The big force multiplier: energy

Monday, 29 August 2022 — Albert Park

[7 min read]

Dear Reader,

In his previous edition, Jim Rickards described the beginning of the war in Ukraine.

But today, he focuses on one particular area with extremely significant geoeconomic consequences — energy.

Energy is an important topic right now, with shortages being felt worldwide and increased prices touching just about everyone’s pockets. So make sure you read on below to see how the Russian invasion of Ukraine got us here.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

Understanding the importance of Ukraine to the global energy market begins with an overview of Ukraine’s role as the major conduit for the shipment of natural gas from Russia to Western Europe. Ukraine is not a major energy producer, but it is one of the world’s most important energy transhipment locations.

This graphic below shows the major natural gas pipelines running from Russia in the east and Belarus in the north toward Poland, Slovakia, Hungary, and Romania. From there, those pipelines connect to hubs that distribute the natural gas further to Italy, Germany, Austria, and other major economies in Western Europe:

The dependence of Western Europe on Russian natural gas is critical. The 27 member nations of the EU currently receive 40% of their imported natural gas from Russia. Most, but not all, of this natural gas passes through Ukraine. Some natural gas enters Germany through the Nord Stream 1 pipeline and other conduits under the Baltic Sea. The Nord Stream 2 pipeline (also under the Baltic Sea), which would supply natural gas to Germany, is currently suspended due to sanctions on Russia. Still, the Ukraine pipelines are the most important link.

The immediate damage to European natural gas supplies transiting through Ukraine went beyond financial sanctions and potential embargos. Russia blew up certain gas pipelines in Ukraine to deny natural gas to Ukrainians and to deny Ukraine their share of the gas revenues paid to Ukraine as transit fees. This damage will not be repaired quickly, even if the war ends.

This dependence on Russian natural gas isn’t distributed evenly throughout the EU. Finland and Latvia receive more than 90% of their natural gas from Russia. Germany receives almost 50% of its natural gas from Russia, while the figure for Italy is only slightly less at 46%. Poland is dependent on Russia for 40%. France is somewhat less dependent, getting 24% of its natural gas from Russia. (France gets a large percentage of its total energy from nuclear power, making it less dependent on oil and natural gas.) These figures are presented in more detail in the chart below:

Of course, these nations have other energy sources — including oil, coal, wind, and solar — but none come close to providing the energy needed to run modern industrial economies while providing heat and light to civilian populations. In particular, solar and wind provide intermittent output, which is not capable of providing the baseload needed to keep a modern power grid in operation. Germany foolishly shut down almost all of its coal- and nuclear-generating capacity over the past 10 years at the urging of climate alarmists, leaving it almost completely dependent on Russia.

Russia seemed to have timed its invasion of Ukraine perfectly if one aim was to have the maximum effect on energy prices. Those prices were already rising steeply due to basic supply and demand factors well before the invasion. In military planning, this is called a ‘force multiplier’.

The idea is to take military forces and make them more powerful by combining with some exogenous variable that has already put the wind at your back. If you were going to conduct a cyber-attack on a stock exchange, the best time would be when the market was already crashing, say 3% or so, and then launch the attack to use the momentum to push it down 20% or more. Putin used the force multiplier tactic by disrupting energy supply chains when prices were already going up.

This tactic is explained by Daniel Yergin, one of the world’s leading authorities on energy and oil markets. He is the Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money and Power. Yergin had the following comments on the timing of Putin’s invasion of Ukraine and the state of global energy markets in an interview with The New York Times published on 26 February 2022:

‘This was a very advantageous time for Putin to move. The oil market always goes through cycles, but it’s just gone through the most violent cycle that I’ve ever studied — from negative prices less than two years ago to an incredibly tight market. Whether Putin calculated that or not, he chose a time when oil markets are really tight, gas markets are really tight, coal markets are really tight, and he’s a big exporter of all three. So he’s a beneficiary of it. That gives him leverage. So whatever this terrible invasion is costing Russia, he’s making a lot of money from a higher oil price. It’s noticeable that oil and gas were not directly sanctioned [by European countries]. And that’s because, you know, if they were to do that, you would really be hitting Europe. I mean, it would partly immobilize Europe. That’s why this is such a difficult situation.’

The impact of the war in Ukraine on world energy prices was felt immediately. Gasoline prices at the pump increased in a matter of days. Because of sanctions, ExxonMobil has announced that it was pulling out of its Sakhalin-1 oil and gas project in the Russian Far East. Energy majors BP, Shell, and Total announced similar pull-outs from Russian energy joint ventures.

The Biden Administration’s dirty little secret

These shutdowns come on top of what was already a global energy shortage. Numerous suggestions are being offered for how Europe can deal with an energy shortage if they cannot buy Russian oil and gas or if Russia imposes an embargo on energy exports.

None of these solutions are practical in less than three or four years. Biden suggested that Europe could obtain natural gas from the Middle East, particularly Qatar. This ignores the fact that China has been buying all of the natural gas available under long-term contracts, so spare capacity is minimal.

Moreover, the chart below shows that spare import capacity for liquid natural gas (LNG) in major countries — including Spain, France, Italy, and the UK — is quite low compared to the amount needed to replace Russian exports:

The dirty little secret among White House policymakers is that they like high energy prices because it helps to promote the Green New Deal (really the Green New Scam) goals of wind and solar power to replace oil and gas. The more expensive gas is the more feasible alternatives become. That represents the triumph of ideology over common sense. There’s a role for wind and solar, but even if you favour it, one has to recognise that it’s non-scalable, intermittent, and cannot come online fast enough to close the gap between existing energy supplies and growing demand for energy.

Another drag on global energy output is the fact that major energy companies are reducing their investments in new exploration and development. Given the opposition to oil and gas from climate alarmists and do-gooder ideologue investors like BlackRock’s Larry Fink, major oil companies are reluctant to invest large amounts in projects that may be deemed unwanted or even banned in years to come. This can be reversed in future years but not in time to alleviate the current shortages.

Investors should expect persistent energy shortages and much higher prices. These trends were underway before the war in Ukraine, but they were greatly exacerbated by the war.

Regards,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

Every day the headlines come. And every day they are a mixture of real news, propaganda, and claptrap. CNBC — ‘Biden cancels $10,000 in federal student loan debt for most borrowers’:

‘Nearly 45% of borrowers, or almost 20 million people, would have their debt fully canceled, according to the White House.’

Isn’t that nice of him, dear reader? Of course, it wasn’t his money. And cancelling the debt won’t cost him a penny.

But Biden’s generosity is a big step forward in financial history. For thousands of years, we humans have been plagued by debt. And now we have the answer — just ‘cancel’ it.

Free at last…free at last…

And now it’s time for Our Saviour to take aim at all the other disagreeable debits in our lives; he should cancel auto loans…mortgage loans…payday loans…revolving loans…government debt…pawn shop loans…bank loans…credit card debt…margin loans…social obligations (‘they invited us…we need to reciprocate’)…loans for solar panels and EVs…child support…alimony…gambling debts…and bar tabs too.

Thanks to the Fed’s ultra-low interest rates and its ‘money printing’, our economy is burdened by US$90 trillion in debt. And Mr Biden has just shown us all how to get rid of it.

And why stop there? Why should we have to return the umbrella we borrowed from the Merrion Hotel during a sudden downpour in Dublin…or the serving platter Ms Jones left with us when she brought over some cookies? We also have a nice little rental car in the driveway; we’d like to keep it.

Thank Divine Providence, our president is on the case!

Robbing Peter to forgive Paul

Only Fox News dared to ask: If the people who got the service don’t have to pay for it, who does? Education is a service. It has a cost. It must be paid by someone. Biden’s act of largesse means that the freight will be paid by people who didn’t ride the train, many of whom didn’t go to college and don’t earn as much as the people who did. In other words, the law clerks and bookkeepers will have to pay for their bosses’ professional training.

Is that such a good idea?

Maybe not.

But don’t worry about the US’s middle class. The housing market may be rolling over. Mortgage payments may be going up. But at least, according to the mainstream press, the job market is still ‘red hot’. Here’s the most recent monthly report, from The Wall Street Journal: ‘July Jobs Report: U.S. Added 528,000 New Jobs as Unemployment Rate Fell to 3.5%’:

‘U.S. employers added a robust 528,000 jobs last month, helping the economy recoup the 22 million positions lost early in the pandemic, as hirers clamored for workers despite a slowdown in economic growth.

‘The labor-force participation rate—or the share of adults working or seeking a job—ticked down to 62.1% in July from 62.2% a month earlier. While the economy has recovered all the jobs it lost since February 2020, there are still 623,000 fewer people in the workforce…

‘Wage growth was stronger than economists anticipated in July, with average hourly earnings rising 0.5% from June and 5.2% from a year ago.’

Let’s see, wages are rising at a 5.2% rate. But prices are rising at an 8.5% rate. Doesn’t that mean that workers are worse off? Yes, of course it does.

And what about all those people who don’t have jobs? David Stockman at Contra Corner:

‘According to the BLS, 243,000 workers dropped out of the labor market in July and 449,000 abandoned the search for work since March. In turn, these fugitives from the jobs market have caused the participation rate to fall to just 62.1%—the lowest level (aside from the Lockdown plunge of April 2020) since April 1977!’

Working class rip off

Since February 2020, the adult US population has grown by about six million people. But the labour force is actually smaller — by 623,000 people. That must mean that there are 6.6 million MORE adults without jobs than there were two years ago.

And here’s another part of the story worth mentioning: Inflation.

Economists long ago noticed that inflation seemed to correspond with lower unemployment. From there it was a hop, skip, and a jump into error: that a little inflation was ‘good for the economy’ because it brought higher employment.

The French economist Jacques Rueff saw the scam immediately. If inflation lowers unemployment, he pointed out, it was only because it rips off the working class by reducing their real wages.

So aren’t we lucky? We live in an enlightened Republic, where we are encouraged to borrow so that we can study gender fluidity and ‘intersectionality’ — rather than get a job and learn how to be a competent welder…

…where we are lured to borrow money to install solar panels on our roofs and drive a spiffy electric car…

…where we are less productive and earn less money…but we have a ‘red hot’ labour market…

…and where we can run up trillions in debt…and then, the government cancels it!

Regards,

Bill Bonner,
For The Daily Reckoning Australia