During a speech to the United Nations in 2018, President Donald Trump warned Germany: "Reliance on a single foreign supplier can leave a nation vulnerable to extortion and intimidation… Germany will become totally dependent on Russian energy if it does not immediately change course." In response, the German delegation was caught on camera laughing at him. Fast forward four years later, here are some not so funny comments and headlines.
Top Energy Regulator Warns Germany Won't Survive Winter Without Russian Nat Gas.
Every day, we receive emergency calls from companies that are about to stop production because they can no longer pay the enormously increased energy bills. Europe’s steel industry, which requires massive amounts of cheap natural gas to run, is slashing production and facing severe financial headwinds. Other sectors, such as chemical production, agriculture, and automating are all facing unprecedented hurdles.
How did this happen? The immediate and primary cause: Russia has choked off the supplies of cheap natural gas that the continent depended on for years to run factories, generate electricity and heat homes. Russia used to supply 40% of Europe’s natural gas, and even more to Germany.
Then there’s the weather. Drought has undermined hydroelectric power. France’s nuclear power plants are running at half-strength because of shutdowns over corrosion problems in key pipes and repairs. A heat wave limited use of river water for cooling power plants, and lower water levels on Germany’s Rhine River has reduced supplies of coal to generators.
But the underlying cause is, according to Forbes Magazine, “Europe’s hasty transition” away from gas, coal, and nuclear to the intermittent renewable generation inherent in wind and solar. In addition, “Europe’s master plan for carbon neutrality has pushed the member states away from long-term purchase agreements and towards short-term pricing, making the crisis even more costly to energy utilities and other consumers.”
Case in point: after the Fukushima nuclear disaster in 2011, German chancellor Angela Merkel announced her nation would close down all its nuclear power plants. Once there were seventeen reactors in Germany. Now there are only three remaining.
This rush to “clean energy,” without nuclear, caused Germany and the rest of the EU to rely more heavily on Russian natural gas as it, to use of one President Biden’s favorite words, “transitioned.” The resulting cost of this decision was heavy, for it burdened German consumers with the highest global electricity prices per household in the world. Thus, in 2019, before the Russian invasion of the Ukraine, German households were paying 34 cents per kilowatt-hour compared to 13 cents in the United States.
Now that the Russians have invaded Ukraine and cut off Europe from its natural gas, the financial repercussions are simply humongous. According to some experts, Europe is facing a 2 trillion Euro increase in gas and power spending, and energy bills will rise so much that it would constitute over 20% of EU household gross disposable income. This huge increase will certainly crowd out consumer spending on other goods and services, and will likely bankrupt many, many businesses.
So, what can Europe do? For one thing, to replace the Russian gas, they have increased the importation of US liquid natural gas. Unfortunately, they are paying in US dollars, and the value of their euro has fallen so much that the equivalent price in euros is 10% more than a year ago. However, it could be a whole lot worse. If they were still buying Russian gas, they would be forced to pay in rubles, and the Russian currency is up more than 40% against the dollar since the Ukraine invasion. Either way, the extremely weak European currency is causing even more energy inflation.
Of course, European politicians are rushing to the rescue of consumers (VOTERS) with plans to freeze prices in power and gas markets. That is not a solution! The key problem is that production of electricity cannot keep up with the demand, and any capping of price increases will not serve to dampen consumption. So those same politicians are coming up with other plans. There is always the Jimmy Carter idea of wearing a sweater during the coming cold winter, but voluntary sacrifice will probably not work. The pols recognize this, so there is talk of rationing, blackouts and even jail for those (in Switzerland) who raise their thermostat over 66 degrees Fahrenheit.
However, what is good for consumers – lower energy prices – is disastrous for European utility companies, which face bankruptcy if they can’t pass along higher fuel costs. Every European nation is planning on printing billions in loans in a massive bailout of companies facing liquidity issues. For instance, the plan of the new prime minister of Britain, Liz Truss, is likely to cost the government $200 billion. That’s peanuts, however, compared to the $1.5 trillion needed to prop up European derivative trading (hedging), according to Norwegian energy giant Equinor.
We’d like to say there is a silver lining, but frankly, this is a financial disaster of epic proportions. Unless the war ends sooner than we expect, European nations will be forced to borrow and print enormous sums of money. Consumer spending should significantly decline, and businesses and employment will suffer. Inflation will stay high, and the Euro will most likely lose even more value. European elites will still fly their private planes to Davos and the like, and it will be the poorest of the poor who will pay for their mistakes.
Who’s laughing now?
https://www.zerohedge.com/commodities/without-energy-no-economy-can-run-german-companies-warn-disaster-electricity-gas-taps
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