Prof. ST Hsieh
Director, US-China Energy Industry Forum
September 10, 2022
War in Ukraine generated some good news today, Ukraine has recaptured some lost grounds for the first time. While no details are available, Zelensky has already announced that he is not ready to talk cease fire with Putin yet. So, ground battle in Ukraine will not end anytime soon.
That means European nations have to come up with an “emergency measure” for containing the unprecedented energy crisis soon. Putin already promised that Russia will not compromise: Russia says that Europe started the economic war by imposing sanctions, and sealed its own fate this winter. “We will not supply gas, oil, coal, heating oil. We will not supply anything.”
Thus European’s “emergency measure” will not include any energy export from Russia. Basically, EU and England have to come up with an equitable “pain sharing” scheme and hope to sell it to the public. EU and England have 28 sovereign states each faces different energy shortage challenges. Some are already heading toward economic recessions. Demonstrations are taking places against governments.
It is a great test for the leadership of European politicians. They successfully came up rounds of severe economic sanctions punishing Russia, unfortunately they backfired and created this “energy crisis.” They must come up with some good “emergency measures” that really work. They must realize that energy market is globalized, their proposed “solutions” should not deviate from the market principle. Price cap etc., even it is supported by the US, will not work, and could create more pains.
Specifically, these politicians should clearly realize that, even if they do not consider Putin’s words, they should consult and get some feedbacks from other major powers such as China and India. Otherwise, these European alone “emergency measures” could cause more sufferings for Europeans and no one can help.
A European recession is no good news for the world. But the world is full of challenges, a global recession is not inevitable if the global supply chain is interrupted by nature force (say, another pandemic) or geopolitics (say, US vs China.) EU should shoulder her global responsibility.
How Europe’s Energy Crisis Could Play Out
Avi SalzmanFollow Sept. 9, 2022 5:24 pm ET
The energy crunch in Europe escalated into a full-blown crisis this past week after Vladimir Putin cut off the pipeline that supplies a third of the natural gas that Russia sends to Europe. 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 that will pull earnings growth into negative territory next year.
European policy makers, initially slow to respond, have snapped into action, but they have few easy options. The European Central Bank has the near-impossible task of dampening inflation while avoiding a deep recession. The ECB raised interest rates by 0.75 percentage points on Thursday, its largest hike ever, and ECB President Christine Lagarde warned of a “really dark downside scenario.”
Countries are reducing power use, mostly through voluntary measures. Thermostats in Spanish office buildings were turned above 80 degrees last month. The lights that normally illuminate Berlin’s famed Brandenburg Gate have gone dark. European Union energy ministers are considering mandatory electricity limits and caps on Russian energy prices, among other measures.
Hundreds of billions of dollars in government support—potentially exceeding Covid bailouts—will soften the blow of high prices. Germany has already authorized €65 billion to help households, and the United Kingdom capped household gas and electric bills at 2,500 pounds sterling ($2,898) a year for the next two years.
The lifeline being extended to households and small businesses may not save larger firms, however. Many are already reeling.
“If there are any shortages, it’s going to be on the industrial side,” says Jack Ablin, chief investment officer at Chicago-based Cresset Capital. While natural gas is used to produce electricity and heat homes, it’s also a key input for industrial plants.
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. “We know from experience that once a plant is closed, it very often becomes a permanent situation.”
Government bailouts are likely to soften the pain, but not eliminate it. “You’re talking about a ballpark of over €1 trillion of extra energy costs for people,” Secker says. “Governments will try to socialize some of that with fiscal support. They’re not going to have the ability to do all of it. The number’s too big.” Politically tricky decisions on rationing energy use could still be ahead.
As the crisis deepens, analyst estimates of corporate earnings could well prove too rosy. Analysts on average expect 17% growth in European earnings this year and 2% next year, Secker says. By comparison, Morgan Stanley sees 12% growth this year and a 10% contraction in 2023.
The MSCI Europe Index , which contains companies from 15 countries, is now trading at 11.5 times expected earnings, below its historical average of 13.5. Secker sees that dropping to 10 as stocks flag in coming months.
To understand why the outlook is so bleak, it helps to look at how the European power crisis came to be.
The problems actually began more than a year ago. Natural-gas prices in Europe had already more than quadrupled on a year-over-year basis as of last September. Demand had risen as Covid lockdowns waned, and supplies were slow to catch up. In addition, a cold prior winter had depleted the amount of gas in storage.
Russia’s invasion of Ukraine in February vastly exacerbated the problem, because buying Russian energy meant funding Russia’s war. Oil prices have been volatile since the war began, but the impact on natural gas is a bigger deal. Europe relies on gas for about a quarter of its needs, from heating to electricity to industrial production. In some countries, it makes up much more. Italy, now the “sick man of Europe,” relies on gas for 40% of its energy. Europe needs to import most of its natural gas because it has limited capacity to produce it.
The war turned the energy crisis into a political one, too. European sanctions against Russia initially spared most energy sources, but European countries began to transition away from Russia regardless. And Russia accelerated the process, ratcheting down the amount of gas it sent through pipelines. The announcement from Russia’s state-controlled energy giant Gazprom that Nord Stream 1 needed maintenance and wouldn’t come back on is the latest blow; analysts think it’s likely the pipeline stays off through the winter. Europe now gets just 9% of its gas from Russia.
The crisis has been particularly acute because other sources of power have underperformed. Droughts have left rivers at a trickle, reducing hydropower by 26%. And a larger-than-usual number of nuclear plants, particularly in France, have been shut down for maintenance this summer. An increase in solar power has taken up some of the slack, but Europe remains undersupplied heading into the winter.
Russia says that Europe started the economic war by imposing sanctions, and sealed its own fate this winter. “We will not supply gas, oil, coal, heating oil. We will not supply anything,” Putin said at a forum in Vladivostok on Wednesday.
Still, the crisis has upended power markets and put the entire electrical system in jeopardy. An executive at Norwegian utility Equinor says that utilities could be on the hook for as much as €1.5 trillion worth of margin calls, and Finland warned of a “Lehman moment” in power markets. Utilities that sell power to traders and to one another use the futures market to hedge. When prices rise, they face margin calls. Some countries have already announced bailouts
Write to Avi Salzman at [email protected]
EU Energy-Crisis Warnings Worsen With Need for Solutions ‘Right Now’
Fri, September 9, 2022 at 12:31 AM
(Bloomberg) — The European Union is throwing together a series of radical plans to tame runaway energy prices and keep the lights on across the continent, but governments across the region are going to need to find common ground and fast.
As the bloc’s energy ministers meet in Brussels on Friday, they are seeking to take the first political steps on ways to prevent Russian President Vladimir Putin’s cutoff of gas supplies from unleashing rationing, blackouts or even social unrest. But as they try to stick together, governments also need to make sure their emergency intervention doesn’t accidentally cause chaos in the energy markets and make things even worse.
The challenge is to find solutions that can be applied across the region and still fit each of the 27 member states economies and national power systems, which are fed by varying energy sources.
Czech Industry Minister Jozef Sikela said Friday that “there’s no time to lose” in reaching an agreement. “I expect the proposal in a few days and I want to have clarity at the end of the month,” he told reporters. “I already see points where I’m pretty sure we will align.”
Before the emergency meeting in Brussels, diplomats were converging on some general themes — the need to break the dependency of power prices on gas and to help boost liquidity in the energy sector — but remain deeply split over what exactly should be done and how. An agreement is expected to take several weeks at least.
“This is not the moment to have principal debates on energy markets. We just need solutions right now,” said Marco Mensink, director general of the European chemical industry association Cefic. “The situation is very alarming — this is about the future of industry in Europe. Companies are shutting production down as we speak, and with these prices, they will not reopen.”
Belgian Prime Minister Alexander De Croo issued an even more dire warning, saying that Europe cannot afford a debate that lasts two months.
“A few weeks like this and the European economy will just go into a full stop. Recovering from that is going to be much more complicated than intervening in gas markets today,” he said Thursday in an interview with Bloomberg News. “The risk of that is de-industrialization and severe risk of fundamental social unrest.”
EU Economy Risks ‘Full Stop’ on Energy Crisis, Belgium Warns
Speed has never been the EU’s strength. Even fast-tracked measures take at least a couple of rounds of negotiations between government representatives before they are approved by ministers, translated into the bloc’s 24 languages and published.
And the bloc is just at the very early stages of devising plans. Detailed measures to limit the impact of the energy crisis have yet to be unveiled. Most will come after European Commission President Ursula von der Leyen holds her annual address to the European Parliament on Sept. 14 in Strasbourg, France.
Finnish Prime Minister Sanna Marin told the parliament on Thursday that an agreement on the emergency intervention plan will also need involvement by heads of government. EU leaders are scheduled to gather for an informal meeting in Prague on Oct. 6-7, with another summit scheduled in Brussels on Oct. 20-21.
Friday’s meeting of energy ministers will be the first chance for EU member nations to assess just how far apart they are on the biggest challenges.
“Talks will not be easy,” Romanian Energy Minister Virgil Popescu told Bloomberg. “We have our own proposals and we’ll put them on the table and discuss. The commission’s proposals are a good start, but we need to see where the other member states stand.”
Von der Leyen said earlier this week that the commission will lay out a set of radical interventions in the energy market, including for a levy on fossil-fuel producers — based on pre-tax profit — and a limit on excess revenues of companies producing power from sources other than gas. The idea is to rechannel profits to support consumers. But those may be difficult ideas for countries to reach a quick agreement.
One step that may be able to come together faster is a proposal to ease the mounting stress in energy markets caused by surging collateral requirements, with utilities facing unsustainable margin calls.
The EU is also planning to discuss the idea of mandatory targets for reducing energy use.
There are some early warning signs of how much Europe will struggle to make painful choices to reach bloc-wide agreements. German Economy Minister Robert Habeck complained that neighboring Belgium, Luxembourg, the Netherlands and Poland refuse to engage in “constructive negotiations” about more gas solidarity agreements.
That could exacerbate the gas crunch in Germany “because a substantial building bloc of the EU’s gas crisis resilience in the form of bilateral agreements would not be available,” Habeck said in a report seen by Bloomberg that he presented to the Bundestag’s energy and climate committee late Wednesday in Berlin.
German Anger Spills Over as Countries Balk at Gas-Sharing Deals
Despite these kinds of challenges, leaders are increasingly recognizing that failure to act may prompt social upheaval and endanger their governments.
The average annual energy bill is already more than a month’s wages for low-paid workers in the majority of EU nations, the European Trade Union Confederation said earlier this week.
“I think we don’t have the space to again say, ok, we put something in the text and then we meet each other in two months,” De Croo said. “In two months, with these prices, I fear it’s too late.”