The year so far has increasingly been one where economics have revolved around the issue of energy with both its price and amount of supply coming to the forefront of thinking. This represents yet another failure by the central banks who have churned out a mantra of energy being non-core for years and indeed decades only to find it dictating their every move right now. The immediate issue focusing minds is this.
Russia has indefinitely suspended gas flows through the Nord Stream 1 pipeline, exacerbating a squeeze on Europe’s energy supplies.
State-owned Gazprom, which was meant to restore operations on the Baltic Sea pipeline on Saturday after three days of maintenance, said the suspension was due to a technical fault. ( Financial Times )
Here is the claimed reason which at best is convenient.
The company said the shutdown was because of an oil leak discovered in the main gas turbine at the Portovaya compressor station near St Petersburg, which feeds the line that runs through the Baltic Sea to Germany. ( FT)
Vastly more likely it is a response to rhetoric like this from the G7 about an oil price cap.
With a view to final design and implementation, we will continue to engage with a diverse group of countries and stakeholders to enhance clarity and compliance and enable trade to continue to flow at or below the envisaged price cap.
As you can see it is really rather vague and as it continues below it leaves more questions than answer.
Once operational, the coalition may consider further action to ensure the effectiveness of the price cap. The price cap measure will be reviewed and reconsidered when appropriate.
So they are determined to introduce a price cap but do not seem to have any idea of the level?! Also once it is established would we as in the G7 be buying Russian oil again? Indeed would they sell it to us? Chances of this working are reduced by the fact that we do not seem to have China and India on board and to some extent not Japan either.
While the exact price has yet to be determined, oil from the Sakhalin-2 energy project involving Japan will be excluded from the cap, a senior Japanese Finance Ministry official said. ( Japan Times)
It seems hard to believe they think they can make this stick, but of course they are the crowd who have got us into this mess highlighted in a way by this from the Financial Times.
“Gazprom’s announcement this afternoon that it is once again shutting down Nord Stream 1 under fallacious pretences is another confirmation of its unreliability as a supplier,” Eric Mamer, the European Commission’s chief spokesman, wrote on Twitter.
So much of past European energy policy has involved getting into deals with this unreliable supplier.
Anyway the fundamental point is that the plan to cut oil prices seems to have so far raised the price of gas,
European natural gas prices open sharply higher after Russia shut downs sine die the Nord Stream 1 pipeline. TTF front-month futures up ~25% to €260 per MWh (equal to >$75 per Btu, or $440 per barrel of oil equivalent) ( Javier Blas)
European Commission
In case you thought that they had interfered enough there is apparently more to come in addition to the G7 plan.
European ministers will discuss radical measures to rein in soaring energy costs, from gas-price caps to a suspension of power derivatives trading, as the bloc races to respond to the deepening crisis. ( Bloomberg)
It is hard to know where to start with this. Let us start with the idea of a gas price cap. Presumably Russia will not supply if they try to imposed it there and why should other suppliers accept this? Next suspending power derivatives trading is just a way of hiding the issue. This is the sort of thing that would would be heavily criticised if Erdogan did it in Turkey. Do not deal with the problem but suppress a signal of it. Will speculators be called terrorists next?
Let me be clear I think that there has been an issue with punters driving prices higher but that there is also a fundamental problem causing the basic issue.
Anyway the fantasy continues.
It should be simple to implement and coordinate across the bloc and be consistent with the bloc’s climate goals, the presidency said in the draft document.
Speaking of fantasies one of the biggest ones of our times has been the claimed capacity of wind power.
A wind of change is blowing across Europe. The North and Baltic Seas Summits have set a target of 85 GW in additional offshore wind capacity by 2030. This can power the equivalent of all households in Austria, Czech Republic, Poland, Slovakia & Slovenia Together we will make Europe a renewable energy powerhouse. ( President Von der Leyen)
It is of course the reliance on unreliable sources of power which has left Europe so vulnerable to this crisis.
The Economy
Europe in particular is seeing an economic slow down and high inflation as we stand and I am not sure that the present issues are dully factored into prospects. For example the OECD thinks that a Russian gas embargo would reduce economic output or GDP by around 2% by the end of 2023 and raise inflation by about 1.5%.
Borrowing and Bond Markets
In essence I think that there will be a lot more government borrowing to cover at least some of the energy price rises. I am expecting more like this from Germany.
BERLIN, Sept 4 (Reuters) – Germany will spend at least 65 billion euros ($64.7 billion) on shielding customers and businesses from soaring inflation, Chancellor Olaf Scholz said on Sunday, two days after Russia announced it was suspending some gas deliveries indefinitely.
There will be a windfall tax on energy companies but much of the money will be borrowed. On its own Germany has relatively strong public finances but with official interest-rates on the rise even its benchmark ten-tear yield has risen above 1.5%. Whereas it is more awkward for Italy which is why its benchmark yield is near 4%.
The UK has seen its equivalent reach 3% this morning with there being an additional factor of uncertainty as to the policies of the new Prime Minister. By the time you read this Liz Truss will effectively have that role although not officially until she sees the Queen tomorrow.
But more borrowing and higher debt costs are on their way across Europe.
Currencies
European currencies seem set to be under pressure. The energy issue is continuing and leaves them looking vulnerable. Some of it is in the price but it is not clear to me that they are fully there yet.
Comment
The political class seems to have their mental faculties paralysed as we see more of the policies who have failed us. The energy price surges will reduce economic output via inflation as we have less money to spend elsewhere. This is before we get to energy intensive industries which are closing even now. From last week.
German finance minister Robert Habeck raises the alarm as local companies have “stopped production altogether” due to sky-high gas and electricity prices. ( @JavierBlas)
This is before we get to the risk of winter energy rationing.
If we now move onto one of the main areas I look at it seems quite likely to me that central banks around Europe will come under pressure from governments to restart QE bond buying again. Although with interest-rates higher it is not the gain it was which as things deteriorate will presumably put pressure on them as well.