Energy Shock

The world is in energy shock.

European imported coal prices increased 421% before Russia invaded Ukraine. German electric power price increased 518%. European natural gas jumped 765% and Asian spot LNG, 957%.  Since then, it’s gotten even worse.

U.K. natural gas futures price has increased +$99.86 (+574%) from $17.41 to $117.27 per mmBtu just since June 8 (Figure 1).

Now Europe’s energy crisis is on a path to even worse outcomes.

Russia announced on September 4 that gas supplies to Europe via the Nord Stream 1 pipeline would not resume in full until the sanctions against Russia were lifted. Finland’s Economic Affairs Minister stated ,

“This has had the ingredients for a kind of a Lehman Brothers of energy industry.”

Mika Lintilä

Many governments are planning to subsidize consumers with price caps and to help industry with loans. My friend and colleague Nate Hagens recently noted that,

“Europe is committing economic suicide.”

Nate Hagens

That is because these bailouts are happening at a time of economic contraction, high inflation and rising interest rates. That means increased and unproductive debt at a time that states cannot afford its service except with more debt.

French President Emmanuel Macron recently stated,

“What we are currently living through is a kind of major tipping point or a great upheaval … we are living the end of what could have seemed an era of abundance…the end of the abundance of products of technologies that seemed always available.”
–Emmanuel Macron

Meanwhile, OPEC+ has decided to cut production by 100,000 barrels of oil per day reversing 15 months of output increases. Although oil is relatively less expensive for Europeans than natural gas and coal, many countries have begun using diesel as a substitute to generate electric power.

In August, Saudi oil minister Abdulaziz bin Salman (ABS) said that this may be necessary to correct problems in the market because “the paper and physical markets have become increasingly more disconnected.”

That is rhetorical nonsense but that’s not what is really going on. This is about the second Cold War to create a new world order.

It should be obvious by now that Russia’s war in Ukraine is about much more than territorial expansion. Ukraine is the staging ground for a larger conflict between states who are dissatisfied with the present world order versus those that are more-or-less satisfied. We only need to look at the countries that continue to buy Russian oil and cooperate with Russia on oil: China, India, Saudi Arabia and the rest of OPEC including Venezuela, Mexico, Kazakhstan, Azerbaijan, Malaysia, Sudan, South Sudan, Oman, Brunei and Bahrain.

Credit Suisse’s Zoltan Pozsar wrote a fascinating post about this in which he identifies the TRICKs bloc of nations—Turkey, Russia, Iran, China, and North Korea—an alliance of economies sanctioned by the U.S. getting ever closer economically and militarily. China and Russia held naval exercises with Iran earlier this year. Iran hosted talks in July between Russia and Turkey, and India, China and Russia held joint military drills a week ago.

The world has begun the descending arc of the Oil Age. Europe’s energy crisis, the war in Ukraine, and escalation of U.S. – Chinese tensions over Taiwan are all part of a struggle to dominate remaining fossil resources as well as new energy sources.

The world is in energy shock. That seems to be awakening people from the big sleep of energy blindness. A major economic contraction seems inevitable. The world order that has existed since the end of World War II is ending. It’s a lot to take in.