More on Germany

Fossil fuels, energy tantrums, and geopolitics

As this long and warm Nachsommer (Indian Summer) draws to a close, dark clouds are appearing on the horizon. Winter, as every year, is evidently coming, and just like every year, the media frenzy about heating and, widely understood, energy, is about as predictable as long, windy, and cold nights in mid-December.

From, e.g., the Financial Times (paywalled) to Irina Slav’s recent pieces over at OilPrice.com (here and here), the temperature in government offices and media outlets is rising fast.

Thus spoke the FT:

‘The US has vowed to support European countries hit by an energy supply crunch blamed by some officials and traders on Russia, and said it would “stand up” to suppliers accused of manipulating prices.’

‘Surging gas costs due to tight supply and low reserves have forced European governments to draw up plans to provide emergency aid to households and utilities. Energy market participants said moves by Kremlin-controlled energy giant Gazprom to restrict supply have contributed to fears of a crippling energy crisis this winter.’

While crying ‘Russia! Russia! Russia!’ is about as close to standard operational procedure for a good deal of Western media (and politicians), it’s also quite meaningless in terms of analysis.

Exhibit A would be I. Slav’s first comment, which comically ascribes almost ‘natural’ qualities to the upsurge of energy prices, in particular natural gas:

‘It was only a matter of time, really. In a globalized world, energy crunches can hardly remain regionally contained for very long, especially in a context of damaged supply chains and a rush to cut investment in fossil fuels. The energy crunch that began in Europe earlier this month may now be on its way to America.’

With inventories ‘running low because of stronger exports’ and ‘the U.S. economy…firing on all cylinders once again’, it is certainly ‘no wonder electricity prices are already going up’. Save a (crocodile) tear for all the ‘traders [that] are already getting jittery, and this will likely contribute to price uncertainty’, concludes I. Slav. In her conclusion, she again resorts to a kind of metaphysical, if mind-numbing, opinion-masquerading-as-analysis, for price uncertainty is here to stay,

‘regardless of how the fundamentals situation develops. Again, Europe is at the heart of the uncertainty - or rather the certainty that prices have higher to climb.

This was posted on 23 Sept. 2021, with an intriguing question at the end:

‘The European energy crunch is spilling over into other regions. The blame game has begun with culprits ranging from years of underinvestment in local gas production to a Gazprom scheme to get Nord Stream 2 approved by Germany. For now, it is still unclear how much of the price surge is due to a gap between demand and supply and how much of it is due to market nervousness, at least according to RBC commodity strategist Christopher Louney, as quoted by the WSJ’s Lee. This question is less important than another, however, and it is a scary one: Just how bad could things get this winter?’

While over at Naked Capitalism, the ‘commentariat’ (their term, not mine), this was discussed as excitedly as ever.

Do take a moment or two to check out the comment sections, it’s well worth your time, esp. in terms of things that apparently went under the radar, incl., but not limited to, the following items:

• Last winter (2020/21) was long and cold, with heating extending well into May, i.e., natural gas consumption was up considerably.

• The subsequent quite war and long summer also saw higher-than-usual demand, but for air conditioning and cooling.

• By late July 2021, prices for natural gas in the Single Market exceeded 500$ per 1,000 cubic metres.

• Increased demand (for coal) in China and the E.U. converged in mid-August 2021, with gas prices rising further, as reported by Russian media (18 Aug.).

• By early September, Russian media again reported that the E.U. would be unable to restock its storage facilities, leading to a shortfall of approximately 25 percent.

• NordStream 2, the controversial joint German-Russian pipeline, was finally completed in mid-September, theoretically paving the way for much more natural gas imports (as seen from the E.U.), but this did nothing to curb E.U. prices, which rose further to almost 800$ per 1,000 cubic metres, as reported Russian media (14 Sept.).

• As of today, gas prices in the E.U. have risen to about 1,000$ per 1,000 cubic metres. With many storage facilities at around 70 percent capacity (only), the ensuing ‘panic’ among European politicians is palpable (and don’t miss this Russian media report from two days ago, incidentally, broadcasted on the same as the German elections took place).

So, what now?

German mainstream media (Spiegel Online, 24 Sept.) has a clear villain in its sight: ‘Russia! Russia! Russia!’ There are virtually innumerable comparable examples of this trope (see, e.g., here, here, or here).

What now? And, above all, is it true?

Remember that Russian media report from early September? It clearly held that Russian gas exports to the E.U. rose by 17.9 percent to 337.2 billion cubic metres from January through August 2021. Gazprom exports to non-CIS countries similarly rose by 19.4 percent to 131.3 billion cubic metres. Gas deliveries to Turkey are up (+173.6 percent), but the numbers for European countries are similarly telling: Germany (+39.3 percent), Italy (+15 percent), Romania (+344 percent), Serbia (+123.9 percent), Poland (+12 percent), Bulgaria (+50.9 percent), Greece (+15.8 percent), and Finland (+22.7 percent).

Two days ago (see that other above Russian media report), Gazprom CEO Alexei Miller noted that Europe is ‘short 23 billion cubic metres’.

With one notable exception (here’s looking at you, Hungary, via Andrei Martyanov’s excellent blog), no E.U. country actually ordered more natural gas from Russia.

Irina Slav, in her second above comment, actually (inadvertently) confirmed this:

‘Gazprom has insisted that it has fulfilled its contractual obligations to European clients, and no one in Europe is disputing that.’

Still, what I find perhaps the most disturbing aspect of this entire quagmire is this:

Why does Russian gas cost about 220$ per 1,000 cubic metres in Germany, while it costs four times that much elsewhere?

And the answer thereto is—E.U. policies, set by the unelected (that is, by E.U. citizens, but by member states’ governments) E.U. Commission, which, in its infinite wisdom, elected to ‘liberalise’ energy markets across the Single Market.

The ‘irony’ of this all wasn’t lost on Russian president Vladimir Putin. A few weeks ago, in mid-September, when E.U. gas prices were around 650$ per 1,000 cubic metres, he had this to say on the occasion of a joint press conference with his Belarusian counterpart:

‘I have said that the price on the free market in Europe is currently 650 dollars [on 10 Sept. 2021] per thousand cubic metres. But it was the brainiacs of the last European Commission who proposed market-based gas pricing, and here you have the result.’

Go, ask yourself this, then:

Have you heard about all of this, in particular the relevant E.U. (de-) regulatory context?

If not, would you care to guess why?

Need another hint? If wholesale gas prices are a quarter of the retail price, guess who is reaping in the profit price differential?

Or, if you like to believe otherwise, you may also trust your energy provider, such as SWG of Switzerland, which announced, on 6 September 2021, that it was—Russia! Russia! Russia!

‘Pipeline gas from Russia has also become scarcer as the Russian supplier Gazprom wants to put pressure on the completion of Nordstream 2 and has therefore booked less transport capacity through Ukraine.’

Truth be told, that wasn’t the only reason given, which incl. empty storage facilities (see above, it’s cold in winter and hot in summer, did you know?), not enough liquified natural gas (more on this at a later time, but it’s typically coming from the U.S. and is much, much more expensive than Russian natural gas), Covid-related delays in maintenance (I’m not making this up, by the way), and, last but not least, ‘increased electricity generation from natural gas in Germany, which became necessary due to the gradual phase-out of nuclear energy and the insufficient wind and PV production’.

Interestingly, Irina Slav (in that second above comment) provides some ‘insights’ into these matters, too:

‘The energy squeeze in Europe has nothing to do with the continent's energy transition plans, the head of the International Energy Agency Fatih Birol told the European Parliament's energy and environment committees:

“It is inaccurate and unfair to explain these high energy prices as a result of clean energy transition policies. This is wrong,” Birol said, as quoted by Reuters. Further, he added that EU governments needed to keep their eyes on reducing global warming, even when times are volatile, referring to the sky-high gas prices in Europe.

The official did not miss the chance to take a stab at Russia, either, saying, “Some major suppliers are reluctant to send additional gas in these difficult days to Europe and elsewhere, even though in my view it was an opportunity to underscore that they are a reliable supplier,” echoing his own earlier remarks that urged Russia to send additional gas volumes to Europe.’

You see, it’s easy: as a E.U. politician, don’t move, and if caught moving, blame someone else. (For a good laugh, I recommend Wikipedia’s entry on Nord Stream, which also provided me with the picture of the company’s Switzerland-based head office in beautiful Zug.)

In summary: this isn’t even wrong. It’s omission by intent.

We shall return to the implications of these issues in due course.