What are the economic consequences of the energy crisis of 2021/2?

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by Shaun Richards

The economic story of 2021 has become one driven by the price of energy just as the establishment and so-called elite meet to further push the policies that have done so much to create the crisis. For our purposes the issue is one of inflation as a first consequence which then becomes contractionary as those on tight budgets reduce other spending and because the price rises have been so great some businesses reduce operations or close entirely. The issue is being exacerbated for us in the Northern Hemisphere as we move towards winter weather. For example in my home country the UK I note that some colder nights with frosts are being forecast more widely.

But we can start by looking East to Japan.

Japan’s spot power price surges to seasonal high amid global energy shortage  Electricity for next-day delivery extended gains to nearly 20 yen/kWh due in part to pricier LNG/coal Power rates are poised to gain further when temperatures turn colder.  ( Stephen Stapczynski )

There is more detail here from Reuters.

On Monday, prices for delivery of electricity early on Tuesday morning reached 55 yen ($0.48) per kilowatt hour (kWh) the highest since late-January.

Traders said higher LNG prices were starting to filter through to the local power market.

This issue is exacerbated by the Japanese switch away from nuclear post the  Fukushima disaster. Indeed last winter they had a near brush with what many of us fear this winter.

TOKYO, Feb 5 (Reuters) – Japan’s worst electricity crunch since the aftermath of the Fukushima crisis has exposed vulnerabilities in the country’s recently liberalised power market, although some of the problems appear self-inflicted.

Power prices in Japan hit record highs last month as a cold snap across northeast Asia prompted a scramble for supplies of liquefied natural gas (LNG), a major fuel for the country’s power plants. Power companies urged customers to ration electricity to prevent blackouts, although no outages occurred.

The Japanese system of long-term contracts based on the oil price will be working as it is much cheaper right now but of course it will not help with this.

The firms include utilities and at least one gas company, the sources said, adding that Japan’s biggest power generator and top LNG buyer, JERA, is also seeking cargoes for delivery in December and January. ( Reuters)

Just like everyone else they will be facing this.

While LNG prices are off their highs, they remain more than 400% higher than this time last year.

Spain

There has been an issue for a while with supplies from Algeria and as of today this has happened.

With winter around the corner and the price of energy skyrocketing, a decision by Algeria to close the Maghreb-Europe natural gas pipeline this coming Sunday is bad news for Spain. ( El Pais )

This is not a complete shutdown from Algeria as it has another pipeline to Spain which will continue and which will be increased at the end of this month. But we have to get there and even so Spain will be left short.

Algeria has pledged to raise its capacity from eight bcm to 10 bcm a year, but Spain would still need around four bcm more to cover its needs. This could possibly be achieved by importing liquefied natural gas (LNG) on carrier ships. ( El Pais)

Looking for shipping would be at exactly the wrong time to do so.

It would take around 50 such vessels to transport the four billion cubic meters required by Spain to make up for the shortfall from MGE that cannot be covered by Medgaz. It will not be easy to find so many carriers, and they will be expensive at a time of high demand. Also, the process of liquefying the gas and later returning it to a gaseous state is much more expensive than simply channeling it through a pipeline. ( El Pais)

We looked at a consequence for Spain of all of this only last Tuesday when the producer prices numbers reported this.

Energy, whose variation of 14.1%, the highest since December 1982, is due to the rise in of the prices of the Production, transport and distribution of electric energy.
Also influencing, although to a lesser extent, increases in the prices of oil refining and gas production; pipeline distribution of gaseous fuels. The impact of this sector on the general index is 4,893.

That is going to come under more pressure the moment we get a cold snap and especially if it is a still cloudy day. Still it has been a while since anyone has blamed the weather for economic problems. The consumer is also being hit as the flash CPI rose to 5.5% with this piece of extra detail.

In this behaviour, the increase in electricity prices stands out, and to a lesser extent, fuels and oil prices for personal vehicles and gas, compared to the decreases recorded in October of last year.

Europe

The weekend story looked like it was starting well as Russian President Vladimir Putin promised to supply plenty of gas to Europe. But then it appeared he was, as so often, playing games.

There’re a number of possible explanations for this….. What’s known is that Russian natural gas flows into Germany (at the Mallnow compressor station) have plunged to zero in the last 24 hours ( @JavierBlas)

That was followed this morning by this.

Unplanned outage. No onward #natgas flow from Bulgaria to Serbia or Romania, which #Gazprom would deliver into SEE via #TurkStream. Add that to Mallnow and Tarifa and no surprises #TTF is back up. 

If you knew the Russian game you would have some free month by buying gas futures on Friday afternoon and selling today.

Shipping

According to Lloyds List there is inflation here.

The Baltic Exchange currently assesses time charter equivalent rates to ship 180,000 cu m of LNG to Tokyo from Gladstone, Australia at $262,215 per day, with LNG-fuelled ships at $201,535.

That is up 7% and 11% , respectively, from the last assessment on October 14, data show.

But also if you can arbitrage between different prices around the world the potential to clean up.

Oslo-listed Flex LNG, which owns 13 LNG carriers, said current landed prices in Europe and Asia were providing “massive arbitrages” for traders.

One 172,000 cm cargo shipped from the US Gulf to Japan yielded an arbitrage of $124m, according to a Flex LNG investor presentation held today.

The US Gulf to Europe route resulted in a profit of $100m.

Flex LNG said a cargo worth $20m based on Henry Hub prices was valued at $120m by the time it reached Europe. The same cargo was worth $144m in japan. Even oil price-linked cargoes had a “massive arbitrage” based on the presentation.

Comment

See also  Mannarino: BE READY! ANOTHER CRISIS IS COMING. Expect Food Shortages And Skyrocketing Prices.

We are already getting an idea of the inflationary consequences of this energy crisis. Spain has marked our cards in two ways firstly with its actual numbers and secondly by its proposed plans for an EU solution. This month;s inflation figures for the UK will include last month’s increase in domestic energy prices. But there is more to come. There will be ebb and flow as for example the last few days have been windy in the UK with electricity production from it in the 12-13 GW region. But a cold still day would send us the other way.

The economic contraction element has been underplayed I think. Some businesses have become uneconomic and closed and I fear there may be more. In a sense one way of keeping power for the consumer is to squeeze industry. The price rises will be an implicit power cut as industries find things uneconomic and close. But actual production will be hit and maybe hard.

The political situation in Glasgow is breathtaking and no I do not mean all the jets flying in for a climate conference. If we just look at the US President Biden entered office with a barrage against fossil-fuel companies with for example the Keystone pipeline cancelled. How is that going?

ROME, Oct 30 (Reuters) – U.S. President Joe Biden on Saturday urged major G20 energy producing countries with spare capacity to boost production to ensure a stronger global economic recovery as part of a broad effort to pressure OPEC and its partners to increase oil supply.

I fear for the worst if this tweet below from Jon Snow of Channel 4 news was not a parody. I only say that because it is getting increasingly hard to tell.

En route to COP26 – trees and branches affected by climate change have slowed our rail journey – tho the branches have been cleared we are doen to 5mph – What an irony! What a message! We MUST change! Dare we hope that we shall?

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