The cause of so many of the economic stories of 2022 is the energy crisis. At this time of year one might reasonably think that it would be under control as at least for us in the Northern Hemisphere it is summer. Actually I can also say that for the time of day because the UK solar production is already 3 GW and rising on its way to its maximum of 8 GW. However it is more complicated than thinking it is a pleasant day as I note the last few days have struggled to get above 6 GW. But just as you think that look what appears.
OIL MARKET: Big price increases from Saudi Aramco, lifting its official selling prices for its flagship Arab Light crude to Asia to near a record high. Two other grades (Extra Light and Super Light) see their OSP lifted to an all-time high premia. Tighter and tightening. ( Javier Blas )
Perhaps that is a signal designed for President Biden who is due their soon so he can ask them to produce more oil. The message back seems to be that you will have to pay a high price for it. I guess they must also be rather bemused that a leader of a country with large energy resources would rather someone produced it. Also they may have spotted that maths is not a strength.
Oil prices have dropped by about $15 over the past month, but prices at the pump have barely come down. That’s not “basic market dynamics.” It’s a market that is failing the American consumer ( @PressSec )
Becomes this.
West Texas Intermediate crude oil, closing price. June 1: $115.26 a barrel July 1: $108.43 a barrel Market difference: $6.8 a barrel White House difference: “about $15” ( Javier Blas)
At the moment WTI is just under US $111 and forecasts have rather lost the plot as US $380 of Goldmans is replaced by US $65 of Citibank. They are just buying a lottery ticket.
Gas in Europe
The country in the front line of the present crisis is of course Germany and according to the Financial Times it is increasingly worried.
The German government has drafted a law that allows it to take stakes in companies crippled by the soaring cost of imported gas as tensions with Russia threaten to plunge the country’s power sector into crisis.
The law, which could be passed by the German parliament as early as this week, would clear a path for the government to bail out Uniper, the largest importer of Russian gas into Germany.
The issue was added to here.
Germany’s energy sector has been in turmoil since mid-June when Russia’s state-controlled gas exporter Gazprom reduced flows of gas through the Nord Stream 1 pipeline under the Baltic Sea by 60 per cent.
Also there are fears it may be about to get even worse.
NS1 will undergo scheduled maintenance between July 11 and July 21, and many in the government fear that gas flows might not resume after the repairs are completed as the economic war between Russia and Germany escalates.
A crisis for manufacturing in Germany
I would like now to continue this from another angle which is what you would think about this if you were a German manufacturer or producer?
Deprived of Gazprom supplies, importers have been forced to procure gas on the spot market at much higher prices. However, they have been unable to pass on these higher costs to their customers, most of whom receive their gas under long-term contracts that are not open to renegotiation.
Does this mean that long-term contracts are a one-way bet only to be honoured when you are on the losing side? It adds insult to injury that rationing may be applied in addition to this.
Officials have already warned that gas might have to be rationed to industrial customers this winter if Germany fails to fill gas storage facilities quickly enough ahead of the cold season.
So if you are a producer in Germany it would appear that even if you had the wisdom to hedge your energy risks that may provide no protection. Then you may be hit by rationing to add insult to injury.
In effect the mistakes of the German government and the energy companies will be passed onto you in a rather unpleasant game of pass the parcel where the music only stops when it reaches a producer.
The amended law also includes a new “price adjustment” mechanism designed to “maintain supply chains as long as possible and prevent cascade effects”, the official said. It would essentially allow companies to pass on the additional costs of procuring gas on spot markets by imposing a levy on all their gas customers.
In effect energy companies are the new banks so we need a new version of “The Precious! The Precious!”
Under the proposed amendments to the energy law, the German state would be able to take stakes in troubled companies “of critical infrastructure in the energy sector”, just as it did in banks affected by the global financial crisis and during the Covid-19 pandemic.
As The Who put it.
Meet the new boss
Same as the old boss
Trade
We noted only yesterday the impact of higher energy prices on the Turkish trade position and hence its economic situation. Well Germany had its own moment.
In May 2022, calendar and seasonally adjusted goods worth a total of 125.8 billion euros were exported from Germany and goods worth 126.7 billion euros were imported to Germany. The foreign trade balance closed in May 2022 with a negative balance of 1.0 billion euros. ( Destatis )
Whilst single month trade figures are unreliable there has been a clear trend.
In April 2022, the calendar and seasonally adjusted balance of the foreign trade statistics was +3.1 billion euros, in May 2021 it was +13.4 billion euros.
There are always other things happening too but the essential move here is higher energy prices. That is before the impact of higher prices on exports and before any rationing of energy for producers.
France
There was a brief period when it looked like France had played something of a blinder with its nuclear policy but then reality set in. The stock had not been updated. As of the weekend there was this.
The scary world of #French #nuclear and #European #energy. If you want to hedge your #power or #electricity needs in France for Q1 2023 you are paying currently EUR605 per MWh as opposed to a current price today of EUR205 or the already exorbitant #German future price of EUR300 ( @gerardreid14)
And now today.
European wholesale gas and electricity flying this morning (again). French power contracts for December (peak load in particular) are reaching scary levels. ( @JavierBlas)
The UK is doing its bit by supplying France with 3 GW of electricity as I type this and we are even burning coal ( 0.9 GW) to help with that as it is a thin day for wind.
Comment
Historians will look back on this period with quite a bit of bemusement. I suspect they will struggle to understand how countries ploughed ahead with energy policies that were so flawed. Unreliable sources cannot provide reliable power unless you have a way of storing on a scale that may never be possible and certainly is impossible right now.
There is a simple way of showing what a mess and scandal this all is. Not even a tear ago the politicians of the world gathered at COP 26 to tell us that coal was in modern language like over. This morning I note this.
GLOBAL COAL-FIRED power generation rose to a record 10,244 terawatt-hours (TWh) in 2021, passing the previous peak of 10,098 TWh set before the pandemic in 2018……COAL combustion is set to rise further in 2022 as China and India focus on indigenous energy resources to improve their energy security and reduce the cost of imports, and Europe tries to reduce its consumption of Russian gas ( @JKempEnergy )