about low elasticity of substitution not being as big issue as some people think. Problem is that there is still too much of work to be done till we get to the point we can run large simulations with numerous heterogenous agents effectively. But I still think they have some value, and I mean as of now it does not look like the situation will get as bad as during oil shock. Gas prices even declined slightly gas storages are almost full $\endgroup$
    – 1muflon1 ♦
    Sep 28, 2022 at 9:58
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    $\begingroup$ This felt like hastily written, so I edited a bit to improve the flow. Feel free to reverse if you don't like it. $\endgroup$
    – Richard Hardy
    Sep 30, 2022 at 13:48

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