The news surrounding Europe’s (natural) gas crunch goes from bad to worse.
Some German power plants are not getting enough coal delivered because of low levels on the river Rhine, threatening to derail the country’s plan to store more fuel ahead of winter.
A heatwave has sent levels on parts of the river, key for shipping everything from coal to oil, to the lowest in at least 15 years on a seasonal basis. Europe’s biggest economy is doing all it can to secure coal to its plants ahead of winter after Russia curbed gas supplies.
Drought also (obviously) affects hydropower.
Seasonally, Spanish hydro generation is running at the second-lowest level in 20 years. In France, hydro generation is the weakest in a decade. In a typical year, hydropower is the fourth-biggest source of electricity across the European Union, after gas, nuclear and wind, generating nearly 14% of all the electricity.
And low water reserves also have an implication for nuclear power.
Bloomberg:
Electricite de France SA, which runs the biggest fleet of nuclear power stations in Europe, has warned it’s likely to trim output at some atomic plants this summer as the drought reduces the amount of river water available for cooling. The French company, which has closed dozens of reactors to check their welding, was forced last month to curb output at its Saint-Alban nuclear plant, nearly Lyon after the Rhone river level dropped. Another five EDF nuclear plants are at risk, the company said last week.
All this increases the demand for (natural) gas, and that, with Putin in the catbird seat, is something of a problem. The chances of Europe being able to build up the gas reserves it needs ahead of winter are worsening, it sometimes seems, daily.
Meanwhile, it’s an indication of how seriously (abandonment of nuclear power aside) that Germany is taking the crisis that may lie ahead that, the Daily Telegraph reports, Deutsche Bank estimates that the country has already cut demand for natural gas by around 10 percent. More, including the use for wood for heating homes, will, the bank warns, be required.
The Daily Telegraph’s Ambrose Evans-Pritchard, a writer not always known as a ray of sunshine, adds some more to the pile of guesses estimates of what a full switch-off of Russia’s gas pipelines could mean:
Goldman Sachs estimates that the eurozone would contract by up to 2.7pc if the gas stops flowing, with GDP potentially falling by 3.2pc in Germany and 4.1pc in Italy.
All those numbers are bad, no, terrible enough, but think for a moment about that fall of 4.1 percent predicted for Italy and what this might mean for market concerns about Italian government debt, something that has (off and on) once again been causing anxiety within the euro zone. The only silver lining (from the European Central Bank’s point of view) is that the ECB might be able to use the gas crisis as yet another excuse to bolster Italy’s position within the euro zone. And to be fair, that’s understandable on a very short-term view. Having both a gas crisis and an Italy-in-the-euro-zone crisis at the same time would be . . . a bit much.
But back to Evans-Pritchard and another twist of the knife:
What is less explored is what would happen if Mr Putin triggers a full-blown oil shock on top of the gas squeeze order to push the cost of living crisis to breaking point.
It is widely assumed that he would not play the oil card because the import revenue is too valuable – worth $700m a day, viz $400m for gas – and because crude is too fungible a commodity on global markets for targeted use against Europe. But this overlooks the internal structure of the Russian economy, and may underestimate Mr Putin’s willingness to create maximum havoc as an instrument of foreign policy.
Natasha Kaneva and Ted Hall at JP Morgan think the Kremlin may be seriously tempted to try. They argue that Russia could halve its total output temporarily and starve the world of up to five million barrels a day – 5pc of global supply – without doing lasting damage to its drilling infrastructure, or suffering an intolerable economic hit. They estimate that a shock and awe squeeze of this magnitude would drive prices to $380 a barrel, levels that would bring the global economy to a shuddering halt.
The more likely calibration is a cut of three million barrels a day. This would lift Brent to $190, still high enough to blast through the all-time record of $148 in mid-2008. “The tightness of the global oil market is on Russia’s side and strong public finances could absorb the revenue losses without too much difficulty,” they said.
There are some good reasons, discussed by Evans-Pritchard, why Putin may not take this step. Nevertheless, it seems that this may be another weapon in the Russian leader’s arsenal, and it would be unwise to discount his willingness to use it.
To repeat my concluding comment from an earlier post:
Quite what all this will do to the willingness of many European countries to stand alongside Ukraine is not hard to guess.