The European Energy Industrial Complex Is Hurting

There’s more to the war in Ukraine than the war in Ukraine. Western nations, now mostly standing alone, seem to have forgotten that they made themselves dependent on Russian energy supplies. The saintly Angela Merkel, largely responsible for her country’s reliance on Russian energy, recently said that she had not committed any fault.

In the meantime, after Joe Biden declared that he, Mr. Tough Guy, was going to reduce the ruble to rubble-- clever locution, at the least-- is watching the ruble recover, along with the Russian economy.

The dollar seems to be strong, but David Goldman suggests that that is an illusion. Along with the Euro and the Japanese Yen, the dollar is weak. The thing is, the dollar is stronger than the Euro and the Yen, which makes it cheaper to vacation in Paris or Tokyo-- assuming that you can afford the air fare.

Goldman explains:

Measured against a trade-weighted basket of currencies, the US dollar is stronger than it has been in a generation. But are we observing dollar strength, or just weakness of the Eeuro and the Japanese yen? Japan’s government debt stands at a tippy 266% of GDP, vs. only 138% for the United States. It no longer can finance its debt with internal savings as retired Japanese spend their nest eggs. Europe is burdened by weakness on its Mediterranean periphery. The major industrial currencies, that is, are in a race to the bottom.

In other words, don’t get too confident. But, then again, I am sure that you are not.

Another interesting story is the impact of the loss of Russian energy supplies on the European economy. As you are aware, Russia is selling oil and gas to India and China, and is doing rather well at it. But that means, less supplies for Western Europe.

The Wall Street Journal reports on the relationships between lower energy supplies and European industry. It is not a pretty picture:

For decades, European industry relied on Russia to supply low-cost oil and natural gas that kept the continent’s factories humming.

Now Europe’s industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling manufacturers’ ability to compete in the global marketplace. Factories are scrambling to find alternatives to Russian energy under threat that Moscow could abruptly turn off the gas spigot, bringing production to a halt.

Obviously, liquid natural gas, from America, was expected to pick up some of the slack. And yet, as you know, an LNG terminal in Houston blew up yesterday, therefore cutting off supply for months.

The Journal report continues:

Europe’s producers of chemicals, fertilizer, steel and other energy-intensive goods have come under pressure over the last eight months as tensions with Russia climbed ahead of the February invasion. Some producers are shutting down in the face of competition from factories in the U.S., the Middle East and other regions where energy costs are much lower than in Europe. Natural-gas prices are now nearly three times higher in Europe than in the U.S.

“Overall, the big concern for Europe is increasing imports and falling exports,” said Marco Mensink, director general of Cefic, Europe’s chemical-industry trade group.

So, it has not all been shut down, but the damage, not only from Russia but from the green policies that the Europeans love so much, is significant. If natural gas prices are around three times higher in Europe than in America, what does that do to the competitive posture of European industry. And what does that do to the cost of everyday life in these countries.

We will not mention the fallout from shutting down coal generating plants and nuclear plants in Germany. The great Merkel bears some considerable responsibility for that.

Russia has only cut off gas to some countries, as of yet:

The conflict with Russia has Europe preparing to ration gas if Russian President Vladimir Putin shuts off supplies to the entire region. Russian state-owned natural-gas company Gazprom PJSC has already cut off Bulgaria, Finland and Poland after the countries refused to accede to a Kremlin decree demanding payment for gas in rubles.

As of last year, Russia supplied about 40% of the European Union’s natural gas.

A united West, led by a senile demented fool, wanted to punish Russia. It has ended up punishing itself:

Europe’s high energy costs are forecast to drag on the region’s industrial production and overall economic growth this year. Economists at the European Commission, the European Union’s executive arm, expect the German economy to shrink in the second quarter under pressure from high energy prices. 

Germany, the region’s largest economy, is also the biggest buyer of Russian natural gas. Europe’s consumers are unlikely to pick up the slack, as high energy costs are filtering through into prices across the economy, sapping their purchasing power.

But, you will be thinking, what about renewables. Can’t the Europeans, the ones who heeded the absurdities issuing from a Swedish schoolgirl, replace all of that dirty gas with nice clean renewables:

The phaseout of Russian supplies risks putting European industry at a long-term competitive disadvantage unless manufacturers can deploy technologies that will sharply reduce their fossil-fuel consumption. But many of these technologies, such as using wind and solar energy to power chemical factory furnaces or hydrogen to make steel, are years from becoming commercially viable and will require massive investments, executives say.

Years from being viable… massive investments… how do you spell policy prescriptions that are completely detached from reality:

Manufacturers depend on natural gas both as a source of energy and a raw material in production. In Europe, natural gas usually sets the price of electricity, hitting factories with a double-whammy if gas prices increase. Ammonia is the most sensitive product, accounting for around 70% of the gas Europe uses as a raw material. Most of that ammonia is used to make fertilizer.

Ah yes, the fertilizer. You know, the kind that increases crop production. Thanks to the Ukraine war and to the tough Western sanctions regime, we are going to be short of fertilizer.

How are the companies trying to make up the shortfall?

OCI NV, a fertilizer producer based in Amsterdam, has lowered ammonia production at its factory in the Netherlands and is instead importing the chemical from its plants in Texas, Egypt and Algeria, said Chief Executive Ahmed El-Hoshy. The company is still completing the final steps of fertilizer production in the Netherlands.

Moves by energy-hungry industries to throttle production have relieved short-term pressure on Europe’s natural-gas supplies, freeing up more gas for Europe to generate electricity and heat homes through the next winter, when officials expect gas supplies will be tight.

The companies, as the saying goes, are coping. But there are limits to their ability to cope. And besides, there is the domestic electricity market to worry about, too.

As for ammonia, here is the problem:

OCI usually only imports significant quantities of ammonia to Europe in winter when gas prices are highest.

“Now every month is a winter month,” Mr. El-Hoshy said.

Other fertilizer manufacturers have decided to shut down factories that can’t import ammonia from overseas. CF Industries Holdings Inc., the U.K.’s largest fertilizer producer, said last week that it would permanently shut a plant that hadn’t been producing ammonia since last year.

“As a high-cost producer in an intensely competitive global industry, we see considerable challenges to long-term sustainability from our current operational approach,” said Brett Nightingale, managing director of the company’s British subsidiary.

As for steelmakers, the story is the same:

European steelmakers have been curtailing production since October to save money on gas and electricity. In March, soaring electricity prices in Spain led steelmakers there to lower output or shut down completely.

“This is absolutely crazy,” said Miguel Ferrandis Torres, chief financial officer of Madrid-based Acerinox SA, which shut one of its production lines for three days in March.

If the gas supplies are cut off completely, things will be very bad indeed. 

Industries have been lobbying European authorities and governments to assure they will keep getting gas from somewhere if Russia stops shipping the fuel.

“With Mr. Putin, nobody knows what is going to happen,” said Jacob Hansen, director general of Fertilizers Europe, the industry’s main lobby group. “We cannot produce any fertilizer without gas. We have to insist that we come right at the top.”

So, the German government will not cut off supplies to private households, but it will need to shut down industry:

If Russia halts the gas flow to Germany, the country would give priority to private households as well as critical services such as hospitals, police stations and military barracks, but large industrial players could face rationing and disruptions, putting thousands of jobs at risk.

The decision of who gets gas in Europe’s largest economy would fall to the Bonn-based Federal Network Agency, the country’s energy regulator.

The agency, which has established a war room equipped with a diesel stockpile, showers, camp beds and food supplies, where a 65-strong crisis team is expected to work around the clock in such an emergency, would decide based on gas-usage data it is currently collecting from companies.

“We’ll take a look at how specific companies can deal with it, which companies can live with gas interruptions and reductions, and which companies definitely cannot,” said Klaus Müller, the president of the agency.

But, the chemical industry will suffer. And the dreams about renewables or about using hydrogen are just that-- dreams:

Europe’s chemical makers rely on natural gas to operate crackers, the large furnaces that separate oil and natural gas into constituent chemicals under immense heat and pressure. 

Cefic’s Mr. Mensink said the industry is researching ways to power the process with electricity but said the technology wouldn’t be ready for commercial use before 2030.

Factories want to replace gas-powered electricity with electricity from renewables, but the supply of wind and solar power isn’t enough to meet demand, Mr. Mensink said.

“We are trying to get as much as we can for our production, but the reality is that Europe will have to invest and build much more,” he said.

European steelmakers are pledging to overhaul their factories to run on hydrogen rather than natural gas as raw material.

“Gas supplies other than from Russia will remain crucial as long as no hydrogen infrastructure at affordable costs is available,” said Axel Eggert, director general of European steel lobby group Eurofer.

[Addendum: Russian Gas supplier Gazprom is cutting energy supplies to Europe. It increased gas supplies to China this year by 67%.]