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Energy Shock

The world is in energy shock.

European imported coal prices increased 421% before Russia invaded Ukraine. German electric power price increased 518%. European natural gas jumped 765% and Asian spot LNG, 957%.  Since then, it’s gotten even worse.

U.K. natural gas futures price has increased +$99.86 (+574%) from $17.41 to $117.27 per mmBtu just since June 8 (Figure 1).

Figure 1. U.K. natural gas futures price has increased +$99.86 (+574%) from $17.41 to $117.27 per mmBtu since June 8. Source: MarketWatch, CME & Labyrinth Consulting Services, Inc.

Now Europe’s energy crisis is on a path to even worse outcomes.

Russia announced on September 4 that gas supplies to Europe via the Nord Stream 1 pipeline would not resume in full until the sanctions against Russia were lifted. Finland’s Economic Affairs Minister stated ,

“This has had the ingredients for a kind of a Lehman Brothers of energy industry.”
–Mika Lintilä

Many governments are planning to subsidize consumers with price caps and to help industry with loans. My friend and colleague Nate Hagens recently noted that,

“Europe is committing economic suicide.”
–Nate Hagens

That is because these bailouts are happening at a time of economic contraction, high inflation and rising interest rates. That means increased and unproductive debt at a time that states cannot afford its service except with more debt.

French President Emmanuel Macron recently stated,

“What we are currently living through is a kind of major tipping point or a great upheaval … we are living the end of what could have seemed an era of abundance…the end of the abundance of products of technologies that seemed always available.”
–Emmanuel Macron

Meanwhile, OPEC+ has decided to cut production by 100,000 barrels of oil per day reversing 15 months of output increases. Although oil is relatively less expensive for Europeans than natural gas and coal, many countries have begun using diesel as a substitute to generate electric power.

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