Winter is here

And the "Russian energy roulette" truly begins

Issues contributed:

• How is the second ‘leg’ of the energy crisis likely to proceed and what are the effects?

• What will the effects of sanctions of the EU, hitting Europe and world at the worst possible time, be?

• What are the likely responses of global leaders?

This week a long overdue winter is arriving to Europe. A very mild October and start of November have led some to conclude that Europe would have solved her dependency on Russian imported energy (gas and oil).

However, for example, German natural gas authority, the Bundesnetzagentur, begs to differ. In its most recent summary, the agency states that:

Avoiding a national gas supply emergency this winter depends on three things: cutting gas consumption by at least 20%, LNG terminals starting operation at the beginning of next year, and the winter decrease.

Essentially, the agency states that avoiding a gas emergency still depends on three “wishes”: rather extreme belt-tightening from households and companies (also called de-industrialization), no hiccups in complex construction projects and an ‘act of God’. I would not be very confident that all these come to be, even though they naturally can. Some forecasts are, for example, predicting a very cold winter for the northern hemisphere.

I have already written on the vulnerabilities of European gas and electriticity markets in detail before, and will not repeat them here. I will make few notions, though.

The German play?

First warnings of possible rolling blackouts have appeared in Finland. This is not an encouraging sign, because it implies that politicians at the Nordpool electricity market area are planning to conduct an electricity hara-kiri (or maybe seppuku). Nordic countries are 100% self-sufficient in energy production and we will only have an energy crisis and blackout, if we try fill the energy glut of central Europe. I consider that this would be extremely foolish decision as it would just weaken us, but that’s where we are heading.

German Chancellor, Olaf Scholz, have been making rounds in energy exporters and China. Leaders of other European countries have not accompanied Chancellor Scholz. This implies that his tour has been an effort to secure supplies of liquified natural gas, or LNG, to Germany.

I have warned that Russo-Ukrainian war and especially the sanctions attached to it, may lead to the fragmentation of the European Union. The actions of Chancellor Scholz, imply that this may have already occurred.

Every country for itself and ‘fast eat the slow’ may become the norm. Those who are slow to acknowledge this, will be hurt the most.

The gamble of the EU

The sanctions EU has imposed to Russian energy exports are planned to take full effect during the next three months. Their timing could simply not be any worse.

Sanctions are effectively cutting the flow of Russian gas and oil to Europe and partly to the world during the peak demand. It’s a completely fool-hearted strategy, and to those preferring the ‘tin-foil-hat’ side of things, this looks like a sabotage of Europe. I have to admit that the latter (tin-foil-hats) are able to make quite strong case for themselves, although I personally still consider that the very poor timing of the sanctions was an act of stupidity and/or arrogance. I might be wrong, though.

It’s needless to say how destructive rolling blackouts would be for whole Europe and her industries. In the Nordics, they would be a purely political decision and we simply have to wait and see what comes. To note, the Nordpool hydro reservoir capacity is running clearly below the 2000-2019 median level.

The EU sanctions will cut 7.4 million barrels per day from global markets by January. This will have effects both to Russia (which can be serious) but also globally.

U.S. diesel storages are at the lowest level in 70 years and shortages have already appeared alongside with a debate on possible export bans (I consider them to be unlikely at this point, though). War-related sanctions are also already creating a global shortage of gasoline, which is becoming an issue even at the U.S. east coast. Everyone probably remembers the gasoline shortages and drivers queuing in the U.K. and in Europe in late-September and October. We are likely to see them return during the next few months.

While it’s very much understandable that economic pressure is put on Russia, we again return to the question, what will the price be? I fear it will be much bigger than many currently understand

What will the response be?

This brings us to the conundrum. When the crisis truly gets going, the rising energy prices and financial shocks are likely to reverberate through the globe. So, what will the response of our leaders be?

Most importantly, if (when) the energy crisis truly emerges again, will the EU leaders try, this time for real, push through the ‘Energy Crisis Fund’? The German €200 billion fund, aimed at cutting the energy costs (through energy and gas price “brakes”), has already caused worry in the other EU countries. Somemember countries worry that the Fund could lead to increasing German dominance in the continent with German companies taking over peers of weaker member states not being able to master enough financial support for their companies.

A piece published at a Pro-EU ThinkTank, Bruegel, criticise the German fund and calls for more demand suppression and supply-expansion policies. Writers also call for an EU crisis fund constructed more prudently (not leading to further inflation pressures and maintaining the no-bailout clause).

This is nice, but the no-bailout clause was utterly destroyed with the €800 billion Recovery Fund of the EU voted through past year. During the Recovery Fund debate it also became clear (I was leading the discussion in Finland) that the primary aim was to establish a federal-like transfer union and common (federal) debt in the EU. This would be likely to be the (hidden) main aim of the energy fund.

My faith on EU leaders being able to agree and execute any rigorous economic project has also collapsed. National and political interests have over-run economic logic in the EU for a very long time. I have no reason to suspect it would change this time around. Thus, any fund would be likely to hasten inflation by disproportionately increasing government spending.

Deeper into the crisis?

I the September Special Issue of our Q-Review series, we wrote:

In any case, the aspect many fail to grasp is that an energy crisis, if fully manifested, will lead to wide-spread closures of manufacturing companies and possible whole industrial sectors. This will have a serious impact on employment, but also on supply chains representing a wide variety of components. Supply chain problems experienced in the height of the coronavirus crisis (lockdowns) could seem as a ‘walk in the park’ compared what’s about to hit.

Moreover, during the Crash and Flood, if our leaders follow the Great Reset agenda, two things would be likely to appear:

1.     Takeover of failing SMEs by the global (or local) conglomerates.

2.     Conditional bailouts of crucial companies in sensitive sectors, such as infrastructure, medical, banking, etc., the governments (effectively a takeover).

The former of these is clear-cut. Major global or local players will either buy out or bailout failing (but high-potential) small and medium-sized businesses, thereby obtaining shareholder control. The rest will fall into bankruptcy. The latter could (would) be a more drastic process.  

Due to the combination of energy, food and inflation crises, we could see a massive government takeover and/or bailouts of banks, commodity traders, utility providers and even retail giants. This would, rather organically, lead to the ‘stakeholder capitalism’, or modern fascism, where governments and major corporations would become heavily tied together. In addition, fiscal support would also make households more reliant on governments. In the extreme case (possibly more likely in the Calamity) a transfer of ownership, in compensation for a debt jubilee, could be offered. This would lead to a very dystopian setup paving way for the one (unofficially stated) aim of the Great Reset, where “you own nothing, and will be happy”.

I do dearly hope that nothing of this sort manifests, but to be honest, during these crazy times, we have to be prepared for almost everything.

It should also be noted that (secretive) ceasefire talks between Russia and Ukraine seem to have been on their way in Ankara, Turkey. I do hope that a truce will be settled, as it would bring much needed relief. In many ways, however, it’s already late, as I explained in my Twitter thread.

Currently, it’s my view that we will face another turmoil in a matter of weeks driven by another round of energy shocks, financial market turmoil and/or nasty surprises in Ukraine.

I recommend everyone to continue preparing for what might be a very dark winter.

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