9/7/2022: Russia Shut Main Gas Pipeline to Europe
It might not be restored until sanctions to Russia are lifted.
Russia shut a main gas pipeline to Europe again. Nord Stream 1 was shut down for 10 days in July. It was shut down again over the weekend indefinitely. Russia blamed it on the sanctions and claimed they couldn’t maintain the pipeline. They detect a leak from a special turbine but they couldn’t fix the issue because that turbine is not available due to the sanctions. However, a spokesperson for the EU told the BBC the sanctions regime does not affect the technology needed for the transport of gas into Europe. Anyhow, it’s within Russia’s power to decide what they want to do with their natural gas. They have decided to cut supplies to Europe severely and there are dire consequences for Europe businesses and consumers.
As mentioned in my previous post, 39% of gas used in Europe was supplied from Russia. With the cuts, that percentage is now below 20%. It makes me wonder how this would affect the Ukrainian-Russian war. I believe most countries support Ukraine out of principle because Russia’s military action is unjustified. But can the countries keep supporting Ukraine if it means soaring energy prices, factory shutdowns or even freezing deaths? I am no political strategist but I imagine most countries have to take into account their potential losses if the shutdown continues.
“In our view, the market continues to underestimate the depth, the breadth and the structural repercussions of the crisis,” the Goldman Sachs analysts wrote. “We believe these will be even deeper than the 1970s oil crisis.”
I don’t believe a year ago anyone could have predicted the European energy crisis we are seeing right now. To add salt to injury, Bloomberg reported that European energy trading is being strained by margin calls of at least $1.5 trillion. It sounds like energy companies were selling long contracts and bet the energy price wouldn’t go parabolic. They were basically selling covered calls as they are the energy producers. But they need to put in more margin as the energy prices soar. The governments are providing these firms loans to help them navigate the liquidity crisis. But they are still facing huge challenges ahead as they couldn’t really mark up the utility prices to the same extent energy prices have risen. If PG&E tells me my electricity bill is going to 10X next year, I would go insane and the government probably would intervene. Chances are we will be seeing more de-globalization down the road and each country/region would build a wall around it to make sure they don’t overly rely on one single source for essentials like food, energy or medical supplies.