Europe Prepares for Energy Crisis and Recession

by Wall Street Rebel - Michael London | 07/07/2022 9:00 AM
Europe Prepares for Energy Crisis and Recession

As Europe braces itself for additional cuts to gas supplies the following week and economists warn of an impending recession, Berlin and Paris are preparing for recessionary bailouts.


Fears of fuel shortages and near-record electricity and natural gas prices are prompting European leaders to take extraordinary measures to secure supplies for the upcoming winter season. Europe is currently experiencing its worst energy crisis in decades.

Germany, the largest importer of Russian gas, was getting ready in Berlin to vote on a bill that would clear the way for the country to assist Russia in rescuing Germany, which is the largest importer of Russian gas.

The prime minister of France made an announcement in Paris regarding her government's intention to take complete control of France's state-backed electric utility provider.

There is a growing concern that soaring energy prices, which are being driven by steadily decreasing Russian gas shipments, will force energy companies to fail, a chain reaction that Germany's energy minister has compared to the way the failure of Lehman Brothers in 2008 triggered the global financial crisis.

"The scale of the crisis and the risk of disruption and further price spikes is now so big that there is a sense in the major E.U. governments that it requires national bailouts," said Henning Gloystein, a director at Eurasia Group, a political risk firm. "The risk of disruption and further price spikes is now so big that it is now so big that there is a sense in the major E.U. governments that it requires national bailouts."

"Private businesses will not be able to bear the expense of these measures."

The disruption is being felt all across the continent as countries such as Austria, France, and the Czech Republic try to find enough gas to fill their storage tanks before the temperatures drop — and, as many people fear before Russia stops shipping gas altogether, which could happen as early as the end of July.

The impact, however, is felt most keenly in Germany, the largest European economy, which has been getting most of its gas for many years from Russia.

The impending danger of shortages during the upcoming winter could result in the rationing of gas and the shutdown of industries, which would then lead to the loss of jobs and protests.

The second stage of Germany's three-step emergency plan for gas was put into effect one month ago; the third stage of the plan gives the government the ability to implement rationing.

Companies are already making preparations to reduce the amount of gas they use and are also formulating backup plans in case flows are reduced even further.

A measure that will be put to a vote in the German Parliament on Thursday is intended to allow the government to provide a lifeline to businesses that are struggling as a result of the record-high price of gas and cuts in supplies from Russia. The vote will take place on the measure.

It would also allow suppliers to pass on price increases to consumers if authorities determined that a "significant reduction in total gas import volumes to Germany is imminent." This would be permitted under the terms of the bill.

Since the beginning of the year, economists have been arguing that it is necessary to take such a step, which would result in significantly higher monthly power bills for homeowners, to break free from dependence on Russian gas.

It is possible that the first company to profit from the revised legislation will be Uniper, an energy provider and Germany's largest gas importer from Russia.

After revising a financial forecast and expecting earnings to be "significantly below" those of previous years, it announced a week ago that it was in discussions with the government regarding the possibility of receiving financial assistance.

In Germany, the company has 5,000 employees, owns a number of gas-fired power plants and gas storage facilities, and is an essential electricity provider to many municipalities and communities.

Since Gazprom, the Russian gas giant, cut natural gas deliveries through the Nord Stream 1 pipeline by 60 percent a month ago, Uniper has been facing mounting losses. This has forced Uniper to turn to the spot market to buy gas at significantly higher prices to fulfill its longstanding contracts with municipalities and companies.

On Wednesday, analysts at S&P Global Ratings, which evaluates the creditworthiness of companies, estimated that the shortfall from Gazprom, which normally supplies more than 50 percent of Uniper's gas, was burdening the company with enormous daily losses in "the low- to mid-double-digit" millions of euros. Gazprom usually is responsible for supplying more than 50 percent of Uniper's gas.

According to what S&P wrote, the amount of red ink could potentially grow if supplies from Gazprom were cut even further.

Robert Habeck, the economics minister for Germany, has warned that the situation may become even direr. Still, he has also stated that the German government will not permit the failure of a single energy company to bring the entire European market down with it.

Prime Minister Elisabeth Borne announced a similar move in France, and it pertains to the nation's state-backed nuclear power operator, Électricité de France.

Since EDF was compelled to shut down approximately half of its reactors, the already financially troubled company has seen its debt load grow even larger.

Ms. Borne told the legislators, "I confirm today the intention of the state to hold 100 percent of the capital of EDF." Still, she did not provide any additional details.

France relies heavily on its nuclear power plants to get it through the current energy crisis. These plants generate approximately 70 percent of the country's total electricity, which is a greater percentage than any other nation.

When Nord Steam 1, the pipeline that connects Germany's northern coast with Russia's gas fields, is scheduled to be shut down for ten days for annual routine maintenance beginning on Monday, this will present a new risk to the availability of energy supplies.

Norway, which has become Europe's largest gas supplier and is pushing its exports to counteract the cuts from Russia, has become an increasingly important player due to the reductions coming from Russia.

This week, gas field workers in Norway went on strike, threatening to cut off up to 60 percent of supplies to Western Europe. However, the Norwegian government quickly intervened to end the work stoppage and restore normal operations.

Marte Mjoes Persen, Norway's labor minister, told Reuters about the strike, "Norway plays a vital role in supplying gas to Europe, and the planned escalation would have had serious consequences for Britain, Germany, and other nations." This was said about Norway's role in supplying gas to Europe. She continued by saying that the "impact would have been dramatic in light of the current situation in Europe."

The use of Norwegian gas has been critical to the success of efforts to resupply Germany's gas storage facilities, several of which were previously owned by Gazprom but ran out of gas in the months leading up to the invasion of Ukraine.

According to a government agency, the storage capacity of the facilities has reached more than 62 percent. If Russia were to stop all gas flow through Nord Stream 1, it would be extremely difficult, if not impossible, to meet the target of 90 percent capacity by November.


The worries have resulted in a doubling of already high prices for natural gas in Europe over the course of the past month, bringing them up to approximately 160 euros per megawatt-hour.

This price is equivalent to about $280 per barrel for oil, which is almost three times as much as what the West Texas Intermediate benchmark is currently fetching in the market.

Economists are alarmed that the high energy cost and a lack of stored gas could push Germany and the rest of the European Union into a recession that would continue well into 2023.

Holger Schmieding, the chief economist at Berenberg, wrote in a research note that "the EU would likely be running on empty at the end of winter" if Russia did not turn on Nord Stream 1 by July 21. This date was set as the deadline for Russia to do so.

If Russia were to shut down its additional pipelines to Europe in late July, the situation would be even worse than it is currently.



                     Europe is facing an energy emergency this winter: RBC's Helima Croft




[Strategic Investment: The Post WWII World Order is About to Collapse]



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