8 min read

Don't Gas Me

Natural gas cutoffs triggered a cascade of parallel problems, sure, but Europe can manage the reality that it's never going back to the way things were. The more important question is how.
Don't Gas Me

Living in the U.K. with an increasingly apocalyptic outlook for household finances in the face of price cap increases and a government that openly disdains, well, everyone, fears of a hard winter are impossible to shake. Russian outlets tend to push oil & gas stories these days whenever they can because the government can pose as if the windfall is offsetting whatever pain from sanctions was intended. That's why Shell CEO Ben van Beurden's warning that today's gas crisis may drag on through another few winters caught their eye as everyone and their grandma scramble to find new sources of energy, new sources of gas, cut usage, or otherwise pray that their governments step in to rationally coordinate the mess we're in. The obvious question is the degree to which this will be true, and as with everything pertaining to the global economy at the moment, there are far too many things up in the air to give a definitive answer.

Truth is that the crisis we're now living through in Europe is about margins, marginal flows of commodities, and the timing of overlapping issues in the energy sector globally. The race is now on for European importers to cut their consumption as much as possible. Here are some charts offering food for thought, with the first two coming from Andreas Steno's Twitter feed:

If Germany is ground zero for what's gone wrong with European energy policy (hint: it's not necessarily despite the rightful flak), then consumption is down around 10% and storage levels are rapidly climbing towards or past 80% far above where they were last winter given the bullwhip effect on demand, prices, and incentives to release supplies out of storage. From December 21, Germany should have an FPSO unit in Wilhemshaven capable of covering about 8% of Germany's demand while Freeport LNG in the US, a plant that provides just shy of US LNG exports, is expected to launch a partial restart in November and be at full capacity by around year end. Berlin's lumbering response is already bearing fruit. We simply don't see it because price signals on the market are telling us we can't have energy. Industrial shutdowns across Europe speak to the problem. At some point, governments are going to have to wake up and absorb the costs through public coffers so they can minimize the economic damage and ration energy transparently.

But Gazprom turning off the taps is just one component in a frustrating set of interlocking constraints. Ramping up coal plants is hindered by the fallout from the EU's coal bans. Russian output is set to contract significantly at a time when Australian miners have proven incapable of turning a period of extended high prices into greater production:

Energy journalists and a fair bit of energy/fintwit like to rant about ESG or blaming a variety of 'suicidal' green policies or the Biden White House for saying mean things and more for the failure to invest into supply. Truth is that a considerable chunk of investor activism is working now because anyone half-smart has every reason to believe coal demand will peak in the next 5 or 6 years as China's energy mix evolves, metallurgical sector slows down along with growth, and no other economy can come close to picking up the slack. Given it takes years to standup a new mine, why expand supply at existing mines or new ones and reduce the price of what you're already extracting when you could instead pass on greater and greater dividends to shareholders? Thermal coal prices are inevitably dragged higher from shortfalls of natural gas since it's the most convenient replacement for power generation purposes. We can blame Moscow all we want for trying to play God with European energy markets, but the problems we're now facing are structural globally. Commodities are having their "revenge of the real."

France's nuclear woes are the other significant impediment, and that's both a policy story and a climate story:

Heatwaves, higher temperatures, and falling water levels across Europe's rivers have begun to affect nuclear plants' capacity forcing them to idle electricity generation when possible to avoid overheating. Turns out that when you rely on river water to help cool reactors, warmer temperatures get in the way. The degree of the nuclear shortfall even relative to last year, never mind the policy choices taken back in 2015 to cut nuclear's share of total output, is huge. Without it, we might not be quite as worried about Germany. And the same climate issues have hit Norway and elsewhere, endangering the UK's ability to import power during shortfalls.

Amid all that, it's tempting to forecast years of doom and gloom in Europe. Trump's warning to Germany from 2018 is making the rounds online. I'm not so certain it makes sense. Yes, there is absolutely no doubt that this winter will be brutal in political terms and for folks like me trying to make do in old flats with poor insulation and austerian cultists who hate helping anyone in charge. But what I find striking from all the critics and galaxy brain types (I include Zoltan Pozsar in that category) is a stunning disinterest in the capacity of consumers, governments, and markets to adapt and the inconvenient details of various markets. Anyone who can afford it right now or otherwise receives policy support is trying to install solar on their roof or look for other means to reduce their consumption via insulation and other measures. We're years away, but I take heart in Octopus Energy's commitment to a massive solar farm in Morocco that will provide power to the British market via subsea cable. More and more countries in Europe are looking to reform permitting and planning permissions for renewables, which doesn't solve the baseload capacity problem but will enable cross-border and domestic redundancies now likely to be aided by electricity market reforms expected next year. While US LNG export growth may face constraints in Texas, the Inflation Reduction Act unlocks a panopoly of tax credits for homeowners to reduce their gas usage at home and for businesses and investors to build out new transmission capacity and renewable energy. The latter may end up freeing up more natural gas for export in the end, though there'll still be regional carrying capacity concerns as Germany ramps up LNG import capacity and other countries adjust as well:

EIA Data, estimates for 2022 and 2023

All of that is to say that the short-term pain is immense and consequences are worrying. One only has to look at elections in Italy to see that. However, things are in motion now that will ease many of the current pressure points posing the biggest problems, likely faster than anyone can effectively model because of the volatility we're now facing. Rising interest rates are certainly something to worry about the longer that inflation remains elevated. What worries me most is the climate variable, but that affects Russia as much as it affects Europe. Domestic power demand in Russia hit record levels the last two summers because of the demand for air conditioning, something that our fine friends at The Economist didn't contextualize when looking at power demand.

Natural gas cutoffs triggered a cascade of parallel problems, sure, but Europe can manage the reality that it's never going back to the way things were. The more important question is how. Importing industrial tech for the energy sector from China to execute a pivot from Russia is certainly an interesting inversion of the galaxy brain takes on Eurasia. Once upon a time, D.C. chancers and wannabe officials prattled on about how Idlib in Syria was somehow linked to the oil market and Russia-Saudi rivalry. I would never claim Kherson has similar significance for gas markets in Europe, but needless to say it's a battle that will shape the political landscape in Russia in the months ahead should it end in a public, humiliating loss. Let's not waste our breath on terms like DragonBear...


  1. The government has updated its GDP and inflation forecast for the 4th time this year, now settling on an expected contraction of 4.2% y-o-y for GDP and an end of year inflation level of 13.4% in annualized. That seems a bit bullish given the underlying trend:
Thanks to Konstantin Sonin! Chicago represent

In short, the underlying trend can only worsen because consumption and investment are taking a large hit while exports incapable of supporting the same levels of domestic import or inter-sectoral consumption are falling. If inflation falls a lot, needless to say that's a bad sign for demand...

2. Denis Manturov's latest supply-side windmill to tilt at: he proposes exempting import substitution projects from taxes on profits, cutting social insurance contributions (de facto payroll taxes) to 7.6%, and providing discounted loans. The profit tax idea is interesting since domestic price inflation for goods being substituted would offer first movers oligopoly or monopoly rents since import substitution legislation generally stipulates "Buy Russian" clauses of some kind. But with domestic demand likely to structurally adjust downwards for at least 2 years, the tax break is a poor measure to strengthen the business case for investment, especially with the ruble comparatively strong.

3. Thanks to Allen Maggard flagging this – looks like workers at a Rostec subsidiary are complaining in an open letter to Putin that their wages are in arrears. This isn't your usual industrial action praying for intervention from the Czar. These are ostensibly well-paid professionals who are increasingly in short supply for the regime's ambitions of 'technological sovereignty.' Look at the current stimulus measures for the IT sector and it amounts to peanuts compared to paying people well and offering them a better life.

4. The walls continue to close in on the public. MinFin is now proposing that the pensions of former prosecutors and investigators, increasingly important for regime security, be indexed by government decision without any law defining said indexation from Oct. 1 onwards. Your average pensioner is no longer seeing their benefits match inflation, but hey, at least the enforcers have a direct line to Mishustin to get that bag.

Like what you read? Pass it around to your friends! If anyone you know is a student or professor and is interested, hit me up at @ntrickett16 on Twitter or email me at nbtrickett@gmail.com. Always happy to look at any freelance opportunities pertaining to Russia, Eurasia, energy and commodities, or my old love foreign policy.

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