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As we’ve said, the freight train of energy shortages is bearing down on Europe. Most of its leaders seem in denial about how bad the impact will be. Mind you, some do understand:
“A few weeks like this and the European economy will just go into a full stop,” Belgian Prime Minister Alexander De Croo said in an interview with Bloomberg News.
“The risk of that is de-industrialization and severe risk of fundamental social unrest.”https://t.co/4dXkgOGqMX
— Javier Blas (@JavierBlas) September 8, 2022
But you wouldn’t get it from the tone and expected substance of an emergency EU energy meeting set for Friday. Politico reported yesterday on the main proposals from the European Commission. Some countries were miffed, since this leak was obviously intended to give EU Commission President Ursula von der Leyen more control over the debate. From EU countries split on von der Leyen’s energy crisis ideas in Politico:
Von der Leyen proposed five “immediate” moves to help tame Europe’s energy emergency:
— Setting a price cap on Russian gas;
— Mandatory measures to reduce electricity demand during peak hours;
— A cap on the “enormous revenues” some companies are making by generating electricity from lower cost sources than gas. These “unexpected profits” would be redirected to help consumers;
— A solidarity tax on fossil fuel companies making big profits, again with the funds sent to help ease the pain for consumers and businesses
— Facilitating funding support for ailing utility companies struggling to pay for supplies on the market.
The article said only two measures had broad support. The first was funding support for utility companies. The excuse is that they are having to pay ” sky-high collateral cash needed to trade on energy exchanges.” That conveniently omits that many of these utilities are in serious trouble, as we wrote a few days ago, due to bad derivative bets. Generally, the problem was they went short, as in bet prices would fall, and instead they went to the moon. It’s hardly a secret that this is the big reason they are in financial pain:
European governments are patching together emergency measures to support utilities amid fears that companies will buckle under the weight of growing margin calls https://t.co/76OjR4Gr98
— Bloomberg Markets (@markets) September 6, 2022
These utilities are too big to fail entities. European officials can’t let them collapse in the middle of a crisis. As we predicted, the energy company rescues would be first in the bailout line, ahead of support to households and businesses.
The second proposal that looks set to secure easy agreement is what amounts to an excess profits tax on energy companies that are low cost providers.
However, when the EU’s priority should be to avert a disaster, it remains fixated on hurting itself to try to hurt Russia:
The most controversial issue is the Russian price cap — largely aimed at punishing the Kremlin financially for the war in Ukraine — with capitals having “very contradictory views,” one EU diplomat said.
Germany has said it is “skeptical” about the idea. Hungary, Russia’s closest EU ally, is against it, as is Slovakia and at least two other countries, diplomats said.
Others, including Poland and Italy, want the Commission to go further and cap the price of all gas imported into the EU. Von der Leyen said this was something the Commission was “looking at” — but Brussels has broadly been against the idea in its assessments so far, which would be much more complex than singling out Russian gas.
The Financial Times, in a later report, explains the logic, such as it is, of a full bore price gas price cap:
Brussels is facing pressure from at least 10 EU countries to implement a cap on gas prices for all suppliers, with some governments warning that singling out Russia could push President Vladimir Putin to cut supplies to Europe completely.
Now this may be a bureaucratically clever way of stopping the Russian price cap by taking the idea to an internally-consistent-looking conclusion. Or they could be dead serious.
We hate to have to keep repeating the obvious. First, Russia has said it will not sell gas or oil to any countries that try to impose non-market prices. Second, the EU’s earlier plans to cut Russian gas use by 2/3 by year end were deemed to be pie in the sky. From CNBC in June:
The EU plans to replace two-thirds of Russian gas imports by the end of the year, as Russia’s war in Ukraine continues to wage on….
However, the EU’s current plan to replace Russian gas looks to fall short.
In 2021, the EU imported around 155 billion cubic meters (bcm) of natural gas from Russia. The bloc’s proposed gas replacements by the end of 2022 – which include LNG (liquefied natural gas) diversification, renewables, heating efficiency, pipeline diversification, biomethane, solar rooftops and heat pumps – amount to around 102 bcm annually, according to data from the EU Commission’s REPowerEU, aggregated in a recent report from economic consultancy TS Lombard.
Christopher Granville, managing director for EMEA and global political research at TS Lombard, said in the report that the European Commission’s aims to replace Gazprom’s gas this year look “wildly optimistic.”
“Apart from implementation timings of commissioning German LNG-receiving terminals, Russia is also an important supplier of LNG, underlining the challenge for Europe of sourcing adequate LNG supplies,” Granville said.
Let us also remember that Europe came up largely empty-handed in its LNG appeals to Qatar and Canada, and the US has been quietly undersupplying Europe to keep prices in the US down.
By way of an update, Alex Christoforu provided this screenshot (at 14:25) showing the EU was currently getting 37.2% of its former Russian gas levels.
The Financial Times story above makes an unsourced claim that Russian gas supplies are down 80%. The difference between the two estimates may depend on the baseline used, since I’ve seen some marked differences.
And remember massive stockpiling was also part of the EU scheme.
Third, Russia keeps reminding the EU that this mess is their doing, but the press and Twitterati dutifully repeat the party line that it’s the evil Putin who is strangling Europe. Putin again offered to open Nord Stream 2 to supply Europe with gas. From a machine translation of Putin’s answer in the Q&A after his speech at Eastern Economic Conference:
Vladimir Putin: Nord Stream 1 is practically closed now, and everyone is saying: “Russia is using this energy weapon.” Another nonsense and nonsense. What weapon do we use? We supply as much as our partners need, as much as they place an order – we fulfill as much. We do not deliver somewhere in the air, but on demand. The application has been submitted – we are executing.
What happened? Two strings of the gas pipeline across Ukraine, Ukraine, on its own initiative, took and turned off one thread under the far-fetched pretext of lack of control over it. They closed themselves. We didn’t close it, Ukraine closed it. Once.
The second pipeline system “Yamal – Europe” through Poland. Poland took and put this gas pipeline under sanctions, and closed it. Have we done this? The Poles closed. The Ukrainians closed, the Poles closed.
Nord Stream 1. Our German partners have subordinated the entire technical side of Nord Stream 1, the maintenance of gas-compressor turbine units, to British law, because it turns out – I didn’t know this myself, Alexei Borisovich [Miller] reported to me – the contract for servicing these units produced by the company Siemens Gazprom was forced to conclude not with the central office of Siemens, but with a subsidiary in the UK, which put Gazprom under sanctions, and it was agreed to repair these turbines at the Siemens plant in Canada.
And what are we doing here? Canada took, in the end, at the numerous requests of Germany, gave it to Germany, and under an agreement with a daughter of Siemens in the UK, the turbines should be sent directly to St. Petersburg. Logistics has changed – you need to make changes to the contract. The British subsidiary of Siemens does not even respond to requests from Gazprom.
Here you can take as many pictures as you like against the background of this turbine, but give me the documents, in the end. This is our property. We must understand the legal status of this property and its technical condition. They give nothing but general conversations.
The last turbine is now out of order, and Siemens representatives came and looked, an oil leak is taking place there, an explosive situation, a fire hazard. Of course, the turbine cannot work like that. Give us turbines, we will turn on Nord Stream 1 tomorrow. They don’t give anything. They say they use it as a weapon. What weapon? They themselves have done things, now they do not know what to do with it. They drove themselves into the so-called sanctions impasse.
Exit one. In Germany, we now see demonstrations going around demanding the inclusion of Nord Stream 2. We share these demands of consumers in Germany, we are ready to do it tomorrow, all you need to do is press a button, but we did not impose sanctions on Nord Stream 2. They did it under pressure from the Americans, and why are they pressing? Because they want to sell themselves, at exorbitant prices. We know the position of the previous [American] administration as well. They said: “Yes, we sell more expensive. Let them buy because we protect them.” Let them buy if they want. We will sell our product.
It has also not been widely acknowledged that Gazprom has increased shipments via the one open Ukraine pipeline to partly offset the Nord Stream 1 reduction.
Back to the von der Leyen proposals. One was “Mandatory measures to reduce electricity demand during peak hours.” But at least four countries are opposed to having the cuts be mandatory. And even if that measure is forced through, how will it be enforced? I doubt that smart meters are common enough in the EU for utilities to limit how much users consume at peak times.
This site and others pointed out that the EU electricity pricing/trading system was making this bad situation worse, but we doubted there was a simple remedy, and an overhaul would be difficult and time consuming even in ordinary circumstances. The idea was shot down, but without an official explanation. Again from Politico:
Poland’s call to reform the Emissions Trading System, which it blames for jacking up energy prices, was a non-starter for Luxembourg, Ireland, Germany, Finland and Sweden, said a senior diplomat.
Again, absent Europe relenting and taking up the Russia Nord Stream 2 offer, there’s no way out of a huge economic crisis even before winter is in full swing. Another example of unforeseen consequences: Important chemicals for water purification could soon be missing in Germany from Germany Detail Zero, a transcription and rough translation of a Die Welt podcast:
Due to high energy costs, the so-called precipitating agents are also becoming scarce: iron or aluminum salts, which are urgently needed in sewage treatment plants. In some federal states, the environment ministers are already allowing limit values to be exceeded.
Due to the energy crisis, sewage treatment plants nationwide lack the means to clean the wastewater – with possibly fatal consequences for rivers, reports the magazine “Spiegel”. Chemical companies can therefore currently hardly supply precipitants.
During chemical water purification, the iron or aluminum salts bind dissolved phosphates in the waste water and prevent these nutrients from getting into rivers and canals in excessive concentrations with the treated waste water. Without any precipitants, municipal sewage treatment plants are forced to discharge wastewater with a high phosphate content and exceed limit values.
This could endanger the stressed German waters in some places after the dry summer and trigger uncontrolled growth of algae. Phosphates are fertilizers for algae. If there is a strong algal bloom, waters tip over due to insufficient oxygen content and living beings die, the magazine continues.
And we don’t see European official even remotely grasping that energy will be rationed, either by prices (with resulting business failures and cutbacks constituting a large part of lowering demand to match supply) or explicit schemes, like hard usage caps and setting priorities among customers. We’re already seeing some ugly measures starting:
first shock therapy move in Romania, applauded by Western Europe – liberalise imported energy prices and liberalise exchange rates, deadly combo for local state-owned industries. https://t.co/r2rTAtWdeH
— Daniela Gabor (@DanielaGabor) September 9, 2022
The fact that the EU isn’t even close to discussing hard choices in a serious way shows how far behind the eight ball they are.
Meanwhile, back at the ranch, China is buying gas from RU with rubles, Saudi Arabia is considering selling China gas and oil in yuan, and RU and China are working on a pipeline deal from RU’s gas fields to China. (The US might not care if the Euro is badly hurt by the EU sanctions, but what happens if the US petro dollar loses reserve currency status thanks in part to the EU’s nonsensical foreign policy? )
The liquidity of the US Treasury market will give the dollar a lasting advantage even with these chunks falling off its dominance.
Maybe our politicians can engineer a deliberate default, it’s the only remaining obvious own goal not yet scored.
There are some problems too big to be financialized away, imo.
What a great comment. I imagine a bunch of skeezy men in a cigar-smoke filled room asking, “hm, how else could we F ourselves over?”
Anyone who’s really looked has known America and many Euro countries have been run by idiots and thieves, not mutually exclusive. But they spread wealth around enough that enough people tolerated it. And now we get to watch the consequences.
‘China is buying gas from RU with rubles’
It gets better than that, flora. I read the other day that the Chinese are buying Russian gas and paying with rubles like you mentioned, but are then selling that gas to the EU for Euros at a very much marked up price. The EU can’t afford to get too fussy about the origin of this gas and are therefore just going ahead and buying it
Reading this post I can only shake my head. If you could call yourself back in January and tried to explain the energy situation in Europe to yourself, where would you start? The whole thing defies belief. Before this is over, people trying to deal with the colossal amount of damage cause will look around and ask that ever ominous question-
‘How did it come to this?’
Ah. That’s interesting. I wonder if any of the Chinese companies buying are, in fact, subsidiaries of western global oil companies like BP or Dutch Royal or ExxonMobil, etc. A question that I doubt we’ll ever know the answer.
Thank you, Yves. My mind reels at the tightly-coupled interconnectedness of it all. Cut natural gas supplies and thus no fertilizers, no aluminum, no steel, no chemicals to treat sewage. Drought-plagued rivers then clogged with algal blooms, fish dying, drought-plagued crop yields dropping, no materials for new tractors (and what happened to those chips?)
I have been listening to a discussion with Australian economist Steve Keen this week, while I cook down gallons of tomatoes for sauce to freeze for the winter. Using natural gas to cook, and assuming the electricity (well, the natural gas, nuclear and hydroelectric energy) will remain available to power the freezer during the winter. He talks about the importance, ignored by orthodox economists, of energy in the economy.
We ‘assume’ the invisible underpinnings of our life will remain intact. The energy that powers our houses, our stoves, our refrigerators, our A/C units, our lights, our cars. The energy that mines, extracts, refines, smelts, forms, transports, constructs, assembles the machines and structures that make our life possible. The energy that powers the internet and is used to manufacture our laptops, iPads, phones. What if it goes away?
Search for ‘steve keen mythonomics the great simplification’ should you wish to be (even more) depressed.
Thanks for the link. I didn’t know that orthodox economists ignored the importance of energy in the economy. It’s obvious to me and I’m an economics illiterate.
Yes, I am an economist (PhD) and that is part of the indoctrination. Energy never came up until I went outside my field of expertise.
An excellent piece, thank you! I’ve listened to Steve Keen before but this is the most expansive and cohesive exploration yet. At least perhaps as my humble mind is able to perceive. It clarifies a number of areas, energy in particular.
As a German resident, my impression is that the German population is completely oblivious to the tsunami of suffering about to crash over their heads. Sara Wagenknecht is the only politician of any stature who has stood up to the anti-Russian hysteria, besides Gerhard Schroeder, and they have both been viciously attacked for it. I believe that many Germans are secretly pleased with the existential thrill of making a sacrifice to „punish“ Putin, their lives being otherwise quite boring. Moreover, they merely calculate their increased energy costs and conclude it is payable. They never consider that German industry, the bedrock of their prosperity, will be eviscerated and will never return. The exception to this is a significant number of Greens who actually do understand the implications and welcome de-industrialisation due to romantic notions of simplicity and a fanatical wish to reduce carbon emissions at any cost.Unfortunately, the more likely result will be social conflict or even civil war.
Very sad. We are seeing the “shock doctrine” in real time, and as you say the well off or comfortable are oblivious. The World Inequality Index is going to have to revise it’s figures and begin referring to the bottom 70% with a miniscule share of wealth and income.
It is not quite that simple. For example, Germany depends (directly or indirectly) on the United States and many of the other hard-line anti-Russian countries for exports. If Germany cuts a deal that enables it to consume Russian gas but cannot export its goods, it is also in a bad situation (although I suppose not freezing to death would perhaps be better than the current path).
I am enormously concerned about the social conflict aspect you mention, though. I do not quite understand how this is not receiving more attention.
I am very depressed with the current state of the public debate in Germany. A lot of people on public forums ( like “Der Spiegel” comment section) are driven solely by self-righteous moral postering. Any mention that the sanctions are counterproductive, don’t reach their professed objectives and on top ruin Europe’s industrial and entrepreneurial landscape is met with ad hominem attacks that one must be a paid Putin troll. There’s no willingness to reflect candidly on the realities that we are creating by our collective actions.
Even more frustrating is the complete inability of the political elite to come to terms with their own failures and change course, doubtlessly partly fueled by a visceral hate for Russians and the unerring conviction of their own moral superiority which to me just appears as crass hypocrisy since in its actions the West daily demonstrates that it doesn’t care very much for human life.
I am also pessimistic about the long term ramifications of the looming economic self-inflicted depression, which will no doubt bring to the fore the most regressive elements of society. The absurdity of the whole situation we brought ourselves into by incompetent politicians is mind boggling.
I also thank you. It’s the same over here, at least at the one place where I comment more than I do at the big place…three total. Apparently many humans are being herded.
Thank you for your input from Germany. What you say makes sense of what we can see faraway. Do you think Habeck does what he does,and says what he says because he truly belongs to the de-growth crowd (antirussian section)?
You are welcome, Ignacio. The behavior of our elite especially Habeck is absolutely puzzling. To me this war presented a unique opportunity (sort of inverse “shock doctrine” disaster capitalism, even though one would hope humans could be driven to action without a tragedy) to develop alternative energy sources on a scale commensurate with the requirements of the impending climate catastrophe, which, of course, would only very slowly lead to a reduction of the dependence on Russia. But instead Habeck and the rest accept dirty fracked and expensive LNG, burning more coal, etc to decouple from Russia as fast as possible, completely disregarding the disastrous consequences this will have for large parts of the population for which he and the rest of the elite are supposedly acting in its best interest and the environment which presumably is dear to their heart. Either he is a true cryptic believer in the degrowth crowd and saw this as an opportunity to wreck the economy which seems quite nuts to me or he truly believes that there is no other moral choice than to punish Russia no matter what. Or could it be that the true masters of NATO announced how everything will go down? As Chomsky said in a recent Paul Jay episode, we live in a lunatic world.
Since yesterday, though, there is a sudden appearance of articles in Der Spiegel and also on the Arte TV channel examining the effects of the suddenly exploding energy bills on small shop owners in Italy and GB. Some journalists seem to be waking up albeit late.
Re helping those Greens to get the war propaganda in perspective my mind wanders off to the subject of electronics…batteries and images. Already the race for lithium has tossed out one president (his team back in as far as I can tell). You think back to “The Hidden Persuaders” and subliminal methods. Now things strike me as flat out Pavlovian! I wrote the following somewhere else today: The sharper the photo of rockets going off (Twitter, ‘newsfeed,’ etc)…or the more unique…the more ‘readers’ believe whatever nutso text that comes with them??? Likewise, the more archetypal the legs on Fox…etc etc.
I could recommend to many bracketing aside the religion in this book, but few will believe one important aspect of the propaganda problem could be this simple, let alone read more from this book discussed [more is available online]…
Everyone can’t make the meeting, so how do you do those worker council meetings Michael Albert talked about without electronics? Dunno. Send the audio over old fashioned telephone lines to old fashioned phones that do conference calls?
To be not quite so “degrowth”…podcasts give me hope. They go back to words. Of course, this site is already at that level with mostly print, but how to teach this generation that words by themselves can get the job done, or even convince them there’s a job to do?
In Europe, too many people read and speak English not to have access to all the writings about the machinations that the USA went through to throw a wrench in Nord Stream 2. And it’s not like it happened so long ago that it could be forgotten. Crazy.
So they want to put a price cap on barely existing to non-existent supplies and let the USA energy producers take them to the cleaners. Or they want to ease their way into gaining widespread support for and pressure to capping prices on USA energy, as if “mechanical or transportation issues” wouldn’t suddenly appear from their “ally.”
They may read and speak English, but many of the younger ones simply don’t read anything other than the memes on their social media accounts, while those who are old enough to remember the Cold War swallow the propaganda like “good Germans.” From what I see, the ones who are against what’s happening are those from the further left and right, which of course makes it easy for the Euro MDM to paint them as marginal malcontents.
Some of the older ones don’t read too much either. I have tried having conversations with people about Ukraine, energy etc (testing the waters very delicately) and most have bought 100% into the official line. The next excuse usually is “I don’t know enough about the topic to have an opinion”.
The price cap idea is particularly daft. What does it matter if you have a price cap if no one is selling to you?
I hope to make it through the winter personally, but the medium term does not look pretty. Maybe I will start researching emigration possibilities too…
What does it matter if you have a price cap if no one is selling to you?
The logic is to make sure that if Russia does not want to sell to the EU under the price cap, then no other country will be able to buy from Russia either, by sanctioning those countries that do not respect the cap.
Now, the problem is that the largest non-EU importer of Russian oil and coal, and the second largest for gas is China. Threatening China with sanctions because it does not respect the price caps will be… interesting.
More on the “logic” https://www.reuters.com/markets/commodities/us-treasury-russian-oil-price-cap-guidance-gives-safe-harbor-maritime-service-2022-09-09/
“then no other country will be able to buy from Russia either, by sanctioning those countries that do not respect the cap.”. Ugly politics.
It’s pretty clear that no one dares to impose secondary sanctions, as in sanctioning countries for trading with Russia. China has gone from pretending to be evenhanded about Ukraine to making a point of saying it’s America’s fault. The latest UN vote on a Ukraine matter had many more countries siding against Ukraine than for it, a reversal from the pattern soon after the war started. Russia exposing that the Ukraine grain shipments have gone almost entirely to Europe, when the pretext for freeing them up was to feed the Global South, is not going to win Ukraine more friends. Oh, and Turkey confirmed Russia’s claims (and that before getting to the fact that it was Ukraine, not Russia, that was blocking the shipments in the first place….)
Ah, yes, Poland and Yamal. Playing both ends against the middle.
Where is the EU? I know that Yamal is off-line because the Poles didn’t want to pay in rubles.
But where is the EU? As we discovered with regard to Biden and Boris Johnson destroying the tentative peace agreement as the EU looked on, the EU is now waiting for Biden and Truss (who may believe that Baden-Wurttemburg is part of Russia) to allow member states to have industrial economies.
Of course, telling the Poles to put Yamal back on line would involve endless days of huffing-puffing and Polish drama-queenery. Poland is the Christ on the Cross of Europe, and Jesus doesn’t pay in rubles!
[I won’t even touch the mysteriously shut off pipeline in Ukraine. You’d think that Ukraine would be a tad loyal to the allies that it keeps shaking down. Ahh, but there’s more to be made in serious drama-queenery.]
This will not end well.
I’m old enough to remember when the USSR was communist, and western Europe was capitalist-ish. But this line:
First, Russia has said it will not sell gas or oil to any countries that try to impose non-market prices.
turns that on its head. When I read that I came to the conclusion that I while don’t understand the players or the plays*, that’s not how things were when things were (relatively) peachy. That line alone gets me to think “uh-oh, something is really upside down here”.
*Above my pay grade. I just try to keep up on this site.
Fortum is our electricity provider here in Norway. It lost 7,4 billion Euros in the second quarter.
In the latest email from Fortum which informed us of the electricity price for August (without the subsidy), we got some more how to save electricity tips. Thank you Fortum.
1. Don’t heat/boil water on the stove top. Use an electric kettle instead.
2. Don’t thaw out freezer articles on the kitchen bench – use the refrigerator.
Fortum with gigantic loss after Russian gas stop.
As has been pointed out ad nasuem, corporations are “designed” to go BK. Debts are paid or not and company leadership gets flushed. The company goes on, and is supposely run to not make the same mistakes. When people go BK, lives are wrecked, homes lost, people can die.
Why would you “bail out” the corporations? Why would you “save” the corporate leadership? They screwed up, and failed. The people that suddenly cannot pay the price gouging bills did nothing wrong, and putting them on the street rather than reforming the corporation will end up costing way more as it tears apart society.
The is the biggest failure of the current elites, capitalism only works if you flush the losers. But really, we don’t have capitalism anymore so maybe it’s all a moot point. But please quit pretending this “the market” at work; it’s not. It’s elites protecting a bunch of crooks and losers.
Ian Welsh made some interesting observations in his most recent post: “When Is the Next Oil Driven Inflation Spike In the US? December to March”. He pointed to a twitter series and a Bloomberg article that indicated Biden has been selling sour crude from its Strategic Petroleum Reserve to hold down the price for sour crude. Estimates based on the rate the u.s. is selling off sour crude from the Strategic Petroleum Reserve and the total amount of sour crude in the Reserve suggest it will run out of sour crude to sell some time around March, 2023.
“Of course, when Biden stops releasing oil, either because he’s out or because he chooses to stop after the election or the holidays are over, then prices are going to spike if sanctions are still in place against Russia and/or Russia is unwilling to sell to the West. As a bonus, the government will need to buy oil itself to stock the reserve back up.”
Things may be a little better in the u.s. than in the EU but this could be a difficult Winter for the u.s. too. At least, unlike the EU, we do not have as much industry or small business left that can fail as energy prices go up.