The Capital Letter

Europe’s Energy Crisis: The Shape of Things to Come?

Tthe Nord Stream 2 gas pipeline project logo on a pipe at the Chelyabinsk pipe rolling plant in Chelyabinsk, Russia, February 26, 2020. (Maxim Shemetov/Reuters)
The week of January 3: energy, climate, China, California, and much, much more.

The New Year has not begun on the happiest of notes with Omicron stalking the land, the Fed upsetting the markets, an “interesting” jobs report, and the latest inflation numbers on the horizon (I suspect that we are not in for a nice surprise).

Then there’s Europe’s energy crunch. It hasn’t gone away.


Europe is facing continued volatility in its wholesale gas markets, prompting concerns across the region that an energy crisis could be about to get even worse.

The front-month gas price at the Dutch TTF hub, a European benchmark for natural gas trading, was around 5% higher by 1 p.m. London time on Wednesday, with the price reaching 93.3 euros per megawatt-hour. Contracts for March and April delivery were also up by 5% on Wednesday, according to New York’s Intercontinental Exchange . . .

Ole Hansen, head of commodity strategy at Saxo Bank, told CNBC in an email that gas prices in the EU and the U.K. remained at the mercy of the weather, the pace of shipments, and Russia.

“Into January, the price of gas has resumed its ascent, again with the prospect of colder weather driving increased demand for heating and very, very low supplies from Russia, especially via two important pipelines through Poland and Ukraine,” Hansen added. “Whether Russia is deliberately keeping supplies down due to Nord Stream 2 pipeline approval delays and the Ukraine border crisis is difficult to say. But it highlights failed energy and storage policies in Europe and the U.K., which has left the region very dependent on imports of gas, especially given the still unreliable level of power generation from renewable sources.”

To put a number on that, over 40 percent of Europe’s natural gas is currently supplied by Russia.

What could possibly go wrong?

On the topic of Russia, I suspect that Moscow’s intervention this week in Kazakhstan in the wake of the turmoil in that country (disturbances triggered, incidentally, by a sharp rise in fuel prices, although there were deeper underlying causes) may well reduce the chance that Russia will broaden its existing military operations in Ukraine for now. Although that doesn’t mean that it will neglect opportunities to toy with Europe’s gas supplies in order to “encourage” the granting of the final approvals needed for the Nord Stream 2 pipeline (a second northern route for the delivery of Russian gas to Europe) to open up for business, and, more generally, to show who is already, to an alarming extent, boss.

To repeat something that I have mentioned before, the reason for the current price spike in Europe does not (with the exception of the U.K. and, arguably, Germany) owe much to its climate policies, but it is a reminder that much of the continent’s energy supplies are less secure than had, until recently, been assumed. The “race to net zero” may, partly, be the product of panic, but it also owes a great deal to complacency. If there is anything good to come out of Europe’s current energy woes, it is that they may act as a useful reminder that the current trajectory of its climate-driven energy policy is an invitation to disaster. We simply are not yet at a stage where renewables can fill the gap opened up by the abandonment of fossil fuels. And it’s not easy to forecast when we will be. Fixing dates for hitting net zero is all very well, but one thing we should have learned after the 20th century is that when central planners ignore reality, disaster will follow.

And in this case, one uncomfortable reality is that both wind and solar are dogged by a range of problems caused by intermittency, the unalterable fact that the wind doesn’t always blow, and the sun doesn’t always shine. Moreover, the hours that the wind and the sun do what they are supposed to do are not entirely predictable: One cause of the U.K.’s energy problems this fall was that North Sea winds just didn’t do what was expected of them, a failure that extended over a fairly lengthy period of time.

Some have argued that the current difficulties are an argument for investing more in renewables, an argument based on the idea that this would reduce dependence on other energy sources. To an extent that’s obviously true, but it still doesn’t address the issue of intermittency. If the wind is not blowing, it doesn’t matter how many wind turbines have been installed. Rather than pouring more billions into the installation of a technology that is not yet ready for prime time (I suspect that this is much more the case for wind than for solar), it would be better to increase funding for research designed to find a way to work around intermittency. It would cost less and would be a far better use of resources.

Meanwhile, from Bloomberg:

The energy crisis roiling markets in Europe is a preview of what the U.S. will face over the next 10 years as it shifts to cleaner power sources, according to Ed Morse, Citigroup’s global head of commodities research.

“We are in the first crisis of the energy transition,” Morse said in an interview on Bloomberg Television. Switching away from fossil fuels is an “event that is going to be disruptive, dislodging and it’s going to create disharmony at home and internationally — and it is also going to make superb advances.”

We’ll have to see about the second half of that last sentence. Assuming the Biden administration continues on its current course, the rest of the excerpt will, I suspect, prove all too true, even if Morse puts it too gently. To be sure, the transition will be “disruptive” and “dislodging,” but those adjectives and the word “disharmony” may understate the extent of the economic, social, and geopolitical havoc to come if the present direction of climate policy is maintained.

Over at the Wall Street Journal, Bjorn Lomborg crunches some numbers:

Energy prices are soaring, and it’s likely a sign of things to come. The rise can be blamed on a variety of things, including the demand rebound after the lockdowns ended, a drop in renewable electricity output from a lack of wind in Europe during most of 2021, and increasingly costly climate policies. But while the pandemic will end and the wind will blow again, climate policies to achieve “net zero” emissions will keep hiking prices.

Barack Obama acknowledged in 2008 that electricity prices “would necessarily skyrocket” under his proposed climate policies. He was more candid than many of today’s politicians and advocates. Limiting the use of fossil fuels requires making them more expensive and pushing people toward green alternatives that remain pricier and less efficient . . .

Costs will continue to rise if politicians remain bent on achieving net-zero emissions globally. Bank of America finds that achieving net zero globally by 2050 will cost $150 trillion over 30 years—almost twice the combined annual gross domestic product of every country on earth. The annual cost ($5 trillion) is more than all the world’s governments and households spend every year on education. Academic studies find the policy is even costlier. The largest database on climate scenarios shows that keeping temperature rises to 2 degrees Celsius—a less stringent policy than net zero by midcentury—would likely cost $8.3 trillion, or 3.3% of world GDP, every year by 2050, and the costs keep escalating so that by the end of the century taxpayers will have paid about $1 quadrillion—a thousand trillion—in total.

I should mention that that estimate is based on the notion that “climate policy costs will be spread efficiently,” something Lomborg rightly concedes is a “heroic assumption” (a key part of his definition of “efficiently” is that “big emitters China and India” cut the most), meaning that more-conservative estimates of the real cost would likely be far higher.

A quadrillion here, a quadrillion there, and pretty soon you’re talking real money.

Lomborg later turns his attention to the U.S.:

For the U.S., one recent study in Nature found reducing emissions only 80% by 2050 will cost more than $2.1 trillion in today’s money annually by midcentury. That is more than $5,000 per American a year. The cost of achieving 100% reductions would be far higher. And this study assumes reductions will be carried out in the most efficient way possible—namely using a single national, steadily increasing carbon tax—but that’s unlikely, and with less-than-ideal policies, the price would be still higher.

Climate activists may not want to acknowledge these costs, but voters will force them to eventually . . .

But will they? As I have discussed on numerous occasions, the name of the climate game has been to remove as much climate policy from the political process as possible, whether by effectively delegating it to regulators in both the public (for example, the Fed, the SEC) or private sectors (accountancy rule makers, for instance) or, indeed, to the unsavory corporatists now setting the agenda on Wall Street and in the C-suite. Nevertheless, sooner or later the costs of the current approach to climate policy are going to become all too evident. If there’s any silver lining to be found in today’s very dark cloud, it is that this energy crunch will increase the chances that enough voters will understand what is coming before it is too late. If that, in due course, also prompts questions about the priorities of today’s climate policy, so much the better.

Where money should be spent, other than on intermittency workarounds, is on energy research, on nuclear power, on limiting the carbon emissions created by existing fossil-fuel resources (ask yourself whether that is more likely to take place in the West or in the OPEC countries or in Russia) and, of course, resilience. To take one example, a (job-intensive) policy of toughening up the flood defenses of low-lying coastal cities ought to appeal to many voters, wherever they stand on climate change. The same can be said of burying power lines in densely populated areas of the U.S.

Here and there, there are hints that an awareness that the current approach is not, to use a possibly unfortunate adjective, economically (and perhaps even politically) sustainable, is sinking in, even in Brussels. The EU Commission has proposed classifying some (there are some fairly stringent restrictions) nuclear and (natural) gas projects as sustainable for the purposes of the EU’s green “taxonomy,” a recognition, in the latter case, of the value of natural gas as a “bridge” fuel between now and a more thoroughly decarbonized future.

The Economist went into more detail on the taxonomy here.

An extract:

The idea emerged after the 2015 Paris climate deal, when the EU’s effort to craft a common green-bond standard for corporate and sovereign issuers revealed that members did not agree on what counted as green. Some countries have since worked on their own classifications, but Europe’s, which maps swathes of the economy over 550 pages, is the most comprehensive.

The taxonomy hopes to end the practice of greenwashing and boost investors’ faith in sustainable assets. It will offer a common set of criteria that investors and banks can use to screen potential investments. Most money managers already have their own teams and tools to measure greenery. But the lack of a shared benchmark means scorecards remain subjective and inconsistent across the industry, which confuses investors. Having a dictionary where they can look up whether an investment can be labelled green puts everyone on the same page . . .

The Commission’s proposal has attracted heavy criticism from, inevitably, Greens (many of whom not only harbor an ancient hatred for nuclear energy but also regard any recognition that natural gas can play a role in an energy transition as succumbing to the wicked allure of fossil fuels). The question of nuclear energy has also highlighted a rift within the EU.


Countries like France and Poland have been pushing strongly for the inclusion of nuclear energy in the taxonomy list as they argue that it is a crucial low-carbon technology which is needed to provide energy security while the EU transitions to renewable energies in the coming decades.

Alongside Germany, other countries like Austria or Luxembourg fiercely oppose such a move amid concerns about nuclear accidents and waste. They would like to see nuclear energy disappear from the EU instead of encouraging the construction of new plants through the green labeling . . .

The proposal must win sufficient support from EU member states (which seems likely: It would take a “reverse reinforced qualified majority” to vote it down) and then the approval of the EU Parliament. To repeat a guess prediction that I made the other day, I think it will go through, a view bolstered by a report that Germany will, when it comes to a vote, abstain — a non-decision reflecting divisions in an unlikely governing coalition made up of the left-of-center SPD, the Green party and the free-market FDP. The FDP and SPD are in favor of the inclusion of gas, the Greens not so much.

That said, all three parties continue to favor phasing out nuclear power. At year end, three out of Germany’s six remaining reactors were switched off. The last three will have gone out of operation by the end of this year. Yes, this is nuts.

On the other hand, as Robert Zubrin reported for Capital Matters in December:

While a year ago French president Emmanuel Macron was calling for cutting the nuclear fraction of France’s electric power from its current 75 percent down to 50 percent (thereby eliminating the world’s only actually decarbonized major electric-power grid), on November 9 he called for “relaunching construction of nuclear reactors in our country . . . to guarantee France’s energy independence, to guarantee our country’s electricity supply and achieve our objectives, in particular carbon neutrality in 2050.”


U.S. energy secretary Jennifer Granholm began her tenure ten months ago by announcing the Biden’s administration’s commitment to strangling the nuclear industry by blocking the establishment of a waste repository. But at the COP26 conference last month, she was all in for nuclear power: “We are very bullish on these advanced nuclear reactors,” Granholm said. “We have, in fact, invested a lot of money in the research and development of those. We are very supportive of that.”

It may be noted that Granholm was voicing support for types of reactors that do not yet exist.

But, it’s a start, I suppose.

The Capital Record

We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 48th episode David is joined by, well, me. Together we look into 2022 and seek out the good, bad, and ugly. We unpack Omicron, inflation, the Fed, ESG, woke capitalism, geopolitical fears, and so much more.

The Capital Matters week that was . . .


Jon Hartley:

The absence of the USSR and its appalling example has affected attitudes in the U.S., where a generation has grown up with no memory of the failings of Soviet-style economic control. Perhaps this partly explains the recent rise of self-described “socialists” in the Millennial and Gen Z generations. (The severity of the Great Recession may also have contributed as well.) According to a 2019 Gallup poll, about 50 percent of Millennials/GenZers have a positive view of “socialism,” while fewer than 40 percent of Gen Xers and only 30 percent of Baby Boomers have a favorable view.

At times like these, Milton Friedman, one of the free market’s greatest defenders, is much missed . . .


Joel Kotkin:

California’s inegalitarian reality reflects the decline of what was once a remarkably diverse, job-rich economy. Key sectors included aerospace, oil, trade, manufacturing, business services, agriculture, as well as software and media. But according to new research from Chapman University’s Marshall Toplansky and Ken Murphy of UC-Irvine, California ‘s rate of job creation over the past three decades has been far below that of key competitors such as Texas, Arizona, Florida, Washington, Nevada, and Colorado.

As one observer put it, California has allowed a largely unregulated sector — the tech industry — to thrive while putting ever more damaging restrictions on the rest of the economy, especially blue-collar sectors. Since the early 1990s, California has lost more than 700,000 out of a total of nearly 2 million manufacturing jobs, while states such as Arizona, Nevada, and Utah have gained, and states in the Intermountain West and parts of the South have emerged as industrial powerhouses . . .

Dominic Pino:

Jared Walczak of the Tax Foundation wrote a blog post yesterday with news that doesn’t seem possible: California — an already high-tax state — wants to double its tax revenue.

No matter how Walczak breaks down the proposed constitutional amendment, the numbers are astounding. It would increase the top marginal income-tax rate to 18.05 percent. That’s 7.05 percentage points higher than Hawaii, the next highest state, and 12.75 percentage points higher than the national median. It would increase taxes by an average of $12,250 per household. “All told, the new tax package is intended to raise an additional $163 billion per year, which is more than California raised in total tax revenue any year prior to the pandemic,” he writes.

It’s not just income taxes, though . . .


Dominic Pino:

Economic predictions are always difficult and are often incorrect, but the economic crisis Afghanistan currently faces was easy to foresee. Not only was it predictable, it was predicted. Not only has it happened, it has happened in the exact ways Stuttaford, Ahmady, and Cole, among others, said that it would.

Though Afghanistan has largely left the headlines, the disaster that was set in motion by President Biden’s withdrawal is still ongoing. Contrary to Biden’s hopes, the American people are not going to easily forget about Afghanistan. His approval ratings began declining during the withdrawal — which likely played a large role in the backlash against Democrats nationally in 2021 — and they have not recovered. Americans and American allies are still stuck in Afghanistan. This crisis isn’t going away, and don’t let the Biden administration tell you that nobody could see it coming.


Andrew Stuttaford:

According to the Wall Street Journal’s Joseph Sternberg, 2022 might be the year when politicians begin to change course on climate policy. The reason? Anxiety about the political consequences of where that course is headed.

As Sternberg notes, in the U.K. some parts of the climate policy bill that will fall due are coming into sight, and they are not being greeted with, shall we say, universal enthusiasm.  Looking beyond (but not excluding) Britain, it is also worth adding that, while the current energy crunch in Europe (outside the U.K. and, to a degree, Germany) owes relatively little to climate policy (at least directly), soaring energy bills are providing a preview of what the energy “transition” (at least as currently envisaged) might look like. When voters start to realize that fact they may be . . . underwhelmed.

Andrew Stuttaford:

Voters in Europe’s democracies are unlikely to take to the streets, at least on a wide scale, over the current price spike, although this certainly cannot entirely be ruled out (indeed there have already been protests by truckers in Dublin) given the way that the discontents of the pandemic era have played out. But it’s worth remembering that fuel-price hikes led to major protests in the U.K. in 2000 and were the trigger for the rise of the gilets jaunes in France in 2018. Nevertheless, what’s going on in Kazakhstan is a reminder that higher fuel costs can carry a high political price, too.

The current energy-price surge in Europe owes relatively little (except in the U.K. and, arguably, Germany) to climate policies, but the current direction of those policies will inevitably push energy prices to a generally — possibly significantly — higher level over time, even after the current price surge subsides. If voters come to see this as a self-inflicted energy crisis, which is what it will be, they are unlikely to be best pleased. The alternative, I suppose, may be a (somewhat self-defeating) subsidy regime, which would itself become both expensive and very hard to go back on, not something that will improve the already badly stretched balance sheets of many European nations.

Before too long, the politics of climate change may well be going through some . . . interesting times.


Steve Hanke:

Leakey wanted to know what I thought of his ideas. Could good property rights cut down on poaching and corruption, save wildlife, and enhance the productivity of East Africa’s savannahs? Could well-managed game cropping, trophy hunting, tourism, and so forth, coupled with pastoral herding, generate more prosperity than the current land-use arrangements? Could such a wildlife-oriented economy co-exist with traditional herding? On and on the questions flowed.

My response was to say that I thought Leakey, in principle, was on the right track but that definitive answers as to how one would establish property rights in East Africa’s common-property resources — as well as the economic values involved — would require practical, empirical investigation. We needed to collect primary data, among other things, through field work . . .


John Berlau:

While the downfall of “Build Back Better” has been getting a lot of attention, it was not the only Washington policy drama with some surprise twists and turns last month. As progressives suffered at least temporary defeat when Senator Joe Manchin (D., W.V.) refused to endorse the massive spending bill, they ended 2021 by snagging a victory in a regulatory-turf battle. While the fight merely seemed to be concerned with technical issues of bank regulation, the consequences will be far-reaching, given that progressives are looking to ram through their desired mandates — particularly Green New Deal–style energy controls — with the instrument of financial regulation.

On New Year’s Eve Day, Jelena Obrenić McWilliams suddenly announced her intention to resign from her position as chairwoman of the Federal Deposit Insurance Commission (FDIC), even though her fixed term would not come to an end until mid-2023. In a letter to President Biden, she said that she intended to resign as of February 4, clearing the way for the president to name an acting chairman of his choosing until a nominee for the position is confirmed . . .


Kevin Williamson:

“Workers Quit Jobs at a Record Level in November,” the Wall Street Journal reports today. The people quitting the most frequently are in relatively low-wage jobs in pandemic-affected industries. Surprise. More from the Journal:

“Workers continued to switch jobs in light of the many opportunities the current labor market provides,” said Nick Bunker, an economist at Indeed. . .. U.S. job openings and workers’ willingness to leave positions have remained elevated with an imbalance between openings and available workers. In November, 6.9 million people were unemployed but say they want work, meaning there were roughly two workers for every three openings.

Can’t afford to pay those wages? Tough noogies, Mr. Boss Man. I can’t afford to fly private. A lot of people can’t afford a new Subaru. Things cost what they cost. If your business doesn’t work with labor trading at market prices, then your business doesn’t work. That happens.

Pay them more . . .


Andrew Stuttaford:

That Germany’s increasing reliance on natural gas from Russia (a reliance that, one way or another, will be boosted further by the shuttering of three nuclear power stations at the end of December) may limit the extent to which Germany will be prepared to push back against Vladimir Putin has, rightly, been a concern for years.

But what about Germany’s dependence on China?

Andrew Stuttaford:

I wrote a bit on Tuesday about Germany’s potentially dangerous business entanglement with China (for another indication of how far this has gone, click on the link here to a tweet by David Goldman. It shows a massive increase in exports from China to Germany, but that doesn’t mean what most might think).

Essentially, as Goldman explains:

“Massive increase in German-Chinese economic integration: German companies shifting ops to China and exporting back home.”

In Goldman’s view, Germany “is becoming a satellite of the Chinese economy” . . .


Daniel Tenreiro:

For the first time since 1931, General Motors was dislodged as the U.S.’s top-selling car company. Toyota’s 2.3 million–vehicle sales in 2021 ranked highest in the country, up 10 percent from the previous year. The shift in market position underscores the ongoing impact of the semiconductor shortage.

The industry as a whole suffered a significant output shortfall, with sales down 20 percent in the fourth quarter despite elevated demand. While the full-year number was slightly above the pandemic lows of 2020, it still notched a historically low 14.9 million. As the world’s largest automaker, Toyota has the scale to lock in orders of scarce computer chips, and its global footprint has allowed it to weather Covid disruptions that continue to crop up around the world. U.S. automakers, on the other hand, faced production delays in the third quarter due to insufficient chip supplies . . .


Dominic Pino:

The only industrialized country that spent a higher percentage of its GDP than the United States on Covid-related fiscal stimulus was Singapore.

That’s according to a blog post from Alex Durante of the Tax Foundation. Expressing the amount of spending as a percentage of GDP allows for better cross-country comparison because it takes into account each country’s ability to spend. One dollar of spending in a country with a small economy means more than one dollar of spending in the U.S.


Aaron Hedlund:

With each passing week, the Biden economy keeps setting records — just not in the way the administration, or anybody, would like. A month ago, inflation reached a 31-year high. November’s inflation passed that mark by hitting a 39-year record of 6.8 percent, and economists expect inflation for 2021 as a whole to top 7 percent when the next CPI reading is released in early January 2022. According to a recent poll, the American people rate the Biden administration’s economic performance as the worst for any first-term president in at least 44 years — since Jimmy Carter. Recognizing the danger signs of falling poll numbers, the Biden administration is now in the midst of a coordinated public-relations campaign to gaslight voters into ignoring rapidly rising prices and subpar job growth. Instead, the White House wants the public to believe that we are in a period of historic prosperity delivered by the administration’s retro-Keynesianism and its anti-supply-side counterrevolution of permanent deficit spending, job-killing mandates, and work disincentives. The administration is also receiving an assist from the media, with some proclaiming that “Biden’s Economic Performance Has Proved Unbeatable.”

But the facts tell the true story . . .

Tom Spencer:

Milton Friedman famously declared that inflation is “always and everywhere a monetary phenomenon.” A statement of the obvious that cannot be said enough, it essentially tells us that inflation can occur only when the quantity of money increases faster than the rise in output. Simple as it may be, it’s an excellent starting point for understanding where inflation comes from, not least at a time of fiscal and monetary largesse. Nevertheless, we are now seeing the Biden administration blame some of today’s inflation on malevolent behavior by large corporations — behavior, they claim, that ought to be addressed by antitrust officials. To believe that is not only to believe in nonsense; it’s to accept a radical interpretation of decades of antitrust law . . .

Supply Chains

Dominic Pino:

On Monday, Karen Hedlund, President Biden’s nominee for the Surface Transportation Board, was sworn in to her post. The five-member board, which regulates railroads, now has three Democrats and two Republicans. That will make it easier to take up an Obama-era regulatory proposal that has languished for years: reciprocal switching.

At a time when supply chains are already stressed and transportation needs to be made easier, this mandate would add a new stressor to the mix . . .


The Latest