Brace yourself for a terrible winter.

[Little Raven]

Warns Thomas Friedman.

Every so often the tectonic geopolitical plates that hold up the world economy suddenly shift in ways that can rattle and destabilize everything on the surface. That’s happening right now in the energy sphere.

Several forces are coming together that could make Vladimir Putin the king of Europe, enable Iran to thumb its nose at America and build an atomic bomb, and disrupt European power markets enough that the upcoming U.N. climate conference in Glasgow could suffer blackouts owing to too little clean energy.

Yes, this is a big one.

Natural gas and coal prices in Europe and Asia just hit their highest levels on record, oil prices in America hit a seven-year high and U.S. gasoline prices are up $1 a gallon from last year. If this winter is as bad as some experts predict — with some in the poor and middle classes unable to heat their homes — I fear we’ll see a populist backlash to the whole climate/green movement. You can already smell that coming in Britain.

I am a fan of the financial newsletter Blain’s Morning Porridge, written by a smart, irreverent market strategist in London, Bill Blain. Last Thursday he bluntly summed up the energy situation for the U.K. and Europe this way:

This winter — people are going to die of cold. As the price of energy goes higher, the costs will fall disproportionately upon the poorest in society. Income inequalities will be dramatically exposed as the most vulnerable in society face a stark choice: heat or eat. … This winter the U.K. is likely to be on its knees, begging energy from wherever it’s available. Europe will be in as much trouble. The Middle East will be charging whatever they can get away with, and the capacity to deliver is limited. … And Vladimir Putin can’t wait. … He will invite each European leader to plead their case individually, menacingly asking each leader why he should open the gas taps to their nation specifically. … Make no mistake, this winter is going to be shocking. Be aware.

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But it’s not just Europe. This energy crunch could pinch ceramics, steel, aluminum, glass and cement suppliers in China, the story added, while it presents households in Brazil with eye-popping power bills because low river water flows have slashed hydropower output. And pandemic-related supply chain problems for coal are making the problem worse.

...

But what if the U.S. or Israel feels it has to strike Iran’s nuclear program in the middle of what could be the worst energy winter since 1973? And what if Iran responds by firing at U.S. or Western oil tankers in the Persian Gulf, where Qatar, the world’s largest exporter of liquefied natural gas, resides? Oil and gas prices will go into the stratosphere. So, Iran suddenly has new leverage: Hit us and you bankrupt the world.

If I can figure that out, the Iranians can.

Little darling — it’s gonna be a long, cold, crazy winter.

Friedman has been wrong before - let's hope he's wrong now.

[malchior]

I think he is going to miss the mark on this one. At least in the US, production has been down since Ida took several facilities offline. Demand for LNG has been higher since power consumption has been a bit higher since temperatures are higher than normal. LNG spot prices are higher but a lot of utilities have long-term futures contracts to exercise so impact on consumers is going to be less terrible. Well unless you're in ERCOT because you might be on your own. For the rest of us who don't live in libertarian dystopias long-term storage is solidly in the middle of the range so there is no real shortage. Unless a good deal of that idle production doesn't come online we'll likely reach some price equilibrium big picture before it gets very cold.

[Little Raven]

Unless a good deal of that idle production doesn't come online we'll likely reach some price equilibrium big picture before it gets very cold.

Even Friedman thinks we'll be fine energy-wise stateside - although we'll no doubt feel secondary effects if the rest of the world runs into trouble.

America has enough oil and natural gas to meet its own needs for now, but its ability to export liquefied natural gas to help others is limited, especially when every utility in Europe and Asia is trying to meet newly minted environmental, social and governance standards for clean energy and therefore is desperate to import natural gas.

He's mostly worried about Europe, and the degree to which this will enable autocrats who sit on energy reserves.

[malchior]

Right - I read it this morning so didn't remember if he bagged on the US too which seemed off to me. In Europe, I recall he made some grandiose point about a mismatched transition to green energy. That sounds somewhat right but it is somewhat a similar story on the capacity side. I think he made some point about supply won't come up fast enough due to COVID-related underinvestment which seems too steep a climb. The European nations have a Russia problem for sure but Putin actually stepped up over the last few days. Him and his cronies are stuffing LNG cash into their own pockets. They have an interest in not letting to go so high that it is unaffordable. They also happen to have quite a store of LNG they haven't shipped as well. And believe it or not a ton of capacity just came online in-land and off-shore Australia over the last two years which is going to take some pressure off. It'll be more expensive since you need to tanker it to specialized terminals but it's an option. It's actually a more robust picture though it isn't great for the climate picture.

[Kraken]

Warns Thomas Friedman.

But it’s not just Europe. This energy crunch could pinch ceramics, steel, aluminum, glass and cement suppliers in China, the story added, while it presents households in Brazil with eye-popping power bills because low river water flows have slashed hydropower output. And pandemic-related supply chain problems for coal are making the problem worse.

Friedman has been wrong before - let's hope he's wrong now.

Already underway in China.

Energy prices have more than doubled this year in China amid soaring electricity demand from factories and slower than expected output from the country’s coal mines. Twenty out of China’s 31 provinces are now rationing electricity, impacting aluminum, steel, cement, and fertilizer production. Power suppliers have told heavy energy users to reduce consumption in the daytime hours and for factories to alternate shutdowns every few days in China's northeastern industrial hubs.

Last week, the Japanese bank Nomura warned of the potential for “another major supply side [global economic] shock,” saying the risks have “been underestimated or even missed.” Nomura, along with Goldman Sachs, has lowered economic growth projections for China and is now forecasting the country’s economy to contract by 0.2% this quarter with weak lower-than-expected growth thereafter.

That scenario, if it plays out, threatens to slow the global post-pandemic economic recovery and to cause higher inflation, warn economists. China’s energy crunch is “set to have a rippling effect across the world” from Asia to Europe, according to Howie Lee, an economist at Singapore’s OCBC Bank.

Official government figures suggest that Chinese factory activity last month shrunk to the lowest level since February 2020, when coronavirus lockdowns crippled the economy.

[malchior]

FWIW - that's a different problem. It is mostly the perils of a centralized economy. They didn't correctly forecast power usage as their economy rapidly expanded and outran capacity. The Chinese are saying it is a slowdown in coal supply but the reality is they don't have the generation capacity and they also have a energy market failure happening. Coal is relatively expensive as an input but the power plants have centrally set prices so some of the plants have gone offline because they can't afford to run. They are making all sort of on the fly regulatory changes to try to fix it.

I saw some accounts that they may be building huge battery banks right now to stretch existing capacity. They'd possibly run them 100% overnight and store the power for day time usage. This all will likely have an add on supply chain effect. Already delayed imports of raw materials will be delayed more and face running into the Chinese New Year pause as well causing more shortages.

Edit: I forgot another factor - they last year set a very aggressive goal to increase usage of renewables. That'd be a mix of solar, wind, and grid-scale battery storage. They want something just shy of 20% by 2025. It is very, very aggressive but putting pressure on their grid to adapt to the changes.