Yves here. To recap the progression of worry about European energy in light of sanctions against Russia: Initially, the concern was that Europe would not get through the winter without blackouts and other hardship. Then with scrounging for LNG plus conservation measures, the new only mildly optimistic forecast was that Europe would scrape through winter if it were not too cold. But even that scenario didn’t solve Europe’s continuing shortfalls for 2023, which could become acute even before the next winter.
As we’ve indicated before, the problem has been remedied only via damage to Europe’s economy, as in cutbacks in energy-intensive industries. So the lack of an energy crisis this winter due to warm weather should not be mistaken for absence of economic harm., as in demand destruction.
You’d think the US would be worried at a fall in actual or potential economic activity from a major trade partner. But first, as Macron has complained specifically in the context of the Inflation Reduction Act, the US hopes chronically high energy costs in Europe will allow the US to steal some production capacity. Second, the US is delighted to sell its high price LNG to Europe in place of cheap Russian gas, bugger the harm to Europe. Third, China exports in 2021 to Europe were close to exactly twice as high as those from the US. So other things being equal, China will suffer more from shrinkage of European demand than the US.
By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
- Mild weather has kept Europe’s gas storage units from draining.
- European storage units are filling again after a week of cold weather.
- Europe’s gas crisis isn’t over yet as much of the demand reduction was a direct result of demand destruction.
In December, the International Energy Agency warned that Europe could face a gas shortage this year despite its successful efforts to fill up storage for winter 2022-23. Now, more voices are joining the warnings as reality sets in, and it is not a reality that one can easily brush aside. For starters, much of Europe’s success in keeping the lights on so far this winter has been the result of milder-than-usual weather. October and half of November were particularly warm, which made reducing gas consumption across the European Union—a mandatory directive—much easier than it would have been otherwise.
Yet the moment the weather got colder in late November, consumption jumped, so in early December, Germany’s head of energy market regulations had to warn Germans to take it easy on the heating as they were not hitting the country’s gas savings target of 20 percent of total consumption.
That warning gave everyone a taste of just how precarious the situation is. Storage units are full, and there’s more LNG coming into European terminals all the time, thanks to the weather.
Reuters’ John Kemp reported that the level of gas in storage in Europe at the end of December 2022 was at the second highest for that time of year for the past ten years and set to remain comfortable until the end of the heating season, according to traders.
Many were quick to celebrate the end of the crisis, but those celebrations may have been premature. To begin with, winter is far from over, and there is still a considerable likelihood of much colder weather in January and February. Besides, the end of winter does not automatically mean an abundance of natural gas.
Last year, European countries managed to stock up on gas in time and in abundance, in no small part thanks to the fact that Russia sent most of its regular volumes of gas during the first half of the year. Except for the cutoff of Bulgaria and Poland for their refusal to pay in rubles, gas supply from Europe’s then-largest supplier remained largely steady.
This helped a lot along with the record intake of U.S. liquefied natural gas. This year, however, there will be no regular Russian gas volumes. Indeed, Moscow, in the face of Deputy Prime Minister Alexander Novak, said it is ready to resume flows along the Yamal-Europe pipeline, which, he said, remains closed for political reasons.
Yet the European Union has repeatedly stated it does not want to increase its imports of Russian gas. Instead, it wants to cut them to zero eventually. And this means it will need to seriously increase its imports of LNG from not only the United States but all other suppliers with uncontracted volumes. And because these still-available volumes are not exactly unlimited, experts are beginning to warm their audience up for another difficult year.
The availability of gas would be the biggest reason why the year would likely be difficult for Europe. But even if winter continues to be mild and ends mild, the gas crisis will not be over. Because LNG is more expensive than pipeline gas, and this is a fact that does not stand to change. And this fact means that even if there is enough LNG to refill Europe’s storage—which is questionable, as the IEA warned—the bill will be huge for a second year in a row.
A high gas import bill is problematic for European economies, especially the ones that have a well-developed heavy industry, which tends to be also heavy gas users. The first red flags appeared last year: much of the gas consumption decline in Germany that was praised by politicians actually came from demand destruction among industrial users because of prohibitive prices.
In other words, gas demand in much of Europe last year fell because it was destroyed and not so much because everyone suddenly became conscientious with their gas use. But demand destruction is not good for the economy. It means shutdowns of factories and layoffs. And this means that this year Europe will be walking a tightrope between keeping its economy going and securing its gas supply for the next heating season. It will be a risky walk.
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>. . . as in cutbacks in energy-intensive industries. So the lack of an energy crisis this winter due to warm weather should not be mistaken for absence of economic harm., as in demand destruction.
Supply destruction would my way of looking at it. A spike in material cost is inevitable considering what isn’t going to be produced.
We had German relatives with us over the holidays. They were what my Irish mother mother would have called overeducated and over intelligent. One was retired from an international development bank and the other lectured on commerce in a German university. They are heavily into freedom and democracy and revere the US gov’t.. Russia is what US-British propaganda has depicted it to be since 1945 in their eyes. A doubling or tripling in heating and transport costs does not bother them. If it gets too bad they can spend time in the Canary Islands. The less well off Germans are in for a rough ride unless they resort to civil unrest which is not likely. Olaf Scholz is in tune with German public opinion.
I get the feeling that wealth is going to be a temporary insulator. Even the upper middle class is going to suffer when their career prospects are harmed by the loss of manufacturing opportunities.
This talk of Germany being a service economy is a tough sell. Many in even the upper middle class aren’t going to be working in the software industry or other “service” careers.
There is a high probability that they will learn the hard way. Even in North America, there’s quite a few upper middle class citizens who were hurt in places like the Midwest by the loss of manufacturing jobs after the so called “free trade” agreements were signed and jobs were outsourced. Keep in mind that the manufacturing sector has employed engineers, human resources, accounting, IT professionals, and has its own business executives. Not everyone in the upper middle class made the transition to Wall Street and Silicon Valley.
Actually, Germany might not be able to create the kind of financial economy that exists in the US either. With the freeze of the Russian foreign exchange reserves, the message that the German government is not sovereign, but rather a US vassal will be an issue.
Software isn’t as easy as it seems either. Governments all over the world are constantly bragging about trying to create their own Silicon Valley. So far, in the Western world, I’ve seen cities where technology plays an important role in the local municipality, but not to the same level of global influence that Silicon Valley has. I’d say the most likely challenge comes from China and many in Silicon Valley seem to agree. In other words, Germany has an uphill battle to climb on that front.
One can only hope that the upper middle class like your relatives wakes up soon. I doubt it though and they will find out the hard way. Their interest would be better served aligning with the working class of their own nations rather than the neoconservatives and the poltiicians.
The majority of German consultants I know have their roles because of demand from domestic manufacturers, especially automotive and chemical. I do agree that this will begin to affect the middle class in short order.
I get pretty much the same response form German academics (that is, “West” German) I know. They are many decades into being America’s colony and they have internalized Thatcher’s canard, “There is not such thing as society.” Since they are presently okay there is no crisis because their personal lives are essentially undisturbed, and they actually believe their personal lives is all there is to modern life. I know the reaction among those who were citizens of East Germany is substantially different and analytically class and anti-imperialism based.
On my part, the EU governments severely underestimate how lightly the population is taking the Energy crisis (though the term “light” is in reference to the severity of the situation).
I remember browsing through the comment section of a pro-ukrainian YouTuber (Johnny Harris) on one of his videos on the dwindling gas flow, and the general consenus amongst the European commentators was that they could survive the winter easily by buying another pair of socks. This reflects the view point of the unwashed masses – that gas and oil are only needed for heating and car fuel. Many people still think that the energy crisis isn’t as severe as unbiased experts point out and that it can easily be solved by expanding on renewables.
Additionally, over the past decades the Europeans have become very cozy. Aside that it would be very difficult to convince the population to get involved in a larger kinetic war (it would be too cold and muddy for them. Besides, you would be demanding they say au revoir to their smart phones for an extended period of time) because of that, the public more or less laughs at the demands of the government to give up creature comforts.
Of course, inflation and high energy prices have made many be more concious of their consumption in many areas, but those same people think that the worst is over. The demand destruction is hushed up, and the PMC is still talking of Ukraine winning. There is still the image of supreme European soft power in people’s minds, partially due to keeping a tight lid on foreign policy blunders (such as Bärbock’s catastropic visit to India), so the view at large is that there are only small difficulties in the garden. There is the gleaming veneer, and the cracks are still too small for the majority to be concerned
They are in for a rude awakening. It will be very interesting to watch this, from a safe distance.
Europe won’t be buying manufactured goods that are made in Europe if European factories are shut-down due to input costs.
And demand will shrink (in Europe), along with the economies that were supported by the manufacturing industry.
But who will gain market-share where European industry can no longer compete? Where was this stuff going, and who will take a bite?
European Union’s Top 10 Exports
The following export product groups represent the highest dollar value in EU global shipments during 2021. Also shown is the percentage share each export category represents in terms of overall exports from the EU.
1. Machinery including computers: US$837.6 billion (13% of total exports)
2. Vehicles: $686 billion (10.6%)
3. Electrical machinery, equipment: $614.9 billion (9.5%)
4. Pharmaceuticals: $496.9 billion (7.7%)
5. Mineral fuels including oil: $329.7 billion (5.1%)
6. Plastics, plastic articles: $293 billion (4.5%)
7. Optical, technical, medical apparatus: $237.6 billion (3.7%)
8. Iron, steel: $179 billion (2.8%)
9. Organic chemicals: $164.6 billion (2.6%)
10. Articles of iron or steel: $137.8 billion (2.1%)
https://www.worldstopexports.com/european-unions-top-10-exports/
LawnDart: That was some great reporting.
I’m sure you noted that almost all those export products / categories are energy-intensive to create, with possible exception of pharmaceuticals.
Don’t you keep wondering when the shoe’s going to drop? My guess is when the order books dry up for those exports – those high energy costs, since they are a big component of costs-to-produce for all those (exc. pharma, as mentioned above)….those costs are going to have to be passed on to the customer.
OK…did a little checking around. I was going to say “no way order books won’t be impacted; energy is a main cost element of all those exports, that means export prices have to rise, loss of competitiveness, etc.”.
Then I note that the German gov’t has provided gov’t support to offset energy cost rises.
See this link.
Main idea is:
Re energy, I read the other day tha Germany’s largest stollen producer may close. Demand was high but energy costs were bankrupting them.
Here in Canada Niederegger of Lubeck is believed to be the best Stollen producer from Germany. Domestically Dimpflmeier is considered to be the leading Stollen baker. The German exporters tend to have long shelf lives which leaves them at a disadvantage to producers in Canada who do not have to add taste altering preservatives as they do not have to bake in bulk due to transatlantic shipping cost and time. A twenty ton shipping container holds an enormous amount of 1,000 gm Stollen packages. My wife is from Lubeck which may colour our opinions. Lubecker Marzipan Stollen is to die for.
The Europeans won’t be able to compete on international markets due to the higher cost of energy.
In other words, mass layoffs. That will be the decline of the middle class and bring major political change to the continent.
Asia used to be a big customer. The easiest way is to see what nations have the biggest imports from the EU.
As for who will take it over? I think that East Asia is going to be the biggest winner. China for example will soon have additional pipeline gas from Russia.
The US will to a lesser degree, but lesser because I suspect most manufacturers who are thinking about the US as a plant location recognize that the company has to be in line with the US geopolitics or risk having their plant expropriated.
Mild weather indeed. In Madrid we haven’t seen any cold day this winter so far.
Yves S. ….the US hopes chronically high energy costs in Europe will allow the US to steal some production capacity.
The US also needs to steal factory engineers — of which there is a serious shortage in the US in 2023, if the figures that a colleague told me are true — from Germany or elsewhere, if it is to reshore manufacturing to the US or even to Mexico, to any significant extent.
IIRC I read somewhere (don’t remember where) that chemical industry shrank by 21% in Germany in Q3. Lost production will have to be replaced by imports, adding to the trade deficit caused by higher energy prices/LNG. Wonder why the euro has recovered.
Today Irina followed up with The LNG Boom Could End With Billions In Stranded Assets Her mordant summary
New title for the article:
The LNG Boom Could Never End And Billions of Windfall Profits Accrue To Exporters When Europe’s Renewable Energy Dream Fails.
I don’t think that will happen for the reason that busts follow booms.
The bright spot is that global warming puts downward pressure on LNG prices as the warmer it gets the less gas is needed for winter heat. Ironic, eh?