What are the economic consequences of the energy crisis of 2021/2?

The economic story of 2021 has become one driven by the price of energy just as the establishment and so-called elite meet to further push the policies that have done so much to create the crisis. For our purposes the issue is one of inflation as a first consequence which then becomes contractionary as those on tight budgets reduce other spending and because the price rises have been so great some businesses reduce operations or close entirely. The issue is being exacerbated for us in the Northern Hemisphere as we move towards winter weather. For example in my home country the UK I note that some colder nights with frosts are being forecast more widely.

But we can start by looking East to Japan.

Japan’s spot power price surges to seasonal high amid global energy shortage  Electricity for next-day delivery extended gains to nearly 20 yen/kWh due in part to pricier LNG/coal Power rates are poised to gain further when temperatures turn colder.  ( Stephen Stapczynski )

There is more detail here from Reuters.

On Monday, prices for delivery of electricity early on Tuesday morning reached 55 yen ($0.48) per kilowatt hour (kWh) the highest since late-January.

Traders said higher LNG prices were starting to filter through to the local power market.

This issue is exacerbated by the Japanese switch away from nuclear post the  Fukushima disaster. Indeed last winter they had a near brush with what many of us fear this winter.

TOKYO, Feb 5 (Reuters) – Japan’s worst electricity crunch since the aftermath of the Fukushima crisis has exposed vulnerabilities in the country’s recently liberalised power market, although some of the problems appear self-inflicted.

Power prices in Japan hit record highs last month as a cold snap across northeast Asia prompted a scramble for supplies of liquefied natural gas (LNG), a major fuel for the country’s power plants. Power companies urged customers to ration electricity to prevent blackouts, although no outages occurred.

The Japanese system of long-term contracts based on the oil price will be working as it is much cheaper right now but of course it will not help with this.

The firms include utilities and at least one gas company, the sources said, adding that Japan’s biggest power generator and top LNG buyer, JERA, is also seeking cargoes for delivery in December and January. ( Reuters)

Just like everyone else they will be facing this.

While LNG prices are off their highs, they remain more than 400% higher than this time last year.

Spain

There has been an issue for a while with supplies from Algeria and as of today this has happened.

With winter around the corner and the price of energy skyrocketing, a decision by Algeria to close the Maghreb-Europe natural gas pipeline this coming Sunday is bad news for Spain. ( El Pais )

This is not a complete shutdown from Algeria as it has another pipeline to Spain which will continue and which will be increased at the end of this month. But we have to get there and even so Spain will be left short.

Algeria has pledged to raise its capacity from eight bcm to 10 bcm a year, but Spain would still need around four bcm more to cover its needs. This could possibly be achieved by importing liquefied natural gas (LNG) on carrier ships. ( El Pais)

Looking for shipping would be at exactly the wrong time to do so.

It would take around 50 such vessels to transport the four billion cubic meters required by Spain to make up for the shortfall from MGE that cannot be covered by Medgaz. It will not be easy to find so many carriers, and they will be expensive at a time of high demand. Also, the process of liquefying the gas and later returning it to a gaseous state is much more expensive than simply channeling it through a pipeline. ( El Pais)

We looked at a consequence for Spain of all of this only last Tuesday when the producer prices numbers reported this.

Energy, whose variation of 14.1%, the highest since December 1982, is due to the rise in of the prices of the Production, transport and distribution of electric energy.
Also influencing, although to a lesser extent, increases in the prices of oil refining and gas production; pipeline distribution of gaseous fuels. The impact of this sector on the general index is 4,893.

That is going to come under more pressure the moment we get a cold snap and especially if it is a still cloudy day. Still it has been a while since anyone has blamed the weather for economic problems. The consumer is also being hit as the flash CPI rose to 5.5% with this piece of extra detail.

In this behaviour, the increase in electricity prices stands out, and to a lesser extent, fuels and oil prices for personal vehicles and gas, compared to the decreases recorded in October of last year.

Europe

The weekend story looked like it was starting well as Russian President Vladimir Putin promised to supply plenty of gas to Europe. But then it appeared he was, as so often, playing games.

There’re a number of possible explanations for this….. What’s known is that Russian natural gas flows into Germany (at the Mallnow compressor station) have plunged to zero in the last 24 hours ( @JavierBlas)

That was followed this morning by this.

Unplanned outage. No onward #natgas flow from Bulgaria to Serbia or Romania, which #Gazprom would deliver into SEE via #TurkStream. Add that to Mallnow and Tarifa and no surprises #TTF is back up. 

If you knew the Russian game you would have some free month by buying gas futures on Friday afternoon and selling today.

Shipping

According to Lloyds List there is inflation here.

The Baltic Exchange currently assesses time charter equivalent rates to ship 180,000 cu m of LNG to Tokyo from Gladstone, Australia at $262,215 per day, with LNG-fuelled ships at $201,535.

That is up 7% and 11% , respectively, from the last assessment on October 14, data show.

But also if you can arbitrage between different prices around the world the potential to clean up.

Oslo-listed Flex LNG, which owns 13 LNG carriers, said current landed prices in Europe and Asia were providing “massive arbitrages” for traders.

One 172,000 cm cargo shipped from the US Gulf to Japan yielded an arbitrage of $124m, according to a Flex LNG investor presentation held today.

The US Gulf to Europe route resulted in a profit of $100m.

Flex LNG said a cargo worth $20m based on Henry Hub prices was valued at $120m by the time it reached Europe. The same cargo was worth $144m in japan. Even oil price-linked cargoes had a “massive arbitrage” based on the presentation.

Comment

We are already getting an idea of the inflationary consequences of this energy crisis. Spain has marked our cards in two ways firstly with its actual numbers and secondly by its proposed plans for an EU solution. This month;s inflation figures for the UK will include last month’s increase in domestic energy prices. But there is more to come. There will be ebb and flow as for example the last few days have been windy in the UK with electricity production from it in the 12-13 GW region. But a cold still day would send us the other way.

The economic contraction element has been underplayed I think. Some businesses have become uneconomic and closed and I fear there may be more. In a sense one way of keeping power for the consumer is to squeeze industry. The price rises will be an implicit power cut as industries find things uneconomic and close. But actual production will be hit and maybe hard.

The political situation in Glasgow is breathtaking and no I do not mean all the jets flying in for a climate conference. If we just look at the US President Biden entered office with a barrage against fossil-fuel companies with for example the Keystone pipeline cancelled. How is that going?

ROME, Oct 30 (Reuters) – U.S. President Joe Biden on Saturday urged major G20 energy producing countries with spare capacity to boost production to ensure a stronger global economic recovery as part of a broad effort to pressure OPEC and its partners to increase oil supply.

I fear for the worst if this tweet below from Jon Snow of Channel 4 news was not a parody. I only say that because it is getting increasingly hard to tell.

En route to COP26 – trees and branches affected by climate change have slowed our rail journey – tho the branches have been cleared we are doen to 5mph – What an irony! What a message! We MUST change! Dare we hope that we shall?

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22 thoughts on “What are the economic consequences of the energy crisis of 2021/2?

  1. Thank you Shaun, I was asking how the so called ‘market middlemen’ were contributing to the increased prices now I know, nice work if you can get it. There is of course no such thing as an electricity market and nobody is an electricity customer, we are all electricity users. That’s a pretty big distinction.
    I suppose I could live in a cave (and avoid council tax too) but that doesn’t seem appealing in this weather. Each country should have one national supplier and either make their own deals or cooperate with near neighbours to ensure supply. The green levy needs abolishing this should be financed at a national level.
    We have the worst of all worlds at the moment, poorly thought out policy aiming at a carbon reduction that politicians know would render them unelectable.

      • Hi bill40

        I agree that the political unwillingness to tell the truth has created the worst of all worlds. The unreliability of renewables has been ignored and the price hidden. I agree completely that any further push should be part of public spending rather than hidden in bills

        As to caves they are in short supply in Battersea to say the least…

  2. I remember in one of my last school days in the mid 60s around 1963 or maybe 64 we had some expert comming along to school who told us that North Sea gas was going to be a no brainer, we had all this gas which would come on stream and give is cheap fuel. Well I never saw any benefits and have never seen any benefits in the 60 years since.

    Its taught me never to trust these so called experts and politicians.

    The fact is we just dont know in the UK where its going to end up, we rely too much on exports for our fuel and energy now and we cannot revert back to coal mining, and as for wind farms and solar power in the UK its too unreliable, either the sun isnt out or the windmills wont produce the power we need.

    Neither am I convinced heat pumps is the way to go at the moment, from what I have read is if its underground heat pump technoloogy you have to ensure your home is well insulated and you make cerrtain their are no draughts inside your property, well I dont think that is a good idea it conflicts with advice on covid which advises people to allow fresh air into the property.

    I read an article in the Mail recently from someone who had an underground heat pump and it only produced enough heat to keep the property barely warm and the family had to walk around with jumopers on and even then relied on a wood burner in the main room of the house. The family got a £70,000 grantg which you cannot get now what a complete waste of money.

    Over the years most people have gotten rid of the their immersion tanks and rely on combination boilers to heat the water immediately, and the gas boilers extremely efficient. A new gas boiler would last over 10 years and hardly need servicing. You would have to be off your head to consider a heat pump with an instalatiuon cost of between £10,000 and £20,000 even after a GOV subsidy.

    The UK public are being led up the garden path at the moment as we were when North Sea gas came on stream.

    Well I for one wont be changing my heating source to a heat pump the GOV can stuff that suggestion.

    • It Makes no difference insulation-wise whether you have Ground-source or Air-source heat pumps. First you insulate. Second you install an MVHR system to take stale moist air out of your house and replace it with fresh air. After you have gone to all that expense you will have a house that you could consider heating via a heat-pump at an affordable cost, not forgetting that it will be far more efficient if you install underfloor heating.

      • not cost effective if you have to dig up my concrete floor .

        bad enough to relay pipe above with larger radiators for another 10-20K on top of the heat pump ( less efficent air as too little garden.

        And gardens? have you seen gardens lately ?

        I have no doub that HMG will be fine , as for the rest of us , we’re serfs – look at the cop26 photos to see who’s the boss is and differnt rules for the serfs/servants

        take care

        Forbin

      • But what doesn’t get covered in any sensible discussion is where to place one.

        The ground pumps need a very large plot, even when you can dig deep to minimise the area required. Most houses don’t have the land. So, for most, air pumps will be the way to go. Except the building regs require the outside unit to be at least 1 metre from the boundary (assuming that noise and other restrictions are met). And you don’t want it in direct sunlight. Not too close to a door or window. And…. the list of restrictions just goes on and on.

        When you add-up the restrictions and the current size of the units, a huge number of properties won’t have the necessary outline to take one – even after you’ve dealt with the all insulation, pipe sizes, radiator sizes/composition, dug up your flooring and/or whatever else. It isn’t just an economic issue to fit these things.

        Someone is either going to have to change the regs and/or make the units much, much smaller for the majority of properties to take one. Otherwise, it just won’t be done (which is what I actually suspect will happen…. as we get nearer the dates/deadlines so it will dawn on the incumbent politician of the day that they can’t keep the timeline and have to move it; same with cars / EVs, etc). Eventually, we’ll get there. But I doubt it will be 2030. 35 or 40 is more realistic.

        I also despair at the green lobby who are targeting finance, etc not to support the old FF industries. The darlings haven’t the sense to realise that their windmills and other bondoogles require the FF industry to work properly in order that those things can be made. Same too for the polluting industries required to make and ship the materials. Not. Thought. Through.

        What has clearly been thought through is the economics of killing consumption, esp. in the western societies. All of the policies and approaches – as pointed out in the article by Shaun – will mean certain industries and jobs become uneconomic with the increases in energy cost, so they go away. The people previously employed need to find something else or they go cap in hand to the government. I think we’ll see more of that as time goes by. Bit by bit, chipped away and eroded.

        But, even if the current energy crises is suddenly resolved, I think it will only be temporary in nature. EROEI is decreasing. FF is under heavy fire from the green lobby. New tech and bondoogles are not happening at pace fast enough to meet the political outcry and the MSM is bombarding the avg citizen with a constant diet of FF=bad and we need to change our ways. The world of cheap energy is simply closing down and being replaced with one where energy will carry a premium.

        We might wish to see our politicians and central bankers take a path that diminishes the pain the changeover requires (and differ on the exact nature of what that looks like), but I think the changeover is coming and there is nothing we can do to stop it. Even if there was no “climate change” movement and no-one cared about the parts per million of carbon measurement, the simple facts of geology and population growth would eventually force our hand anyway.

        So, the government will become responsible for dishing out ever larger and larger social security payments, employment schemes and so on (at least in aggregate). Increasing their borrowing because even if they tax at 100% on everything there won’t be enough money to go round. So, the BoE (and other central banks) will be forced to keep rates lower and for longer as it’s the only way the government borrowing remains cheap enough for the charade to go on. If you’re lucky enough to keep working, esp. on a decent wage then great. You’ll see your purchasing power gradually eroded – and even be told what you can and can’t spend it on. For an increasing number of folks life is going to be more difficult, costly and uncomfortable – esp. those without the well paying jobs or government funded pension. So, get used to the idea of wearing an additional jumper. Or skipping a meal here or there. Or, at least reading about those who actually do.

        And so it will go until the system finally breaks down.

        The only real question is whether you will be unfortunate(?) to live long enough to see it happen.

        • you are right , the politicians have either realized this and hoping for the best or they waffle on .

          did you know net zero excludes shipping and aviation ? the Greens are spitting chips over that but if you go ahead and do what the eco crowd want then we’re looking at a Vegan Agrigarian society with less calories than a medieval serf, that is 2000 kcal and most of the population back on the land ( and to farm the land they had 3000 kcal for each serf ) . I ‘ve looked into it and they brush off the result – starvation .

          We will think of North Korea as a paradise in comparison .

          I could go on but the data is out there

          And worse of it? it make no difference at all because China, India and Africa will burn it all .

          At least we’re probaly get a bronze star from Greta for showing effort ( PAH! ) .

          • reply to peter

            thats true but a Vegan Agrigarian society will not have an NHS as thats a product of an industrial
            society and there wont be one ( it makes too much CO2 , yes seriously )

  3. Sorry about the extremely bad pun. but it’ll take a lot of the heat out of the economy.
    Energy is a necessity, so removes optional spending

  4. Hello Shaun,

    perhap snowy forgot about the wrong kind of leaves…..

    frankly it drives me crazy all this hypocracy – flown in from Itlay after a break on a private CO2 emmitting supa yot

    and they can’t see it , cant see it all

    Forbin

    • Hi Forbin

      I went to see the new Dune film the Sunday before last and it reminded me that events are much more Harkonnen than Atreides these days. As an aside the film is good with Rebecca Ferguson excellent as Lady Jessica.

      Actually in some ways it is worse than the Harkonnen’s in that at least you know where you are with them, albeit nowhere.

  5. Anyone know why fuel ( petrol and diesel ) is still so expensive? It shot up in the brief shortage and hasn’t come down again.

    Don’t get me started on heat pumps! I had a friend who is a heating engineer look at my property out of interest and the cost would be enormous – well north of £30K and he reckoned we would still need supplementary heating – on a house built in 97 with good insulation. And that didn’t include the cost of ripping up the bathroom floors to replace the narrow bore central heating pipework.

    • yoy up $45 barrel brent is $85 whillst WTI is $83.5

      becase of negative sentiment from Biden admin companies have not invested and are reluctant to do so – big oil is not in favour.

      I expect $100 in the next 6 months and it kinda being engineered as peak should not be until around 2035 frame mark

      forbin

      • The fuel prices went from around 120+ per litre to 140+ per litre in the space of a few days around here which I don’t think had anything to do with oil price. I had expected that once the panic buying stopped it would drop back. But it hasn’t – wondering why?

      • does anyone know if fuel prices shot up so much in other countries? I rather thought that this was an artificial increase due to panic

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