Prof. ST Hsieh
Director, US-China Energy Industry Forum
June 23, 2022
The following news report should be very troublesome for everyone. Ukraine war just enters the fourth month with no end in sight, but Germany is warning everybody around the world that a “Lehman Moment” is coming again. If our memory serves, “Lehman Moment” occurred in 2008 while a major US financial firm, Lehman Brothers, collapsed quickly in September 2008; its bankruptcy filing created a world financial panic under the watchful eyes of US government.
There is no way for justifying any war, especially Russian invasion against Ukraine. The US led west economic sanctions against Russia is extreme and the objective is simple and clear: to render Russia into full submission. Thus, it is also a life and death warfare for Russia. It is not reasonable for Germany and any other nation to blame Russia’s willingness to use energy exports as a weapon. As the Ukraine war goes on, west is providing billion US dollar worth of lethal weapons to Ukraine for killing Russian soldiers! War is war and there are no holds barred: there is no rational reason why energy should not be weaponized.
The real worrisome issue is now that Germany is warning the “whole market is in danger of collapsing,” it means that the “global economy” is in danger of collapsing. However, Ukraine war is limited in Ukraine, or at most it is Russia against European nations, the vast populations and nations around the world, China, India, Indonesia, Brazil etc. have no input to the war or peace but they all have to bear the brunt of a collapsing global economy. Is it fair?
Should Germany take the lead to “conclude” the Ukraine war, so nobody has to suffer the sad consequence of a collapsed global economy? For all practical purposes, Germany people will suffer the most with a very cold winter soon as well as a broken-down economy that might be worse than the defeat after WWII. Because there will not be any Marshall Plan as the US cannot afford it.
The irony is the following statement from a British commentator: Germany’s industrial might has been significantly aided by its access to cheap Russian energy. Now those taps are being closed. The rhetoric question is should Germany repent and get rid off Russian gas right now?
‘The whole market is in danger of collapsing’: Germany warns of a ‘Lehman moment’ if Russia cuts off natural gas to Europe
Thu, June 23, 2022, 2:43 PM
Germany is one step closer to having to ration its gas usage as supply from Russia starts to dry up, and the country’s top economic affairs official is warning that it could lead to an even larger economic spillover effect.
As of Thursday, Germany has entered the second alert level of its emergency gas plan, according to Robert Habeck, Germany’s minister for economic affairs and climate action.
At this level, “security of supply is currently ensured, but the situation is tense,” Habeck’s ministry announced, after gas supplies along the Nord Stream 1 pipeline connecting Russia to Germany began drying up on June 14.
“Even if we don’t feel it yet, we are in the midst of a gas crisis. From now on, gas is a scarce asset,” Habeck said in a statement accompanying the ministry’s announcement.
Habeck added that if supply continues to fall, and prices continue to rise, it could create ripples that would do irreparable and wide-reaching damage to the energy market, in what he likened to a “Lehman Brothers effect,” referring to when the Lehman Brothers investment bank declared bankruptcy in 2008, sending economic shock waves through the global financial system.
“The whole market is in danger of collapsing at some point,” Habeck said.
German markets have been among the hardest hit by the war in Ukraine and Russia’s willingness to use energy exports as a weapon owing to the country’s heavy reliance on Russian gas imports. Russia accounted for 55% of Germany’s gas imports in 2021, and 40% in the first quarter of 2022.
Between the beginning of the year and the end of May, Germany has been able to lower Russian gas imports to 35%, but the country’s energy markets are still highly vulnerable to even the slightest changes in supply from Russia.
When Russia began tightening gas flows to Germany last week, Russian gas company Gazprom said it was because of technical issues involving a missing gas compressor unit at a power plant on the Russian side of the Nord Stream pipeline. The shutoff had an immediate effect, sending gas prices surging 24% across Europe, and Habeck responded to the act at the time by calling it “politically motivated.”
In his most recent statements, Habeck expressed uncertainty that Russian President Vladimir Putin would not resort to the same measures again in future, and he urged Germans to prepare.
“Prices are already high, and we need to brace ourselves for further increases. This will impact our industrial output and impose a great burden on many consumers. It is an external shock,” Habeck said.
Habeck added that it is the country’s “top priority” to fill up gas storage ahead of next winter, but acknowledged that the threat from Russia makes Germany’s energy security outlook less predictable, and that more stringent energy rationing measures may be inevitable.
“All consumers—in industry, in public institutions, and in households—should continue to cut their gas consumption as far as they can so that we can get through the winter,” he said.
While encouraging rationing measures, moving to its second alert level means that German gas companies and suppliers are now under more pressure to find alternative sources of gas to help keep storage levels stable within the next few months, according to the ministry’s statement. The German government is providing gas companies $15.8 billion in loans and credit to purchase more gas from abroad and help shore up supplies.
At the second alert level, companies could theoretically begin passing on the higher costs to consumers, but the government is not allowing that to happen yet, Reuters reported.
Should Germany enter its third alert level, the government would be able to begin unilaterally deciding when and where to ration gas supplies, according to the ministry’s statement.
European natural gas prices spike after Germany declares ‘alarm’ stage of emergency gas plan as Russia cuts supplies to Europe
Thu, June 23, 2022, 7:21 AM
- European natural gas futures jumped Thursday after Germany entered the “alarm” phase of its gas emergency plan.
- Berlin said Russia’s reduction of gas supplies is an attack on Europe’s largest economy.
- Germany is now in the second of three levels of its emergency plan that responds to lower gas inflows.
The German government has raised the emergency level for natural gas supplies to the second “alarm” stage of its three-level plan as flows from Russia sharply drop.
The government declared the phase on Thursday, and said that if Russian supplies remain low, Germany may not be able to store enough gas to meet surging demand for heating in winter.
The government is now urging people and companies to increase their efforts to cut back on gas use.
It is also calling on utilities to prepare to resume the operation of currently offline coal-fired thermal power plants to help reduce gas consumption in electricity generation.
Gas flows from Russia via the Nord Stream 1 pipeline have plunged by about 60 percent since Russian gas giant Gazprom announced a steep drop in supplies last week.
BBC: Germany takes step closer to gas rationing
The country has triggered the “alarm” stage of an emergency gas plan to deal with shortages, Germany’s economy ministry said.
It is the latest part of a standoff between the European Union and Russia over its invasion of Ukraine.
German economy minister Robert Habeck said Russia was using gas “as a weapon” in response to EU sanctions.
“We must not fool ourselves. The cut in gas supplies is an economic attack on us by [Russian President Vladimir] Putin,” Mr Habeck said, adding Germans would have to reduce consumption.
Mr Habeck said there would “hopefully never” be a need to ration gas for German industry, but he added: “Of course, I can’t rule it out.”
At the top of the German government they say they have a phased plan to deal with all dependencies on Russia for energy. It has been easy with coal, as they can simply buy it in shipped form from the likes of South Africa and Colombia. Oil too is mainly shipped on tankers, bar one refinery connected to a pipeline from Russia.
But gas needs a significant investment in alternative infrastructure, basically the LNG terminals that enable the purchase of shipped gas from around the world. This normally takes years, but Germany is exploring the idea of floating terminals that some claim could be ready by the end of the year. Further permanent terminals will take two years or so, part of the German effort to reduce dependence on Russian gas from 55% to 10%.
But then there is the much bigger issue of where the shipped gas comes from. Even before a fire at a key US export terminal, in theory 155 billion cubic metres of Russian gas exported to Europe by pipeline needs to be found from the current 500 billion cubic metres market for shipped LNG.
Producers need to pump much more gas to meet this demand, but, for example the Qataris are finding it easy to sell this on long-term contracts lasting longer than a decade. Germany wants a shorter contract to reflect its efforts to phase out fossil fuels. In any event the transfer of German energy demand into this market will push up prices for the whole world.
In the short term, however, the challenge will be to maintain supply and demand in the German energy system. And while Europe’s industrial powerhouse scrambles to expand its gas import options, it might need to prepare for “demand management”, using less energy in its factories and households, and that risks recession across Europe.
‘All bets are off’
Nathan Piper, head of oil and gas research at Investec, said the continuing restrictions to gas supplies from Russia to Europe was a “worrying development”.
“Effectively, all bets are off on what could happen next,” he said. “Any pretence that Russia is a reliable provider of gas supplies has gone.”
In the summer disrupted gas supplies are “less of a pressing concern”, but he said the situation could become worse in winter when people need more heating.
Whether Germany has to start rationing gas “remains to be seen”, he said, but if prices continue to rise industry will cut back anyway as gas becomes uneconomical.
German industry is already looking at how it will cope with a supply squeeze, with some firms considering resorting to energy sources that were previously being phased out.
Kelheim Fibres, which supplies Proctor & Gamble among others, is looking at fitting out its gas power plant to run on oil.
“Oil has only one advantage: supply is secure,” the firm’s Wolfgang Ott told Reuters.
In the UK, coal plants have been asked to stay open longer, and the government is considering whether to let a new coal mine in Cumbria go ahead.
This is despite global efforts to reduce coal consumption to try to limit the impact of climate change.