Guess Who Is In The Driver’s Seat Now?

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Europe is about to learn what the words “hot,” “cold,” and “energy dependence” really mean.  Very possibly, America will too.

School has just begun, and in this case the teacher is Gazprom, a Russian energy conglomerate that is the largest producer of natural gas in the world.  Estimates are that it supplies Europe with up to 40% of this resource. 

Nord Stream, the pipeline that delivers the gas to Germany and beyond, shut down on July 11 for 10-days for maintenance of a turbine.  Shipments resumed as scheduled on July 21, but the news is not all good.  Budget Commissioner Johannes Hand said he doesn’t expect the pipeline to return to full capacity.  And Hahn is not alone.

Klaus Mueller, head of a German regulatory group, tweeted that natural gas flows might reach pre-maintenance levels, but dismissed the idea they would increase to 60% any time soon.  Even if Germany and other countries will be able to manage at this reduced volume it will be with a great deal of hardship. 

Moreover, Gazprom was less than reassuring about future shipments.  It said a second turbine also needs maintenance and this one too will require a shutdown.   


A Friend In Need…

Germany imports a third of its natural gas from Russia, as well as a third of its oil and more than half of its coal.

Realizing its energy dependence, Germany was building supplies to prepare for the upcoming winter.  Its storage tanks were about two-thirds full before Nord Stream shut down – not as much as they wanted but nevertheless a respectable level for this time of the year.  But now, because of the shutdown, they had to draw down reserves.  

Actually, Gazprom began cutting deliveries in mid-June, and a gas shortage in Europe has been building for months; Russia’s role in this is clear.  

In September 2021 – five months before Russia invaded Ukraine – the International Energy Agency (IEA) said, “Russia was preventing a significant amount of gas from reaching Europe… creating artificial tightness in markets and driving up prices.”  


Tightening The Noose

The question now is: Will Russia increase energy exports or reduce them in retaliation for sanctions?  According to a Deutsche Bank analysis, if deliveries are at least 40% of their pre-maintenance level, Germany will be able to eke through the winter – provided there is “mild demand curtailment and quite high gas imports from other countries.”  

Germany has the largest economy is Europe, and to paraphrase the old saying, if it catches a cold the rest of the Continent will sneeze.  Many Americans invest in Germany either directly or indirectly.  Besides, a severe gas shortage there could create shortages of parts or even force factories to close, and the ripple effects easily reach the US. 

While Gazprom’s resumption of shipments is good news, it is premature to say Europe’s energy woes are over.  For example, technical problems could force additional shutdowns or the upcoming winter may be severe.  Moreover, Putin can hardly be considered a reliable and trusted business partner.

Deutsche Bank analyst Jim Reid says investors should "expect the uncertainty to continue for many months and potential gas flows be linked to various geopolitical themes such as a cease-fire with Ukraine."  Reid adds that there is no certainty that gas supply will continue even at the current reduced level.    


Coins And Dollars 

Although politics and economics look very different, they are more like flip sides of the same coin.  Over the years, there have been riots and revolutions because of food shortages, out-of-control inflation, high unemployment, and economies that have crashed.  Europe is not immune from these problems.

UBS economists analyzed what might happen if gas shipments from Russia are further reduced.  Of course, the answers depend on the extent of the reduction and the duration.  However, they found it could cause:

*A significant drop in corporate earnings;  

*A significant market selloff; 

*A sharp decline in the value of the euro; and 

*Yields on some bonds that could drop to zero percent in a flight to safety.

UBS added there could easily be “much worse economic disruptions” and “more negative growth.”  

What UBS experts haven’t included in their analysis are political repercussions from widespread energy shortages.  


Heroes And Villains

European (and other) countries vilified Putin when Russia invaded Ukraine.  They slapped Russia with painful sanctions and boycotts, and tried their best to destroy the Russian economy.  

But now there are press reports that Russia will annex parts of the Ukraine and expand the war.  How will Europe respond?  Facing the prospect of a devastating energy shortage, will they continue to pursue anti-Russian policies or make a humiliating about-face and apologetically tow Putin’s line?

Meanwhile, Putin continues to defy and outmaneuver the West.  For example, he just flew to Iran, where he signed a major energy deal to develop onshore and offshore Iranian oil fields; The Jerusalem Post estimates it could eventually be worth $40 billion. 

When the war in Ukraine broke out, European leaders began beating their chests to prove how decent they are and to out-humanitarian each other.  In point, maybe they were right.  But their support for Ukraine cost Russia a great deal of blood, treasure, and prestige, and all the while European leaders were brazenly and openly anti-Russian.    

Putin was treif, but somehow his oil and gas remained kosher and it was fine to do business with him.  How European leaders were so oblivious to their own countries’ energy needs is baffling, but they never secured other sources.    

In any case, Putin is now in the driver’s seat, and there’s a big grin on his face as countries come to him hat in hand to buy oil and gas.  Do you think he will let bygones be bygones or that he sees this as payback time?