Every so often the tectonic geopolitical plates that hold up the world economy suddenly shift in ways that can rattle and destabilize everything on the surface. That’s happening right now in the energy sphere.
Several forces are coming together that could make Vladimir Putin the king of Europe, enable Iran to thumb its nose at America and build an atomic bomb, and disrupt European power markets enough that the upcoming U.N. climate conference in Glasgow could suffer blackouts owing to too little clean energy.
Yes, this is a big one.
Natural gas and coal prices in Europe and Asia just hit their highest levels on record, oil prices in America hit a seven-year high and U.S. gasoline prices are up $1 a gallon from last year.If this winter is as bad as some experts predict — with some in the poor and middle classes unable to heat their homes —I fear we’ll see a populist backlash to the whole climate/green movement. You can already smell that coming in Britain.
I am a fan of the financial newsletter Blain’s Morning Porridge, written by a smart, irreverent market strategist in London, Bill Blain. Last Thursday he bluntly summed up the energy situation for the U.K. and Europe this way:
This winter — people are going to die of cold. As the price of energy goes higher, the costs will fall disproportionately upon the poorest in society. Income inequalities will be dramatically exposed as the most vulnerable in society face a stark choice: heat or eat. … This winter the U.K. is likely to be on its knees, begging energy from wherever it’s available. Europe will be in as much trouble. The Middle East will be charging whatever they can get away with, and the capacity to deliver is limited. … And Vladimir Putin can’t wait. … He will invite each European leader to plead their case individually, menacingly asking each leader why he should open the gas taps to their nation specifically. … Make no mistake, this winter is going to be shocking. Be aware.
How did we get here? In truth, it’s a good-news-bad-news story.
The good news is that every major economy has signed onto reducing its carbon footprint by phasing out dirtier fuels like coal to heat homes and to power industries. The bad news is that most nations are doing it in totally uncoordinated ways, from the top down, and before the market has produced sufficient clean renewables like wind, solar and hydro.
If you don’t have enough renewables but you want to go green, the next best thing is natural gas, which emits about half as much CO₂ as coal (as long as methane is not released in the extraction process). But there is not enough of this transition fuel to go around. So, everyone is scrambling to get more, which is why the European Union’s biggest pipeline gas supplier — Russia — is now in the catbird seat and prices are skyrocketing along with blackouts.
As Bloomberg Businessweek reported on Sept. 27, when it comes to natural gas, “inventories at European storage facilities are at historically low levels for this time of year. Pipeline flows from Russia and Norway have been limited. That’s worrying as calmer weather has reduced output from wind turbines, while Europe’s aging nuclear plants are being phased out or are more prone to outages — making gas even more necessary. No wonder European gas prices surged by almost 500 percent in the past year and are trading near record.”
But it’s not just Europe. This energy crunch could pinch ceramics, steel, aluminum, glass and cement suppliers in China, the story added, while it presents households in Brazil with eye-popping power bills because low river water flows have slashed hydropower output. And pandemic-related supply chain problems for coal are making the problem worse.
But how did the bad-news side of this story emerge so fast?
Blame Covid-19. First, the pandemic erupted and signaled to every major economy that we were headed for a deep recession. This sent prices of all kinds of commodities, including oil and gas, into downward spirals.
This, in turn, led banks to choke off investment in new natural gas capacity and crude wells after seven years of already declining investments in these hydrocarbons because of lousy returns.
But the economy snapped back — thanks to government stimulus programs — far faster than anticipated. And so, too, did demand for energy. But this industry does not ramp up quickly. So, there was not enough natural gas, let alone renewables, to fill in the gap.
America has enough oil and natural gas to meet its own needs for now, but its ability to export liquefied natural gas to help others is limited, especially when every utility in Europe and Asia is trying to meet newly minted environmental, social and governance standards for clean energy and therefore is desperate to import natural gas.
When every country jumps in at once, the price goes crazy. Or the lights go out.
Don’t get me wrong. I am as green as ever. But I’m not a nice green. I am a mean green. Achieving the scale of clean energy that we need requires not only wind, solar and hydro, but also a carbon tax in every major industrial economy, nuclear power and natural gas as a bridge. If you oppose all those, you’re not serious about what scientists tell us needs to be done right now — put in place enough non-carbon-emitting fuels to manage the destructive aspects of climate change that have become unavoidable, so we can avoid those that would be unmanageable.
Sadly, in an overreaction to the Fukushima nuclear accident, Germany decided in 2011 to phase out all of its nuclear power by 2022 — nuclear power stations that in the year 2000 generated 29.5 percent of Germany’s power generation mix. All of that has to be replaced by wind, solar, hydro and natural gas, and there is just not enough now.
As Bill Gates points out in his smart book “How to Avoid a Climate Disaster,” the only way to reach our climate targets is to shift production of all the big heavy industries, like steel, cement and automobiles, as well as how we heat our homes and power our cars, to electricity generated from clean energy. Safe and affordable nuclear power has to be part of our mix because, Gates argues, “it is the only carbon-free, scalable energy source that’s available 24 hours a day.”
Meanwhile, though, this energy crisis is coinciding with the stalemate in the talks between the U.S. and Iran about restoring the nuclear deal that Donald Trump recklessly tore up in 2018 — without any alternative plan to curb Iran’s nuclear program. To pressure us, Iran has resumed enriching uranium to levels such that U.S. officials now believe it could be only a few months, or less, away from having enough fissile material for a single bomb.
It would take much longer for Iran to build a warhead and delivery system, but some U.S. officials believe that Iran just wants to make itself a threshold nuclear power, like Japan, where it would stay just a few turns of the screw away from actually having a bomb. This would give it all the deterrence it needs. Both Israel and America have vowed not to let Iran get that close to the doorstep of a nuclear weapon. Alas, we are entering crunchtime.
But what if the U.S. or Israel feels it has to strike Iran’s nuclear program in the middle of what could be the worst energy winter since 1973? And what if Iran responds by firing at U.S. or Western oil tankers in the Persian Gulf, where Qatar, the world’s largest exporter of liquefied natural gas, resides? Oil and gas prices will go into the stratosphere. So, Iran suddenly has new leverage: Hit us and you bankrupt the world.
If I can figure that out, the Iranians can.
Little darling — it’s gonna be a long, cold, crazy winter.