It wasn’t supposed to be this way. Italy has Algeria to the south, which was going to increase gas and oil exports. Italy had the LNG facilities and was going to be part of “the continent’s new economic growth engine.”
Such ideas were faulty to begin with, and they have come crashing down in recent weeks as the US-led Red Sea fiasco exposes deep issues with Italy’s plans to not only weather the energy crisis caused by Europe severing itself from Russia, but capitalize off of it.
The escalatory chain of events starting with Israel’s war on Gaza leading to the US’ exercise in futility to save international shipping from the Houthis has Italy scrambling to find other sources of LNG. Italy has been getting about 50 percent of its LNG from the US, while around 39% was arriving from Qatar, but as a result of the Red Sea chaos shipments are being cancelled or delayed.
That’s bad news for Italian energy company Edison, which is in the middle of a 25-year contract with QatarEnergy for about 6.5 billion cubic metres (bcm) per year of LNG, and Italian energy giant Eni, which in October signed a 27-year-deal for up to one million tons per year of LNG.
The Red Sea blockade is also causing more widespread supply chain chaos in Europe and could leave Italian ports, heavily dependent on the Suez Canal, at a disadvantage compared to northern Europe.
And it all couldn’t come at a worse time for Italy.
In its latest forecast, the Bank of Italy estimates GDP growth will slow from 0.7 percent in 2023 to 0.6 percent this year.
Italy’s annual inflation rate eased to 0.6 percent in December 2023 from 0.7 percent in November. But a wider lens shows how dire the overall picture is: throughout 2023 consumer prices rose by an average of 5.7 percent, following the 8.1 percent increase in 2022.
Istat reports that the slowdown was mainly due to “reduced pressure on energy prices,” which only climbed by 1.2 percent, but that’s on top of the 50.9 percent surge in 2022.
The effects on real wages have been a disaster:
There have been many complaints about the cost of living crisis in the US, but please take a look what has been happening in Europe pic.twitter.com/oyLuwJMN3b
— Michael A. Arouet (@MichaelAArouet) January 27, 2024
In 2022, 35.1 percent of Italian households experienced worsening financial conditions, according to the National Consumer Union (UNC). The numbers haven’t been released for 2023 yet, but similar highs wouldn’t be surprising. The president of the UNC said just last month that an increasing number of Italians are on “forced diets” while still spending more on food.
This will lead to a worsening of one of Rome’s chief problems. Italy is no stranger to declining real wage growth. Since joining the monetary union in the 1990s and no longer being able to devalue its own currency, Rome embarked on decades-long efforts (ongoing) to tame inflation and real wage growth. They were largely successful except it backfired “in terms of aggregate demand, productivity and, ultimately, growth.”
Manufacturing continues its nosedive with December marking the ninth-straight month of declines in output and new orders, and a Hamburg Commercial Bank analysis notes that the purchasing managers’ index “fails to convey any signals of hope.”
Confindustria, Italy’s main business association, said in a recent report that industrial production and business confidence, already falling in 2023, are getting even worse due to the US-led Red Sea fiasco. It’s another nail in the coffin of Europe’s industry, including Italy, the EU’s second largest manufacturing nation.
Some Europeans are still pushing the idea that the EU do something in the face of threats to their industry from the US and China.
#19gennaio intervista @repubblica. Necessario e urgente Industrial Act 🇪🇺 per affrontare sfide competitive lanciate da 🇺🇸 e 🇨🇳. Serve stimolare investimenti nei settori strategici guardando al futuro industriale dell’Europa. Senza industria non c’è Europa ! pic.twitter.com/sLSu8rXxhk
— Carlo Bonomi (@CarloBonomi_) January 19, 2024
While Brussels dithers, the deindustrialization continues, but EU and national officials still talk about ramping up shell production and taking on Russia.
Neoliberalism, the undying ruler in the Eternal City, is always the answer to the perpetual bad economic news. And so the strip mining of once-proud Italian assets continues. It was only a few months ago that the New York-based private equity firm KKR, which includes former CIA director David Petraeus as a partner, reached a controversial agreement to buy the fixed-line network of Telecom Italia. Now the Italian daily La Repubblica is declaring that “Italy Is For Sale,” in which it describes plans for 20 billion euros worth of privatizations, including more of the state rail company Ferrovie dello Stato, Poste Italiane, Monte dei Paschi bank and energy giant Eni. The plan is reportedly necessitated by the country’s tax cuts. The roughly 100 billion euros Rome has burned through in order to address the energy crisis surely hasn’t helped either.
The La Repubblica story led to a good old-fashioned inter-elite feud over who does a better job of selling out Italian workers. Italian Prime Minister Giorgia Meloni attacked the paper’s owners (the multi-industry business dynasty Agnelli family whose patriarch was one of the original founders of the Fiat motor company) for being hypocrites as they sold Fiat to foreign owners. While they fight, no one has a plan for how to stop the decline of Italian manufacturing.
As of October, Italy’s average wholesale power costs were about 147 percent above their 2019 average, leading to ongoing carnage in energy intensive industries.
A few weeks ago, an Italian court allowed energy companies to cut off gas supplies to steel company Acciaierie d’Italia (ADI), majority owned by multinational steel giant ArcelorMittal, over mounting debts.This is the company’s main plant, which is in the southern Italian city of Taranto and is one of the largest in Europe. It employs about 8,200 people and many other jobs depend on the plant.
Italy as Energy Hub?
As Italian industry’s decline accelerates, and the government keeps selling off assets, its plan to transform the country into a gas hub for Europe is going up in flames in the Red Sea. Meloni’s predecessor, the unelected former Goldman Sachs man Mario Draghi, was one of the biggest proponents of the EU’s doomed Russia policy and pushed the energy hub idea, which was seamlessly picked up by Meloni.
It was never all that well thought out in the first place.
In 2021, Russian imports accounted for 23 percent of Italian fuel consumption with gas depended on more heavily (about 40 percent of imports), but it was said Italy was well-positioned to manage the loss of Russian fuels due its proximity to North Africa. Italy quickly began looking south across the Mediterranean as part of the EU-wide turn to Africa in search of energy replacements for Russian oil and gas. Algeria was going to increase the flow of gas through an existing pipeline, and the countries plan to build another pipeline.
Here were Italy’s calculations from a March 2022 piece from Hellenic Shipping News:
Italy consumed 29 billion cubic metres (bcm) of Russian gas last year, representing about 40% of its imports. It is gradually replacing around 10.5 bcm of that by increased imports from other countries starting from this winter, according to Eni.
Most of the extra gas will come from Algeria, which said on Sept. 21 it would increase total deliveries to Italy by nearly 20% to 25.2 bcm this year. This means it will become Italy’s top supplier, provide roughly 35% of imports; Russia’s share has meanwhile dropped to very low levels, Descalzi said this week.
The rest of the shortfall was to be made up of LNG shipments from Angola, Egypt, Mozambique, Qatar and of course the United States.
Rome was using billions of euros coming from the EU’s green fund, the REPowerEU plan, and the Covid recovery fund to completely wean itself off Russian gas and turn the country into a hub, mainly with LNG storage facilities. The government rushed through a 5 billion cubic meter capacity (bcm) LNG terminal project in Tuscany with the Draghi government appointing a special commissioner with near-absolute powers that allowed the project to proceed despite court challenges.
In December, Italy’s gas grid operator Snam completed a $400 million deal for another floating 5 bcm LNG storage and regasification facility that will be based on Italy’s northeastern coast, which will bring the country’s total to 28 bcm. In September of 2022, Reuters declared that the “energy crisis sires new European order: a strong Italy and ailing Germany.”
The Italian government patted itself on the back and said it was the “best in Europe” on energy security.
While gas made up about 51 percent of Italy’s total electricity generation in 2022 (the highest level in Europe), more than 95 percent of it was imported from overseas, and the problem was the math was overly optimistic going forward.
The Transmed system connecting Algeria and Italy wasn’t even operating at full capacity in 2022 when Italy began to believe it was going to be able to ramp up deliveries. There were major Algerian production issues, including infrastructure problems and the need to divert gas to meet increasing domestic demand for electricity.
Marco Giuli, a researcher at the Brussels School of Governance in Belgium, told Natural Gas Intelligence at the time that “the additional 9 Bcm from Algeria by 2023 is unrealistic, especially considering that Algerian supplies to Italy increased by 80% between 2020 and 2021, Giuli said.
Here we are in 2024 and Algeria’s gas exports to the EU have actually declined:
🇩🇿’s LNG export reached a 13 year high in 2023. As 🇩🇿’s largest LNG buyer, 🇹🇷 increased its import by 20% reaching a record 4.45 BCM followed by 🇫🇷 & 🇮🇹.
— ReDa Amrani (@RedaAmrani_) January 15, 2024
And the main reason Italy has been able to import as much gas as it has from Algeria is only because it was diverted from Spain due a spat over Madrid’s support for Morocco in a Western Sahara land dispute that angered Algiers.
Italy’s plans also didn’t take into account possible supply chain issues that have been shaking the shipping industry now for years.
That’s the thing about supplies through the pipelines between Russia and Europe; there’s a reason they were always described as cheap and reliable – at least up until the point states start blowing up pipelines, and nearly an entire continent’s worth of elected (and unelected) officials lose their minds.
The gap is often wide between those officials and the public, however, as is the case in Italy.
Italians and Russians enjoy longstanding ties. After World War Two the strong Communist party in Italy was a natural ally to the USSR, and Italian companies were some of the biggest traders with Russia during Soviet times. Since the breakup of the USSR, Russia and Italy remained strong business partners. For example, Italy shared manufacturing know-how, such as on civil aircraft and helicopter projects, as well as the modernization of rail transportation, and Russia had the energy. Many mid-sized Italian businesses were also eager to get into the emerging Russia market. Italians have never been as supportive of Project Ukraine as their northern neighbors, and the public is increasingly opposed to the country’s involvement in the war.
On January 22, La Repubblica released the results of a December poll that showed those against continuing to send military aid is now at 57 percent. Those in favor has dropped from 50 percent in April of 2022 to 47 percent in September of 2023 to 42 percent now. Other polls have found even less support.
In January, the Meloni government extended military aid to Kiev for another year.