Posted on 09/06/2022 8:33:25 PM PDT by SeekAndFind
What is the scale of the energy challenge?
We got a very shocking sense of the staggering numbers involved in the existential, crippling European crisis earlier today when Norwegian energy giant Equinor echoed what Zoltan Pozsar said in March, warning that “European energy trading risks grinding to a halt unless governments extend liquidity to cover margin calls of at least $1.5 trillion." As Bloomberg put it, in its best non-Zoltan imitation, "aside from inflating bills and fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s putting pressure on European Union officials to intervene to prevent energy markets from stalling."
“Liquidity support is going to be needed,” Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview. The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.””
In other words, massive amounts of newly-printed funding (because with yields blowing up, Europe's fiscal stimulus will be over before it started unless central banks step in and backstop the latest energy hyperinflation bailout plans) will be required to avert an energy disaster. Alas, the final number will be even more massive, because overnight Goldman's research team published a must read note (available to pro subs), in which the bank looked at the scale of the energy bill challenge, potential European government responses and industry implications, and quantified the total damage. The numbers are staggering:
According to Goldman, Italian household energy bills could rise from ~€150 to ~€600 in 2023. Some more details:
"For most families and industrial customers, energy bills are renegotiated every twelve months; on our estimates, energy bills for most consumers will peak this winter. We estimate a c.€500/month cost for power and gas currently, implying a c.200% increase vs. 2021 when average bills were c.€160/month. Energy bills could approach €600/month in a zero flows (from Russia) scenario we believe (see here for more on this zero flows scenario). "
The trigger for this exponential surge in costs: since January 2020, 1-year forward gas and power prices – usually the reference when signing new energy supply contracts for families or industrial customers – have each increased by more than 13x. The following exhibit shows this evolution, rebased to 100.
For Europe as a whole, this would be equivalent to a near €2 TRILLION increase in gas and power spending (equivalent to c.15% of GDP).
Goldman next calculates that if current 1-year forward prices remain unchanged for the coming six months, supply contract renegotiations would lift the EU's power and gas unitary bills by c.200%, vs. 2021. As a reference, the exhibits below show (using Italy as an example) the unitary cost of energy (€/MWh) evolution of gas and electricity, for both industrial users and households.
In this nightmare scenario, Energy bills would constitute over 20% of EU household gross disposable income.
The next table shows a sensitivity analysis in the surge in energy bills for Europe, depending on the development of gas and power prices.
And while Goldman does not say it, the biggest winner from this historic transfer of wealth - one which sees Europe's standard of living implode as disposable income evaporates going instead into staples like power and heat... is none other than Vladimir Putin.
But we already knew that: last weekend Credit Suisse repo guru Zoltan Poszar published what may have been the most insightful snippet of the entire European energy crisis (to date) when he extended the infamous "Minsky Moment" framework to Europe, and specifically Germany, which he said "can’t cover its payments without Russian gas and the government is asking citizens to conserve energy to leave more for industry." He then elaborated that "Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage: in Germany, $2 trillion of value added depends on $20 billion of gas from Russia… …that’s 100-times leverage – much more than Lehman’s."
Guess what: Russian gas will never cost $20 billion again, and meanwhile the margin call on that 100x leverage is now due.
So what solutions could governments use to cushion the consumer hit in Europe? According to Goldman, two come to mind:
Windfall tax on European utilities would have very little impact (only €30bn of income per year).
Price caps in power generation would be more effective and could save €650bn p/a. This is based on fact that a large part of power generation costs less than the marginal source of energy. These could follow the example set in Spain, where there are two co-existing caps:
But price caps would not fully solve the affordability issue, as the increase in gas and power bills would still be +€1.3 tn, or c.10% of GDP on the team’s estimates.
This is why Goldman believes that the introduction of a "tariff deficit" might eventually be needed, to spread the recent spike in bills over 10-20 years, and allowing the Utilities to securitize promptly these future payments. Although this scheme would limit demand destruction, it would smooth the increase in tariffs, limit the near-term decline in industrial production, and largely defuse regulatory risk.
Whatever the band aid solution that is applied, however, the reality is grim. And while we wait for the latest Zoltan note to quanity it in a way only he can, the math is simple: Europe can't print more nat gas, oil, coal, etc, so one way or another, it will have to offset the surge in costs, first in commodities and then in all downstream chains, which in the very near future will mean governments will soon be subsidizing Europe's cost of living as the alternative is a violent revolution. In short: we are about to see the printers go brrrr like never before, if only to prevent Europeans from going brrrr this winter...
Much more in the full Goldman note available to pro subs.
What a shame that no one warned the Germans of the consequence of becoming so totally dependent on Russian energy.
“The Greenies need to be lynched. This is criminal.”
That’s really not an exaggeration - these roaches need to be exterminated.
They’ve taken control of every government in the west by sending out armies of “activists” raising hell and terrorizing anyone who stands in their way.
Forcing everybody to buy electric cars will solve the problem. /s
Enron on steroids.
Bailout.
I really hope Europe learns an expensive lesson. It’s time they get a reality check about so-called green energy.
I live in Sicily - since I didn't want another stupid-crazy bill every month, complete with an expensive "standing charge" one must pay whether or not one uses a single Kw of energy, I elected to heat my top floor with a pellet stove.
It works well but in spite of all the greenie cheerleading and hype about how efficient these stoves are the reality is much different: When you do the math, factoring in the electricity required to run the fans, sensors, ignitor etc. it becomes clear that they're no bargain to run and were, costwise, (until recently) equivalent to heating with natural gas.
And now, with the insane increase in the cost of electricity here, they'll be expensive to run, which is why I spent a good part of this summer busting my ass installing a solar electric system and battery bank in 110 degree heat.
I'm not buying pellets either this year - screw that - instead, I'll be using crushed olive pits in my pellet stove because they are less than half the cost of pellets now and only require minor mods to the stove, which I will perform.
I also bought two wood stoves and will install them next week. I can get wood for free, so that makes sense. Hate having to spend time and money to do all of this but the alternative is to be at the complete mercy of merciless, murderous, leftist/globohomo filth.
No matter what the Eurofilth orchestrating this latest crisis do, things will be ok in my house. Unfortunately, a lot of folks who have stood by helplessly and done nothing to prepare for the deprivation and misery that's definitely heading towards Europe are going to suffer badly.
From my perch it's looking more and more like violent revolution will be the only way out for much of Europe.
the globalists elites want public support by force, we will freeze you out with our climate agenda and blame it on the ruskies
Interesting comments. Especially about the pellet stove. I remember the first one I saw had a windup mechanism for the pellets and an optional fan. I think the guy is still using it in a hunting cabin up north in Oregon. Wish I had access to crushed olive pits!
Thank you for your observations.
As I recall, Orange Man warned them about this several years ago, over their cackles and laughing. Who’s laughing now!.
Trump, you Magnificent bastard!
US could supply Europe with American LPG, if only he was still in office. Elections (even corrupt ones) have consequences.
F*ck Joe Biden!
Entirely self inflicted. I will thoroughly enjoy watching it burn.
Bookmark
The price of natural gas in USA markets has dropped more than 10% in the last week - from $9.26 to $7.93 as I write this.
Utterly weird.
Russia completely shuts down NG to Europe, and the price drops!
Redistribution of wealth.
“”Green” on the outside
but RED on the inside!”
Like the watermelon in my refrigerator.
Windup mechanism sounds like a great idea! I’m guessing that if you live out west in the US you can get them, especially in California. Since Sicily is blanketed with olive trees and groves, there’s no shortage of pits.
Thats right. They have very effective tactics. They are overwhelmingly outnumbered but still impose their agenda. Now people are really going to feel the pain.
Schadenfreude or compassion, schadenfreude or compassion.
This is tough one.
Harry wants to retire and move to Rapallo, Italy, dreaming of an idyllic existence in a villa by the sea. Unfortunately for Harry, his memories of Rapallo were from the summertime, when he was there during the war. Now it's winter, and Harry struggles in vain to keep the drafty old building heated.
My house is a gorgeous old townhouse in a medieval, hilltop village, which I singlehandedly restored over a five year period. It was a complete wreck when I bought it. The building is stone with walls three feet thick and concrete tile floors, so it stays relatively cool in the summer but gets chilly, and in some rooms damp, in the winter.
I bought two small wood stoves to solve that problem this season.
That sounds like Harry's villa in the book. He also complains that it it drafty.
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