Italy gas supply: The possible consequences for Italy of a Russian gas embargo

How much does Italy depend on Russian gas? And how will Italy replace Russian gas if it stops importing it? What about the consequences for Italian companies, especially construction companies, and for the country's growth? What are the consequences for the pockets of Italian households? Maurizio Mazziero, founder of Mazziero Research and expert in raw materials and macroeconomics, discusses the situation with idealista/news.

"In the absence of the war and a possible embargo, Italian industry was already suffering from inflation," Mazziero notes first of all. "However, today the main elements linked to the price of energy, which is much higher than last year, are found in 2 main areas. On the one hand, oil: the situation of Italian oil is less alarming, since only about 15 per cent of our needs are imported from Russia, a percentage that can be more easily replaced with marginal upward price adjustments. On the other hand, gas, which accounts for about half of our needs from Russia, has seen a disproportionate rise in prices, and in the space of a year we have gone from 20 to 110 euros per megawatt hour, with peaks of 320 euros".

How can Italy replace Russian gas?

"You have to consider that Italy has an annual consumption of 76 billion cubic metres of gas. Of this, around 30 billion cubic metres comes from Russia and must be replaced by other supplies. From Algeria we currently obtain around 23 billion cubic metres and supplies will increase by a further nine billion cubic metres (by 2024). The remaining 20 billion cubic metres will partly come from Azerbaijan via Puglia, but that is a maximum of 1.5 billion cubic metres. From the three Italian regasifiers we could add 3 billion cubic metres. If we added new regasification platforms offshore, we could have about 10 billion cubic metres of gas. That would leave about 5 billion cubic metres of supply uncovered; assuming, of course, that the above calculation is carried out to the letter." 

How will Italian companies react to rising gas prices?

"The point is that companies are energy-intensive, and the reduced availability of gas will inevitably lead to higher costs. If we think about the construction industry, the glass, cement and ceramics industries use a lot of gas for production, so they will certainly suffer a strong impact. The difference will be in how Italian companies cope with the price increase: by reducing their profit margins, by passing on the higher costs to the end customer or, ultimately, by reducing production. Already today we have examples of reduced production, for example in the production of fertilisers; something which then affects food production. The same argument can be extended to every sector."

What impact can we expect on the construction industry due to rising energy costs?

"Rising energy costs have two effects on the price of goods: firstly, on higher production costs; secondly, on the cost of the fuel needed for transport and distribution. Because let's not forget that most goods travel by road. So if we look at the costs of building construction, these can increase both because of higher production costs per se and because of higher distribution costs. But I don't see any real possibility of a blockage in the sector."

Does the construction sector still have growth prospects?

"No doubt the construction sector in Italy will slow down, given the current situation. However, it is a sector that is doing well thanks to tax incentives, so it is likely to continue to meet demand for houses at least until materials become scarce. At that point there may be a slowdown in production, but hardly a halt. Growth in general is a different matter."

What are the prospects for Italy's GDP in 2022?

"Mazziero Research has had to revise its growth estimates for the first quarter, from +0.3% to -0.2% (slightly more optimistic than the government, which forecasts -0.5%). In the second quarter, we expect a further decline of 0.4%, which, with two quarters in a row in decline, puts Italy in a technical recession. In the third quarter we will probably see a recovery, which at the moment is estimated at +0.3%, but this is not enough to offset the decline in the previous quarter. However, this situation is dependent on the development of the conflict in Ukraine and the effects of sanctions against Russia, as well as the state of gas imports. The range for year-end growth varies from 0.6 to 3.1%, so we see a very large margin of uncertainty."

What will be the key determinants of growth in the coming months in Italy?

"The key is still gas supply: higher costs have an impact on the balance of trade, as they push up the value of (energy) imports relative to exports, which depresses economic growth. And it has to be said that importing gas is also necessary in the hot season, as the energy stock needed for the winter has to be built up. The key element therefore remains the capacity to store and, before that, to supply energy from markets other than Russia."

What, finally, is the impact of the current situation on Italian households?

"According to ISTAT, the climate of confidence in Italian households is already not positive, showing values even worse than those at the beginning of the pandemic, when uncertainty about the future was at its highest. At the moment, in fact, not all the increases have yet been passed on to the shopping trolley or bills, but they are particularly noticeable only on some products, because companies are trying to buffer the situation by reducing their profit margins. However, if the situation continues, a harsher impact may still have to come."

What should residents in Italy expect in 2022?

"The real problem is that, while inflation is skyrocketing, wages remain the same. And this increases the risk of stagflation, i.e. economic stagnation in the presence of rising prices, because if purchasing power falls, so does consumption. In my opinion this is the worst element because it puts strain on our country's ability to react. Wage support is a long-standing and structural issue, and it would have been desirable to address it in a non-crisis period, precisely in order to have the capacity to cope with it now. Unfortunately, the situation has exploded and we can only hope that it will be short-lived."