“The economy of imaginary wealth is being replaced by the economy of real and hard assets.”

— Vladimir Putin

There are of course many — mostly negative — things to be said about Putin, but this statement is a pretty good assessment of the current situation. Unfortunately, his European counterpart politicians still don’t seem to grasp the economic realities and therefore keep making the situation worse and worse.

They (Western politicians) are blaming Russia for using its energy resources as a means for economic warfare. As if Russia was the initiator and the villain to blame here. They seem to totally have forgotten who initiated, and is still the main contributor, to this economic war. It was not Russia, but the Western countries, which started (and openly stated) to initiate sanctions, freeze and confiscate assets, in an effort to crumble Russia’s economy.

Just to make sure that nobody misunderstands the point here: Russia started an aggressive and horrendous war in Ukraine, which was a terrible mistake and is by no means justifiable! However, what the West has done in response also has horrific consequences for many people around the world.

The result of it is, that Russia sees herself pushed into a corner and feels triggered to burn the precious natural gas, while the rest of the world is scrambling for energy.

Consequently, Europeans are facing a severe energy crisis with potentially detrimental ramifications. Moreover, it is not only Europe that is suffering the consequences. Other nations are suffering from the supply shortages and rising prices as well. Nations that have stood peacefully on the sidelines now see themselves outbid by European countries which are now purchasing the LNG cargoes that they previously imported. And especially the poorest people, who are on the brink of being able to support their livelihood, are most severely affected by these events.

The ignorance of European politicians in acknowledging their mistakes and stopping their economic war is in my opinion also not justifiable.

Or does an (unclear & questionable) end justify (cruel & devastating) means?

Anyway, since this is not intended to be a newsletter about morals, let’s look at some economic implications.

Europe’s Natural Gas Supply

In the May issue of the Ataraxia Financial Newsletter, I outlined the difficulties for Europe to import enough natural gas without it coming through the Russian pipelines. It can be read here. Now this eventuality seems to have become reality.

In 2021, Europe imported about 40% of its natural gas supplies from Russia. The particular issue with natural gas is, that it is not so easy to switch the supplier as it is with other resources, such as oil. From the May issue:

While it is possible to shift oil suppliers, it is far more difficult to change sources for natural gas. Oil can be globally transported on tankers while gas is mostly transported to Europe through pipelines. In order to ship gas from other sources, it first needs to be cooled down into liquefied natural gas (LNG). This process is complicated, more expensive and requires an infrastructure which first needs to be set up, requiring time and capital expenditures. Currently, a bit more than 50% of the natural gas is supplied via pipelines with a distinct geographical destination, which is the reason why the gas prices have way higher variations across different geographical areas than oil has.

Furthermore, unlike the oil tankers, that are unspecialized and can easily be rebuilt to serve other functions, the LNG carriers are very specialized in their design. It follows, that the whole production and operation purpose of them, requires a particularized commitment for their intended use.

Here is a chart showing the gas pipelines to Europe:

As can be seen, there are three main pipelines, which supply natural gas from Russia to Europe. The next figure shows, how Russia has cut back on its gas deliveries over the last months, in an attempt to weaponize its resources to fight back against European sanctions:

Now, also the gas via Nordstream 1 (blue in the figure) has been completely halted.

The key problem at the moment, is that Europe just doesn’t have the import capacity of LNG gas sources to fully compensate all of the needed supplies. Hence, it either has to reduce its demand, or shift to other energy sources.

As a consequence, the gas prices in Europe have absolutely exploded over the past few weeks to a point, where the first European companies feel forced to reduce or totally stop their production:

The Crisis (Mis)Management

Faced with these circumstances, what have the European governments done so far, to manage this crisis:

• Several construction projects have been initiated to build facilities to increase the LNG import capacities. → These are good steps, but it will take some time for them to be available, definitely not in the coming winter.
• There are also numerous efforts undertaken, to force the demand downward, by giving various regulations to limit the usage of electricity.→ These help to save energy, but it obviously comes at the price of a lower standard of living. Going back to the caves would be the ultimate culmination of this strategy and would spare Europe from any energy blackouts.
• Providing financial help to support households against the rising prices.→ While it sounds good, this is contradictory to the policies to lowering demand.
  • UK’s new prime minister, Elizabeth Truss, even went so far as to cap the energy bills for household at £2,500. So basically as soon as you reach the mark, you are incentivized to use as much energy as possible.
• Capping profits for energy producers.→ Economics 101: If you want more energy, you definitely shouldn’t take away the incentive to produce it.
• Germany, the largest European economy — and without any doubt taking the first position on the “failed energy leader-board” — is now watched by everybody. There is now a discussion about the three remaining nuclear plants, which currently supply about 6% of German electricity and are scheduled to be shut down at the end of this year. After previously lying to the public, that it is technically not possible to keep them running, Germany’s Minister for Economic Affairs and Climate Action, Robert Habeck, has now changed the course and Germany is seemingly going to postpone the shutdown of 2 of the remaining 3 nuclear energy plants.
  → While this is at least a step in the right direction, so far the plan is to still turn them off, but keep them “in reserve” until April, meaning only to turn them on, if there is an actual energy shortage. Nuclear professionals immediately jumped in, saying that nuclear plants are not built to be switched ‘on’ and ‘off’ like a light bulb, which once more shows just how uninformed the decision makers are about the actual matters at hand.

The sad irony is, that most of these policies will actually backfire and have the opposite consequences of the stated goals. Subsidizing household consumption, while at the same time imposing demand restrictions is a recipe for disaster. Furthermore, I can already see how the UK will be flooded by Bitcoin miners, which are going to take advantage of the free energy, sponsored by the UK government.

In addition, after years of demonizing and disincentivizing the production of fossil energy sources, Europe is facing its day of reckoning. It becomes painfully obvious how important these energy sources still are. Unfortunately, most political ‘leaders’ remain blind to economic realities. Instead of incentivizing energy companies to ramp up their production in the face of the crisis, they are imposing windfall taxes and profit caps.

There seems to be a total lack of knowledge — or pure ignorance — of basic economics. Therefore, there is a good reason to believe, that the European gas prices will remain elevated for the foreseeable future.

Here is the above mentioned German Minister for Economic Affairs and Climate Action again, showing off once more his total lack of basic knowledge about business operations and the situation that small businesses are facing:

TheRealTom™ ✊ @tomdabassmanThe German Minister of Economics, Robert Habeck: ‘Bakeries, craft businesses, cleaning companies…. they can just stop producing this year, but they don’t go insolvent. They don’t work into the red.’ #Germany #EnergyPrices #Energy

September 7th 2022711 Retweets2,138 Likes

To quote H.L. Mencken:

“Every decent man is ashamed of the government he lives under.”

Politicians are so detached from reality. They live in their own political bubble world, promising the sky to get elected and grab power, and then wield their power over their subjects and cause havoc.

Finally, the lack of natural gas supply, which is primarily used to heat homes and generate electricity, is threatening the quality of life and poses severe danger for the sustainability of many businesses.

Related Articles:

Natural Gas – A Dive Into Europe’s Dilemma

Natural Gas as an Indicator