This week we talk -again- about the energy crisis, and therefore our word of the week is “brennholz”.
- The background of the energy crisis: How did we get to this point?
- Russia vs. Western Powers
- Green vs. efficient energy resources
- What happened at Freeport LNG, and also at Nordstream 1 and 2
- UK Bond Market Turmoil
Good morning, I’m Austerity Jones and I am feeling energized this morning, aren’t you C Thomas?
C Thomas: Very clever, Austerity. I see what you did there, and good morning. Let me ask you a question… Do you know what ESG stands for?
Austerity: It should be Environmental, Social, and Governance?
C Thomas: Correct, but ESG actually stands for… I will tell you at the end.
We are in a war of energy and we are trying to fight it with one hand tied behind our back due to ESG restrictions. Now let’s start off by speculating dangerously a little bit shall we? If you are a chess-playing Russian leader or maybe a Go-playing Chinese leader, think about how this scenario plays out in your strategy sessions. Since the sanctions were lowered on Russia and the US decided to take their foreign reserves and kick the Russians out of the Swift System. we have been at war. The Russians are fighting a kinetic war and, although we haven’t committed troops, we are funding some of the resistance and I wish I remembered who said this great line “we will not stop fighting until the last Ukrainian falls.” Let me give you a little background before speculating. Now let’s look at the energy component of this. The Russians have been selling natural gas and oil to Europe because of the European dependence on natural gas for heating due to lack of their own supply. The Europeans decided to go green instead of securing their own natural gas supplies. It seems that hasn’t worked out very well, and it seems that just deciding to go green like Germany did with their Germany Renewable Energy Act of 2021 doesn’t mean that magic candles are coming out of the asses of pink elephants.
Let’s do some quick math for a northern European nation. Half the day is night, the country is very cloudy, let’s say half the time, and wind is unpredictable so how much energy gather are they getting. Add to that that solar and wind are less efficient sources of energy and wa- la! You have an energy problem. you were dependent on nuclear and natural gas and coal. Coal was dirty so you shut that down and nuclear wasn’t green enough (even though it’s the cleanest and most efficient source of energy) so you have natural gas as your backup and most dependable base load power source. You as a country and largely a continent decide to source it from one source. That one source has now angered the global bully and the global bully has punched him in the nose and you are laughing at him while he bleeds. The country with the bloody nose said I’m gonna take my gas and go home, and you are saying whoa whoa whoa we need your gas. Russia says fine “Pay for it in rubles or gold then” and Germany replies we can’t do that because we promised the US we would back their play. Russia says have a nice day but we are going to have to do maintenance on the pipeline now. They have been reducing supply and putting the pinch on Europe all summer, but now we can speculate.
Since Russia cut off natural gas from Europe, Europe said “Fine, we will buy it from the US, and it will be expensive because it has to be shipped across an ocean after being liquefied at considerable cost at special facilities that are quite rare in the US and then reversal facilities in Europe which Europe lacks in quantity anyway. Freeport LNG has such a liquefaction facility here in the US and one of the biggest, and in the months after the Ukraine war its cargo of LNG had changed from mostly going to Asia to now heading for Europe at much higher prices as the desperate Europeans were the top bidder almost by necessity. However, In June at Freeport LNG there was an explosion that was later reported to be 450 feet high and Freeport came out and declared force majeure, which would basically say it was an unavoidable act or an act of nature and release them from their contracts. They then retracted this declaration putting themselves on the hook for up to $8B and causing strain amongst their buyers who are scrambling for product. Freeport LNG have released no details about why they revoked the declaration and have refused to comment. They are the second biggest exporter of LNG in the US and although originally expected to be shut down for 3 weeks at this facility, it now looks like it could be the end of the year before they are ready to resume full operations.
Because this is 1 of Europe’s biggest sources of natural gas, and their biggest source-just blew up in the Baltic sea. Swedish and Danish authorities are saying that it was likely sabotage on the two pipelines Nord Stream 1 and Nord Stream 2. Now one pipeline was new and had never delivered gas due to politics but the other one was the one under maintenance and not really operating, but they are bubbling up natural gas into the Baltic sea like a big ass Jacuzzi! Bubbles as large as a km wide are proof that the pipelines are not functional. This means that even if Germany and Europe wanted to go backward this winter and ask Mr. Putin to turn on the gas, pretty please with a Wienerschnitzel on top, they likely wouldn’t be able to do it. I don’t believe in coincidence ladies and gentlemen. I believe someone doesn’t want Europe to have natural gas this winter. Some people are blaming the Russians in the western media, but if Europe ends up in big trouble this winter and it looks like they will, Putin would have stood to win if Europe splits with America. He gets to sell gas on existing pipelines and he is able to fund his war more easily. Could it be the Americans making sure that Europe stays in its lane and that the US gets to sell more natural gas? That makes sense. What about Ukraine? If Europe bails and the west stops giving Ukraine support then it is likely a bad scenario for Ukraine. That’s a maybe. Could it be a rogue group of climate activists making sure that Europe goes green to save the spotted owls and the whales? Perhaps.
What is known is that Europe, largely due to these energy shortages, are paying 10-12x normal prices. Factories are shutting down due to profitability impossibilities and also the government is shutting them down saying “you don’t get any gas, it must be saved for saving people.” Thermostats are being turned down, and showers are being taken cold, and the Eiffel Tower has gone dark. This is your green future folks. Not in some far away utopia, but this winter in Europe, a developed region, but one lacking in two major resources- natural gas and common sense politicians.
The UK is suffering from terrible gas prices increases which has forced their government to cap prices and pick up the bill. Energy prices affect everything as an importing nation and inflation has reached double digits. How are they paying for this and their PM’s new tax cuts? By selling UK bonds, but their bond prices are rising and falling by incredible amounts in a day! The bond market said no. Large pension funds were facing margin calls that were so massive that they called in the Bank of England for an emergency temporary session of quantitative easing. They are buying bonds to keep the yield from going any higher and bond prices from dropping any further. They went from 4 to 5% on the 10 year gilt, and then back to 4% again after the BOE acted, for perspective think of 10% moves in the stock market for shaking an economy to the core.
Matt Levine writes about it in his email newsletter more extensively if you want the full story (he’s the goat of newsletters btw), but here are some sobering titbits. One senior London based banker said at one point Wednesday morning there were no buyers of long-dated UK treasuries and I quote “It was not quite a Lehman moment, But it got close” referring to the Lehman Brothers collapse during the GFC. Kerrin Rosenberg, Cardano Investment chief executive goes on to say this If there was no intervention today, gilt yields could have done up to 7-8 percent from 4.5 per cent this morning and in that situation around 90% of UK Pension funds would have run out of collateral. They would have been wiped out.” Again if you aren’t reading Matt Levine for finance you need to but this is buried in the middle of an email newsletter where he references the Thursday article in the Financial Times written by Alexandra Scaggs and Louis Ashworth. Yet, on the front page of the BBC website today above what we would have called the fold in newspaper parlance I get to read about New Zealand’s overlooked cuisine! These green energy policies and spendthrift national governments are breaking developed countries and no one is even noticing! Let me repeat- 90% of the pensions of our largest ally were this close to being wiped out. The bank was selling bonds on Monday and buying bonds on Wednesday, and this is supposed to be temporary for a few weeks. What happens then? Remember all the way back 7 days ago when we talked about the British pound and we think we know where the new PM of the UK Liz Truss stood after releasing her new policies? Well UK betting odds have dropped from 40 to 1 all the way down to 6 to1 that she is out by the end of 2022.
Green energy policies, inflation, bad government policies, and financial leverage almost crashed an economy, but tell me more about Mauri noodles. Which brings us to the word of the day Austerity- and no it isn’t spendthrift as we all know that governments can stop spending money. No, the word is Brennholz.
Brennholz- a German word for firewood
That’s right, green old Germany is now rolling coal like a diesel pickup on a Tesla. They are also gathering Brennholz to make sure that they don’t freeze to death this winter. The low country of Belgium was some of the worst areas decimated in WWII due to the German occupation after Poland, but it seems like Germany could be the second battleground in this war after Ukraine unless the UK beats them to it. This is a far different kind of war, but the suffering will be similar. As for the saboteurs of the LNG facilities, my guess is we will never know, and it will hardly be mentioned again.
Sincerely Yours,
C Thomas Printer
Austerity: C Thomas! you didn’t tell us what ESG stands for?
C Thomas: Everybody’s Short Gas…
Also born on this date:
Chris LeDoux,
Donna Karan,
Groucho Marx,
Annie Leibovitz,
Sting,
Johnnie Cochran,
and the Mahatma, Mahatma Ghandi.