A Permanent Energy Crisis
Europe’s grave energy predicament has probably just turned irreversible with the blow-up of the Nord Stream pipeline system, carrying Russian gas to Germany under the Baltic Sea. These were no thin straws, the combined theoretical capacity of NS1 and 2 was 110 billion cubic meters (bcm) per year (or 3884.61 billion cubic feet, bcf, if you prefer.) Nord Stream 2 was never opened, but was ready to operate, and thus it was filled up with some 800 million USD worth of natural gas already. Now its all lost. Where does this leave Europe in energy terms? What might be the impact of this event on the continent’s future?
Let me start by stating: the EU had no cheaper energy options than Russian fossil fuels (not only natural gas, but oil and coal as well). All other options put European economies in a completely uncompetitive position. This was a well known fact long before the war in Ukraine began. As the authors of the foreign policy report by RAND pointed out in 2019 already:
…alternative gas supplies are likely to be more expensive in terms of both infrastructure costs and gas prices. If governments subsidize the infrastructure, they will have to reduce expenditures for other purposes or raise taxes, both of which might create a drag on the economy. Higher gas prices will reduce the ability of Europeans to purchase other goods and services, also creating a drag on the economy.
Alternative sources are, and always were, not only less in quantity (no wonder, we live in a finite world after all), but also much more expensive. For proof look no further than the following headline:
A recent study by Rystad Energy and funded by the American Petroleum Institute and the International Association for Oil & Gas Producers found that U.S. producers will remain the biggest LNG suppliers to European countries over the long term. But before the market rebalances, there will be a supply gap lasting until somewhere between 2023 and 2025.
The report continues to point out that after 2025 it would be relatively smooth — though probably costly — sailing for gas supplies in Europe. The question remains, however, what will Europe do over these three years?
The likeliest answer to this question is quite unpleasant because it effectively comes down to the demise of its status as an industrial power. There is not enough money in the world to keep all industries in Europe on life support for three years and keep them profitable.
Truth to the matter: US shale drillers are already struggling to meet European demand — not to mention replacing lost volumes. As it is usually the case with such industry funded reports, like the one by Rystad above, they never intended to tell you the truth. Instead, they try to convince banks and hedge found managers (people who have absolutely no idea how the oil business works) to pour more money into a dying industry.
You have a much better chance to get a picture somewhat closer to reality when you listen to desperate CEO-s trying to explain the situation to (even more desperate) shareholders. But before we get into that: it is vital to understand, that most of the natural gas is coming from oil wells, as ‘associated gas’. Thus watching the oil market closely tells us a lot about Europe’s prospects for getting enough natural gas — not to mention oil itself, the import of which they are wisely planning to stop during mid-winter, when demand for heating oil spikes…
Now, back to oil executives telling us that Prices Don’t Reflect Tight Supply:
“Shale will likely tip over in five years, and U.S. production will be down 20 to 30 percent quickly. When it does — this feels like watching the steam roller scene in Austin Powers. Oil prices in the late 2020s will be something to behold,” the executive concluded.
It appears to me that the world is very short on supply, with big draws in Organization for Economic Cooperation and Development inventories still taking place even after a significant increase (and now leveling off) in North American drilling and completion activity,” the executive commented, adding that OPEC has “for the first time ever” acknowledged that there is no spare capacity.
Just to make sure no one missed the point: the shale revolution in the US is over and done. What we see now in America, the world’s biggest oil producer by the way, is a leveling off in drilling activity in anticipation of a precipitous fall in oil production within five years.
Let that sink in for a moment.
Ugh, what about the Saudis then? It cannot be that bad there, now can it? Well, let’s unpack this “no spare capacity” story a little. As the president and chief executive officer of Saudi Aramco (the world’s biggest oil company) Amin H. Nasser warned his audience last week:
The oil market is not in balance, and supply is getting tighter because there is little in the way of new supply to make up for natural depletion, which has been accompanied by other factors such as political instability and U.S. sanctions on large producers.
At the same time, with the EU tightening the sanction screws on Russia, chances are that gas prices will remain elevated, which will result in what UBS noted as one factor for higher oil prices: greater demand for fuels to use in the generation of electricity instead of even costlier natural gas.
Did you get that? Did he just used the forbidden word: depletion?! Honestly I did not dare to imagine, not even a few weeks ago, that we will get so close to the admission that Peak Oil is just around the corner. Well, I guess Arthur Schopenhauer was right after all:
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
I guess we are about to enter the self-evident phase, as the world slowly realizes the truth in the scientifically proven fact of Peak Oil Supply during the coming months and years ahead.
What about Russia then? Soon they will be clogged with oil they cannot sell! Sure, for a while. Until new pipelines get built towards China, Pakistan and India. In the end however, depletion will hit them as well. According to a government strategy document cited by Kommersant, Russia’s oil production is unlikely to recover to pre-COVID levels. Russia may have already passed peak oil output. With sanctions on European imports and a looming price cap, this almost looks like a certainty now. So much for the number three producer of oil.
I think the statements above made it abundantly clear: it is not demand which is going away, but supply. As increasingly tight natural gas availability gets replaced by oil in electricity generation — you have to recharge those electric vehicles frequently after all — demand is almost certain to grow. The world’s top three producers, responsible for more than a third of world oil supply, has just announced that they cannot grow production any further and that natural depletion is weighing heavily on them. The onset of a long decline in world oil production is now within sight. I can but wonder what a mess it will create when it arrives.
Meanwhile in Europe, the high cost of energy has already caused multiple bankruptcies. This isn’t just limited to toilet paper and diaper manufacturers, but also the metals sector, cement, chemicals, and more. Companies are fleeing the continent in search for lower energy (natural gas and electricity) prices, with quite a number of them finding solace in the US. As a result, America enjoys a boom not only in LNG exports, but also in factory jobs: like it’s the 1970s again. If prices remain high, I’m sure there is more to come.
This where we get to the sabotage of both Nord Stream pipelines, punching holes into three of the four pipes, and possibly damaging the fourth. If seawater enters the tube system — which I’m certain it will, once we have to wait three weeks for an investigation to begin — it will corrode them from the inside out, making the reopening of the gas delivery system rather unsafe, and thus improbable.
On top of the technical issues this act of sabotage has caused to the currently closed pipeline system, it has also removed the only gain Europe could’ve hoped from a potential peace deal between Ukraine and Russia. It has most probably made Germany’s energy woes permanent, increasing the risk significantly that more businesses would flee the continent. Up until recently Russia has repeatedly asked for the removal of sanctions on pipeline equipment in case of Nord Stream 1 and the administrative blocks on Nord Stream 2. While I’m sure Gazprom could’ve found a way around Siemens equipment issues (installing its own equipment for example), they were clearly waiting for the Germans to remove legal roadblocks preventing NS2 to open. I bet they have kept these options in store for a peace agreement to be made. Now, its all down the drains.
I have no doubt, however, as to what the investigation’s result will be. The West will blame Moscow and come up with all sorts of knee-jerk explanations — while every discussion pointing in the other direction will be shunned or labeled Russian propaganda. I wonder though, if indeed Moscow stood behind all this, why did they hit their own infrastructure instead of the brand new Norwegian pipeline in the very same area, delivering gas they have no control over to Poland? And, by the way, who gained the most out of this? Questions to ponder on.
Bah! Who needs those dirty, polluting fossil fuels anyway?! Let’s turn green an utilize Europe’s great renewable potential! — If this sounds out of tune to you amidst the greatest disaster for Europe’s industry in living memory, then you are not too far off the mark. The current energy crisis has provided ample evidence that ‘renewables’, the much touted magic bullet solution, are simply not up to the task of powering an economy without adequate supplies of natural gas. Especially not throughout the winter—during the dark, and often windless months, when you need heat and energy the most… But who am I to tell.
At this point, one might wonder can it be even worse for Europe?
In fact, it can. On the financial front the situation is deteriorating fast, even as we speak. The continent’s woes has just been made worse by the FED’s relentless rate hikes: making dollar based government debts even more expensive for the entire world, and in it: Europe. It should not come as a surprise then that the Euro has fallen below parity: as a result it now worths less than a Dollar, and now the Pound is following suit — reaching its all time lows, and who knows where it will stop.
This will make the import of goods, especially the much needed non-Russian oil and LNG to Europe even more expensive, accelerating the collapse of its economy. Simply put, it forces Europeans to cough up more Euros to pay the price in USD for the same amount of fossil fuels, solar panels, wind turbines, batteries and base metals imported into the continent.
Lacking its own supplies of these essentials, and soon the manufacturing capacity to run a modern economy, this rise in US interest rates now threatens the Euro zone with a sovereign debt crisis, if not with outright hyperinflation. In today’s hyper-connected world, especially when it comes to finances, this would surely not be limited to Europe and certainly has the potential to bring down other economies too in a blink of an eye. Another thing to watch out for.
Epilogue. Every war has winners and losers. Some are closer to the actual fighting some are positioned in a safe distance. I leave it up to you, Dear Reader, which country you put in which category. One thing is for sure though: the onset of fossil fuel depletion is close, and while Europe’s woes can be attributed to a war and a number of ‘unintended consequences’, depletion will not spare any nation on Earth. Be it China, Russia, Saudi Arabia or the US — when these fuels will start their relentless decline all these nations will share the same fate Europe is experiencing right now. Something around a drop of 20–30% in oil production will do… All this with an unnervingly high potential of ending up in a last man standing game, upending previous partnerships and turning nations against each other.
Where does this leave us in terms of the near future? One thing is for sure: Europe is toast. After losing the half of its energy supply, and not only natural gas but sanctioned coal and oil as well, an increasingly tightening world supply of these fuels will leave Europe with little solace. If deindustrialization begins on a broader scale it will be hard to tell where it will stop.
At this point all European governments can do is to set up a triage of technologies — as John Micheal Greer proposed in his book The Long Descent. Ruthless, and cold headed decisions will have to be made: which businesses to keep and which to let go. Do we need aluminum die casting? Steel smelting? Or should we prioritize fertilizer production?
Tough choices, and combined with a Russian mobilization threatening with a win over Ukraine, it will put the EU and NATO under their ultimate pressure tests. Whether these institutions will survive into the next decade once the proverbial really hits the fan on the other side of the pond as well, no one can tell.
Interesting times indeed.
Image credit: Unsplash