The 2022-23 Economic Crisis Megathread

[Jacob]

I don't know how much the massive drought in China is pinging your media spheres, but it's really quite bad.

[Crazy_Ivan80]

I don't know how much the massive drought in China is pinging your media spheres, but it's really quite bad.

I've seen it pop up here and there but not too much visibility in the media, which is odd as they're always first in line to engage in fear mongering over the supposedly coming apocalypse in order to drump up support for the authoritarian greens.

[Josquius]

I don't know how much the massive drought in China is pinging your media spheres, but it's really quite bad.

Zero.

Too preoccupied with our own drought with some mention going to other European countries.

[Sheilbh]

I've seen the map doing the rounds a few times but nothing about the actual impact in China.

[Jacob]

It's so bad that they're massively rationing electricity due to the drop in hydro power. In Sichuan (and Chongqing, which is traditional Sichuan as well) factories are shut down, subway trains with only on single lightbulb per car, AC cannot be set to temperatures lower than 26C and a whole bunch of other measures.

[Sheilbh]

France's PM to business leaders: "it's urgent to stop any energy consumption that isn't indispensable immediately."

We're only at the start of this and it isn't going to ping back immediately after this winter - the war is a bit part of it, but so is demand from China and Europe doesn't have enough of its own resources or enough routes for easy imports.

It isn't even just support for households - I'd be very surprised if we don't end up with rationing/state allocation by this winter in most of Europe. I've said before but I don't think Europe's in a position to pick and choose its solutions - I think we probably need to be doing everything.

[celedhring]

Van der Leyden has just announced an emergency reform of the European energy market.

I suspect the temporary suspension/reduction of carbon surcharges will be on the table.

[Sheilbh]

You can see why:

Javier Blas
@JavierBlas
9h
German power for next year broke through the €1,000 per MWh level for the first time as the European  energy crisis intensifies | #EnergyCrisis #energytwitter

1) margin calls driving trading. Liquidity is extremely low
2) more state support would be needed in the next 24-48 hours for European utilities to stay solvent
3) the calls for suspending the forward electricity market are growing a lot louder
As expected, the European utilities are calling on governments for bail-outs.

Uniper of Germany asks for an additional €4 billion (on top of the €9 billion it got recently).

It says it's "accumulating cash losses of well over €100 million per day."

I could be wrong but I think this is beyond support for the market because I don't think this looks like a functioning marketbut one that needs intervention.

[Berkut]

How much of this is driven by actual, real supply and demand, and how much if just rampant speculation of the futures market?

[DGuller]

I wonder to what extent it's also the momentum of the price movement?  In the short run, the sudden price movements tend to develop a momentum of their own, as speculators observe the trend and compound it with their own opportunistic actions.  Eventually the momentum exhausts itself, but liquidity and lack of fear don't materialize suddenly.

[Sheilbh]

How much of this is driven by actual, real supply and demand, and how much if just rampant speculation of the futures market?

There will be profit-taking but a lot is real supply and demand. Europe is competing with Asia in a way that it previously wasn't  - just in 2021 Chinese demand for LNG increased by 20% because of China's energy transition away from coal and also expanding industry. They're fallinga little in 2022 which is helpful - but this is a long term shift. From 2016 to 2021 Chinese LNG imports from about 2 billion cubic feet per day to over 10 billion - in that time period European imports of Russian pipeline gas as a share of its gas supply increase because China's like a whale getting into the LNG market (and at a national level lots of governments pretend they don't have any choices to make: Germany starts its nuclear phase-out, the UK shuts down its gas storage system, Ireland decided not to build any LNG terminals).

That has had a huge impact on spot markets for LNG globally - and much of Europe is relatively new-ish to that market. Traditional LNG-dependent countries like Pakistan and Bangladesh are being priced out, there was even an auction by Pakistan where they could not buy LNG at any price. In addition a lot of the big LNG suppliers, like the Gulf States, are very big on long-term contracts and historically Euroepan importers have not wanted them and have preferred to buy on the market - which has an impact on European supply.

Also South Korea and Japan are both major LNG importers and have both issued public statements that they are looking to buy a lot of LNG this winter which is very unusual and a sign of a wider distressed market. I'd add that Japan is reversing it's anti-nuclear policies and South Korea have announced a pause to their phase out of nuclear.

There is not enough supply available for export to European countries to replace pipeline gas from Russia. At the moment European storage is looking good - it's about 80-90% of where it needs to be. But winter storage only accounts for 25% of consumption and during the winter normally the Russian pipeline is exporting at full capacity into Europe (that's why turbines get repaired in the summer). That seems less likely this year.

And this isn't just futures - these are wholesale energy prices across Europe today (just two years ago the average was about €50):


I think Helen Thompson has been really good on this - and has been ringing a bell about energy politics for years (especially on the Talking Politics podcast, RIP ). She's even written a book which in large part is the energy history of the 20th century. I think her key point is that the war has been a tipping point rather than a cause and that actually this is has been an issue and geopolitical risk for Europe for the last 100 years. But I think post-cold war Europe's leaders lost their energy literacy/awareness of its geopolitical importance and risk of being used as a weapon. Which we shouldn't have been because actually Russia used gas as a weapon against Ukraine all through the 2000s but we saw it as a story about Ukrainian corruption, and even after the invasion of Crimea didn't fundamentally re-assess.

Edit: And of course we've talked a lot about the impact on households and small business which is going to be huge but there's also big, gas-intensive business and the knock on effects on supply chains. For example, I read in a really interesting provocative piece that in Germany $2 trillion worth of value added depends on $20 billion - that's enormous and slightly terrifying leverage even in an economy the size of Germany's and the knock-on effect on other industries and supply chains and workers.

As I say my view is we're reaching a point where the state needs to allocate so essential services get what they need, there's some form of rationing/price controls for a certain amount for households. And we need to spend on everything that could possibly help with energy transition.

[Tamas]

I have heard that Germany are filling their gas reserves at record pace. So maybe it won't be THAT critical a situation come winter, and maybe that contributes to higher prices now?

[celedhring]

I have heard that Germany are filling their gas reserves at record pace. So maybe it won't be THAT critical a situation come winter, and maybe that contributes to higher prices now?

Most European nations have done so, but I've read somewhere that storage will cover just 25% of winter gas needs if Russia makes us go cold turkey.

[Tamas]

I think it's a giant bluff from Russia. They need to be seen as having the power over European energy but once they actually cut it their only leverage is gone, not to mention their income source.

[Crazy_Ivan80]

I think it's a giant bluff from Russia. They need to be seen as having the power over European energy but once they actually cut it their only leverage is gone, not to mention their income source.

https://www.youtube.com/watch?v=h-fdRlC7OHE&ab_channel=JoeBlogs

this one was interesting.
Can't say how true/false it is but I guess it's more trustworthy than the Russian propaganda