Prof. ST Hsieh
Director, US-China Energy Industry Forum
November 23, 2022
Europe was a model for a market system with free trades but it is no more. Because their politicians badly managed the sanctions against Russia after the Ukraine War broke out almost ten months ago. Specifically, the US led sanctions against Russian energy backfired badly. Europe now faces unprecedented energy shortage under winter weather.
The previously announced “price cap” scheme now means “self-preservations” rather than punishing Russia. It is well understood that any government promised “price cap” on any product is against the market system, it will not work effectively and, in fact, will cause long term damages to the market system. Bail out or nationalization of private businesses is costly, and it will take a long time to recover. Nationalization of Uniper cost US $53 bln is 1.2% of German’s GDP in 2021. German’s economy is projected to shrink in 2023.
Ukraine war is bad news, unfortunately no end is in sight so suffering will continue.
Europe’s new oil price cap won’t hurt Russia
Wed, November 23, 2022 at 7:14 AM
European insurance and trading firms will soon be blocked from handling Russian oil unless its price is below a pre-set cap.
Europe’s latest economic volley against Russia—a price cap on Russian oil—seems likely to land as a dud.
Russia can’t afford to maintain its war in Ukraine without selling its oil and gas to the global market. And much to the chagrin of Ukraine’s allies in Europe and the US, the global energy market can’t function smoothly without Russian oil and gas. Various tepid energy sanctions, including a ban on Russian fossil fuel imports by the US, have had almost no effect, as oil shipments have simply been diverted to China, India, and other buyers keen to snap it up at a discount. In November, Russian crude oil production was only about 2% less than it was before the invasion.
On Dec. 5, the EU will institute a modified embargo on almost all Russian oil. No matter who the final buyer, nearly all of that oil must first pass through the hands of Europe or UK-based traders, shipping companies, and insurers. A total EU embargo could choke off 10% of global oil supplies overnight, with likely devastating consequences for the global economy. To avert that, European shippers and insurers will now be allowed to bypass the embargo—if they agree only to deal with Russian oil below a designated price per barrel.
The arithmetic logic of the price cap on Russian oil
In theory, that price cap should be high enough that Russia is still incentivized to drill, but far enough below market value that it makes a serious dent in Russia’s profits. But in negotiations on Nov. 23, EU diplomats are settling on a price cap of about $65-70, according to Bloomberg—which is more or less the same price that Russian oil is already selling at.
Poland and other hawkish members of the bloc had pushed for $20, which would certainly do more damage to Vladimir Putin’s war chest but would also likely guarantee Russian production cuts and all the consequent turmoil to global energy prices and supply chains. In other words, European policymakers pulled their punches on sanctions in the interest of preventing further instability in the global economy.
Separately, EU policymakers also seem squeamish about a new price cap being negotiated this week for natural gas. Gas imports from Russia are not under embargo in the EU, but supplies have been cut significantly as part of Russia’s retaliation strategy, driving up electricity and home heating bills across Europe.
The new gas price cap is meant as a consumer protection measure. Once gas futures prices reach a certain point—regardless of where the gas comes from—regulators will block it from going higher, limiting the sticker shock to households and businesses. But the proposed cap—€275 per megawatt hour, and only if that price is reached for more than 10 days within a two-week period—is still far above pre-war prices. That cap will be negotiated further and possibly revised on Nov. 24.
Germany’s Uniper sees bailout cost hitting $53 bln
Wed, November 23, 2022 at 6:07 AM
On Wednesday (November 23) the firm said it could need another 25 billion euros – close to $26 billion.
That would take the total cost to around $53 billion.
Uniper is the largest corporate casualty of Europe’s energy crisis.
It nearly collapsed after Russia’s Gazprom – its biggest supplier – cut off gas flows.
That led to the firm posting a record net loss for Germany, and forced Berlin to nationalise it.
Investors are due to vote on the whole bailout package on December 19.
It will also need approval from competition watchdogs in Brussels.
Shares in the firm, which were already down over 80% this year, lost around 4% on Wednesday.