European Natural Gas Shortage of 2022?

[Dream of Freedom]

Are any of you in Europe personally doing anything extra to prepare? If so I am curious as to what.

Do any of you have any insights into the economic ramifications?

[Seppia]

@doomberg is a great follow on Twitter, been talking about this for months.
Another great follow on commodities is Javier Blas on Bloomberg.

I am happy I’m moving to the USA, and I’m happy I’m relatively well off financially: electricity costs are going though the roof in Europe.

What worries me is the politicians seem blissfully unaware of basic functioning of stuff, yesterday Von Der Leyden was blabbering about “decoupling the price of electricity from the price of gas” and putting price caps.

What I believe is going to happen:
1/ rationing (almost certain at this point)
2/ subsidies (already happened with the nationalization of EDF, happening else we ie in Austria)
3/ industries closing (happening)

Worst case scenario this is an industrial catastrophe in Europe that will hit this winter.
There are two ways out of this in the short term
1/ Europe caves to Russia so they reopen the taps
2/ massive deficit spending to subsidize away a lot of the cost


I’m certainly missing a ton of stuff so interested to hear the board’s opinion on this one

[zbigi]

Also, european stock markets will probably see a huge bloodbath once companies stop operations due to gas and/or electricity being too expensive (just a week ago, largest polish producers of fertilizers stopped operations until further notice, due to natgas prices). Inflation will also probably be huge.

As for my personal preparations, luckily Poland's ruling Knuckleheads Party (PiS) have been resisting moving away from coal, so this is still where most of our electricity and heat omes from. And even though our local coal extraction is not enough and we've been importing a low of cheap Russian coal up until the war, it's probably much easier to import coal from other continents than LNG. It is even reflected by prices of coal going up by "mere" 200%, as oposed for 1000% for natgas.

Unfortunately, Europe has unified market for energy, so it may be possible that electricity generated in Poland from cheap coal will just be sold abroad with a huge markup by Polish energy companies? I dunno if Polish rulers can prevent that from happening.

[jacob]

What I believe is going to happen:
1/ rationing (almost certain at this point)
2/ subsidies (already happened with the nationalization of EDF, happening else we ie in Austria)
3/ industries closing (happening)

This is the Danish approach, except inverted---the government is basically trying to keep the pain away from the voters for as long as possible. Big users, like heavy industry (e.g. concrete production), are already rationed. The 400,000 households with natgas(*) heating have received a "heating check". This being a new system, some money was wasted going to people who didn't need it but checked a box somewhere. Someone actually dared to suggest cutting taxes and fees on energy (this is a 180 on "go green" policy). These are fortunately high, so there's a big buffer there to play with before it hits the consumer (unlike in the US). No rationing at the residential level yet. However, I know that in Germany some apartment buildings are turning the central heating down to 16C/61F at night. There's increasing talk about countries looking out for themselves, e.g. not exporting electricity insofar they're short themselves.

Overall, at least at the government level, plans are being changed realizing how underprepared they are for a situation like this.

(*) Ironically, natgas was rolled out under great fanfare in the mid 1980s as "the future".

At the praxis level, the commentary(*) is full of people talking about how they can save on electricity by upgrading this or that product. E.g. replace all lights with LED, energy-star rated dry tumblers, ... I made some suggestions about maybe doing dishes by hand or line drying clothes, but that is still too many WLs away from what people are willing to consider. The suggestion of wearing a jacket indoors was laughed off. In terms of prepping, the response is 98% "LMAO it can't happen here". Basically, pretty normal for humans.

(*) Also interesting is that people post their respective electricity budgets. Like with money usage, it's all over the map. Some families are easily using 2-3x as much as other families for the same size household. It's really hard to bridge the understanding, but people are trying.

A few people are getting absolutely crushed. Basically people are clueless about their energy usage. As long as the lights stay on, they're used to just paying the bill. Any conversation is very defensive. One example was a person with an electricity bill of $1500/month! After much back and forth, it became clear that this was one of the rare cases of baseboard heating. However, the person had realized that baseboard heating was eating a lot of electricity, and so turned them down a bit. However, since it was now too cold for comfort, they had bought some electric heaters and set them up around them home instead. ... It's basically this level of understanding that we're dealing with.

[ertyu]

What is interesting to me is that the DAX still hasn't fallen properly - or at least to me it seems like it hasn't. For how much risk/costs/industry closures are being predicted, it certainly seems to me both the DAX/FTSE/EUROSTOXX should be lower, and they aren't.* Bridgewater shorted them.

* this is not a quantitatively reasoned opinion

If we bet that Russia/Ukraine would not grow into WW3 and things do get rougher this winter, there might be a buying opportunity.
If Russia/Ukraine gets resolved unexpectedly, there might be a rapid bounce due to short covering.
A bunch of analysts with republican bent have been criticizing Biden for his short-sightedness in drawing down the us petroleum reserve "for political reasons" leading to the elections because this would make the us very vulnerable to the saudis in the middle of winter/at the time when the reserve needs to be replenished. It is, however, possible, that what is being planned for is that the russia/ukraine conflict would see a resolution before that happens.

Honestly, with the strength of negative sentiment, I would not be surprised to see a surprise the other way.

I am also curious to hear why I might be wrong. As I said, this is just opinion and isn't based on quantitative analysis.

[white belt]

Yeah I think I've been posting about this since the leadup to the Russian invasion. The one bright spot is that gas storage is high for this time of the year in Europe. However, storage only can supplement continuous gas flow, so if the gas flow reduces as we move into the colder months then Europe will have a tough winter. Industry and the economy as whole will get crushed as output gets further restricted. I think watching how all of this plays out will be an interesting case study for how the developed world will respond to natural resource shortages in the future. This year it might be natural gas, but next year it might be grains (they are related due to fertilizer production). These sort of disruptions should make individual households more resilient over time, but the interim could be very unpleasant. My best advice for those in Europe is to get yourself some good indoor winter wear like Refrigiwear or the local equivalent. See the thread about reducing heating bills where multiple posters have experimented with thermostat temperatures in the 50F's and low 60F's for an extended period of time over the winter. I was surprised how bundled up I needed to be to feel comfortable when sedentary at 60F interior temperature.

[ertyu]

Quite a few talking heads online are of the same opinion - that western europeans are too soft and spoiled and won't know how to handle the situation, so we will see social unrest this fall/winter as people ask themselves, "and why is some buttfuck nowhere region ukraine worth my inconvenience."

Based on your observations, would you say this is likely?

[zbigi]

What is interesting to me is that the DAX still hasn't fallen properly - or at least to me it seems like it hasn't. For how much risk/costs/industry closures are being predicted, it certainly seems to me both the DAX/FTSE/EUROSTOXX should be lower, and they aren't.* Bridgewater shorted them.

* this is not a quantitatively reasoned opinion

If we bet that Russia/Ukraine would not grow into WW3 and things do get rougher this winter, there might be a buying opportunity.

Yesterday, Shell CEO remarked that Europe is in for at least a couple rough winters. Simiarly, Belgian Prime Minister (I think?) said that it will take 5-10 years for the situation to return to normal. Given that, buying euro stocks soon now might be premature, as they might be down for quite a while. It might be better to stuff that money into inflation-adjusted bonds, and significantly increase the (nominal) capital before moving to stocks.

[chenda]

I'm not too concerned.

My impression is there is enough price and supply slack in the system to mitigate the worse. Besides, Putin needs the euros to finance his war just as much as Europe needs the gas.

I only use my heaters for a few months over the winter, as I'm in a well insulated small flat. Wearing jumpers indoors in the winter is something I've always done and I usually keep the heating off at night. A few extra blankets is more than sufficient.

My parents have a large open fireplace in their house which they often use in the winter as a supplemental heat source. I'm going to encourage them to stockpile firewood soon as I suspect prices will rise a lot over winter, if they haven't already.

[theanimal]

@Chenda-Open fireplaces are traditionally about 10% efficient. Almost all of the heat goes straight up the chimney, as well as much of the air within the room. They'd be better served by insulating the fireplace further and not using it.

[chenda]

@Chenda-Open fireplaces are traditionally about 10% efficient. Almost all of the heat goes straight up the chimney, as well as much of the air within the room. They'd be better served by insulating the fireplace further and not using it.

But its sooo nice sitting by an open fire on a winter's evening...

Also, if the central heating fails it provides some redundancy.

[white belt]

My impression is there is enough price and supply slack in the system to mitigate the worse. Besides, Putin needs the euros to finance his war just as much as Europe needs the gas.

If gas flows are further restricted, there is not enough supply to meet demand. No amount of money will solve this issue in the short term because it is based on physical limitations. Europe has already been maximizing the amount of gas they can import from the USA, but it will take years to get more import terminals and ships built. Similarly, it will take years for Europe to build up alternative energy production. Russia is profiting heavily from their oil exports and has spent the past few years hardening their economy for exactly just this situation. Russia can absorb the pain from a gas shutoff much better than most of Europe.

[chenda]

Russia can absorb the pain from a gas shutoff much better than most of Europe.

But can they afford to say goodbye to the €100 million they get daily from gas exports to Europe?

[white belt]

But can they afford to say goodbye to the €100 million they get daily from gas exports to Europe?

Yes, Russia is one of the least indebted nations in the world (<20% debt to GDP). Ironically, the default of Russian debt due to sanctions actually strengthened the Russian government balance sheet since it just screwed over foreign holders of Russian debt. The Ruble is at its highest level against the USD since 2018. If energy prices remain high (mostly oil) and Asia continues to buy from Russia, the Russian economy will continue to stay afloat.

See more: https://www.cnn.com/2022/08/28/business ... index.html

[Jean]

somehow, i'm excited.

[unemployable]

Besides, Putin needs the euros to finance his war just as much as Europe needs the gas.

Fun fact: Of the 10 most populous countries

• One is Russia

• One is the US

• And of the other eight, NONE have put sanctions on Russia

Russia's gonna be fine. Putin did this math before he invaded.

[chenda]

@unemployable - yeah but most of the 8 are economic middleweights at best (Bangladesh, Nigeria etc) Europe is bigger than all of them.

[Jean]

if you take russia's 10 biggest trading partner, it's another picture.
big population is irrelevant. it's even a liability under some circonstances.
and now, if you look at how russia is important to the non sanctioning countries as a trading partner, when compared to the sanctionig countries, that might look even worse for russia.

[sky]

https://www.bruegel.org/dataset/europea ... as-imports

If you look at the peak gas use season (winter), the EU imports about 9,000 MCM (million cubic meters) per week in 2021 and 2022.

In 2021, gas imports from Russia were about 3,000 MCM per week during the peak use period. In 2022, prior to the beginning of the Ukraine war in Feb 2022, gas imports from Russia were about 2,000 MCM.

In 2021, LNG imports into the EU started at about 1,500 MCM, and by the beginning of the war in Feb 2022, had increased to 3,500 MCM. This increase occurred prior to the beginning of the war and may have been influenced by the threat of war, however, it may be that LNG exporters increased production and transport due to market opportunities.

If Russia does not export gas to the EU during the winter season, one could expect a shortfall of about 2,000 MCM per week, or 22% of winter consumption levels.

Note that LNG imports increased from 1,500 MCM to 3,500 MCM over the period of one year, prior to outbreak of war. Can LNG imports continue to increase during winter 2023?

There are limits to how much LNG that ships, ports and processing facilities can deliver to the gas grid. The question is can LNG importers and processors increase LNG imports in winter 2023. An increase of 2,000 MCM would be required to match pre-war consumption in the EU. This is the same increase in LNG imports as experienced from Jan 2021 to Jan 2022.

I suspect that conservation efforts can reduce gas consumption by 10% to 20% with minor discomfort to the consumers. The economic measures and increased energy cost put in place to force conservation may cause some harm to the economy. If one assumes that Russian gas imports are not replaced by LNG, Norway or Algerian imports, then a 22% consumption decrease is required.

[theanimal]

Export infrastructure is just as much a limiting factor. US LNG has been running at or above capacity at export terminals for a while now. I don't know about Norway and Northern Africa, but it might be difficult to make up the difference. I see that Norway only has 1 export terminal, Algeria has 4. Egypt has 2. Increased port capacity on both ends takes years of development. And of course, in the interim there are always the possibilities of severe weather events or something like the Freeport outage occurring again elsewhere.