Perhaps the most memorable comment at the outbreak of World War I—or at least the one quoted in every history book—came from the British foreign minister Sir Edward Grey: “The lamps are going out all over Europe, we shall not see them lit again in our life-time.”
The first half of this statement suddenly applies again to Europe’s energy crisis that threatens a cold and dark winter ahead, and we’ll have to see if the lights of Europe come fully on again in the years to come. Simply put: Europe’s self-inflicted energy crisis is a lot worse than it looks.
European nations are scrambling to backstop consumers from having to pay electricity rates that could increase tenfold or more—if the electricity is available in sufficient quantity at all. What this means is massive government bailouts for energy suppliers. Britain’s new prime minister Liz Truss plans to freeze consumer energy costs for two years, at a likely cost to the government of perhaps $200 billion, because utilities face bankruptcy if they can’t pass along higher fuel costs. The bill for continental Europe, and especially Germany, which may have to shutter even more of its heavy industry, is sure to be much higher—perhaps reaching $2 trillion over the coming year.
An energy-triggered financial crisis could begin even before the leaves turn and drop from the trees this fall. Bloomberg reported a few days ago that upside-down energy firms are facing up to $1.5 trillion in margin calls shortly:
European energy trading is being strained by margin calls of at least $1.5 trillion, putting pressure on governments to provide more liquidity buffers, according to Norway’s Equinor ASA.
Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a “Lehman Brothers” moment, with power companies facing sudden cash shortages.
We all remember how the last “Lehman Brothers moment” worked out.
Right now it doesn’t look like European governments are providing anywhere near enough credit backstop for their energy sector:
So far Germany has introduced Europe’s biggest scheme to backstop companies affected by the fallout of the war in Ukraine, setting aside 7 billion euros in loans to be made available to companies facing liquidity issues. German energy giant Uniper SE last week sought an extra 4 billion euros after fully using a 9 billion-euro existing facility, while Austria extended a 2 billion-euro credit to cover the trading positions of Vienna’s municipal power utility. . .
Among the emergency interventions being discussed by the EU are price caps in power and gas markets.
This is pretty close to the formula that plunged California into its persistent rolling blackouts back in 2000/2001, which culminated finally in emergency rate hikes (after rates had already more than doubled in some areas), and which culminated in the state’s two major utilities declaring bankruptcy. (And two years later California’s indecisive Governor Gray Davis was recalled largely over his incompetent handling of the crisis.)
Natural-gas prices soared 30% at one point, and Goldman Sachs analysts projected that Europeans will see their monthly energy bills triple this winter to an average of 500 euros, or almost $500, per family at the peak.
When the worst of it hits, utility bills could account for 15% of European gross domestic product, crowding out other kinds of spending and investment. Goldman warns that the repercussions “will be even deeper than the 1970s oil crisis.”
Europe is now on the verge of recession, if not already in one, and the worst looks yet to come. Graham Secker, Morgan Stanley’s chief European equity strategist, expects an imminent recession in Europe. . .
The metals industry is facing a “life or death winter” after electricity and gas costs soared over 10 times last year’s levels, a group of chief executives wrote in a letter asking the European Parliament for emergency aid. The products they make sell for less than the cost of keeping the plant running, they argued. Half of the EU’s zinc and aluminum production has already been halted.
Meanwhile, here in the U.S. natural gas prices are at their highest in almost 15 years, having risen over the last two years from under $2/mln BTU to nearly $9 right now. Isn’t America self-sufficient in natural gas thanks to fracking, with abundant untapped reserves? Yes indeed, and there are a lot of complaints that one reason we are seeing this price spike is that we’re shipping a lot of gas to Europe to try to backfill the cutoff Russian supply. The reason for this is simple, and is exactly the same reason that premium beef producers in Iowa like to sell their steaks to New York City—a higher market price. Natural gas producers that have been under some pressure from low gas prices over the last decade are making a rational decision to supply markets where the commodity is more scarce. Already there are calls from the usual Democrat interventionists to restrict overseas sales of American gas (even as they also oppose fracking), because of course they will.
The cause of the European energy crisis is obvious—a combination of green energy fantasy alongside their willing dependence on Russian oil and gas to fill in the large gaps. President Trump criticized Germany’s energy policy in a speech to the UN a few years ago and suggested they cancel the Nordstream II pipeline from Russia (which Germany has now done), but the German UN delegation laughed at him. I doubt they are laughing now.
P.S. Notice below, by the way, that Europe’s energy cost volatility started long before the Ukrainian War, because the limits of the wind- and solar-heavy supply were starting to be reached: