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European Energy Crisis Progressing
In last Thursday’s dispatch, we covered the dynamic of this inflationary bear market, where the conditions of the global macro landscape are rapidly repricing global interest rates higher. Similarly in our “Energy, Currency & Deglobalization” series,
Energy, Currency & Deglobalization, Part 1”
“Energy, Currency & Deglobalization, Part 2”
Since our latest release, the response from European governments to “combat” surging energy costs have been astounding.
In the United Kingdom, newly appointed Prime Minister Liz Truss has already unleashed a draft plan as a response to rising consumer energy bills. The policy plan could cost £130 billion over the next 18 months. The plan details the government stepping in to set new prices while also guaranteeing financing to cover the price differences to private sector energy suppliers. Using 2021 annual numbers, the plan would be roughly 5.9% of Gross Domestic Product. The U.K.’s stimulus at 5% of GDP would roughly be the equivalent of a $1 trillion stimulus package in the United States.
£40 billion for U.K. businesses. Counting both, they represent roughly 7.7% of GDP for what’s likely to be a conservative first pass of stimulus and spending to offset a longer, sustained period of much higher energy bills across all of Europe the next 18-24 months. The initial policy scope doesn’t seem to have a cap on its spending so it’s essentially an open short position on energy prices.
Ursula von der Leyen, president of the European Commision, tweeted the following:
The supposed price cap of Russian oil is important for a number of reasons: The first is that with Europe’s solution for the incumbent energy crisis seeming to be stimulative fiscal packages and energy rationing, what this does to the euro and pound, both currencies of energy importing sovereignties, only compounds its problems.
Energy Trading Stressed By Margin Calls Of $1.5 Trillion.”
“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 energy company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.”
–Bloomberg
Similarly, Goldman warned of a dismal outlook for markets.
“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.”
Metal Plants Feeding Europe’s Factories Face An Existential Crisis”
“Europe’s Top Aluminum Plant Will Cut Output 22% On Energy Costs”
“German Factory Orders Fall For Sixth Month Amid Energy Squeeze”
“The curtailments add to the extreme toll that the energy crisis is having on Europe’s metals industry, which is one of the biggest industrial consumers of power and gas. A group representing the region’s biggest producers wrote to European Union politicians warning that the energy crisis could cause ‘permanent deindustrialization’ in the bloc, unless a package of support measures are implemented.”
Aluminum, which takes approximately 40 times more energy than copper to produce, is quite energy intensive.
“This is a genuine existential crisis,” said Paul Voss, director-general of European Aluminum, which represents the region’s biggest producers and processors. “We really need to sort something quite quickly, otherwise there will be nothing left to fix.”
–Bloomberg
What is being demanded due to the structural energy deficit in Europe is the populous and the business sector demanding the public balance sheet assume the risk. Subsidies for energy bills or price caps does nothing to change the absolute amount of molecules of high-energy density fossil fuels on the planet. The price caps and subsequent response from Russian President Vladimir Putin is what makes all the difference, and it has the potential to create potentially devastating outcomes in financial markets.
Bitcoin’s Seven Daily Candles” where we cover their latest August monetary report) and the European Central Bank expects a 75 basis point rate hike in their announcement tomorrow, after just recently raising from negative rates. For what it’s worth, the probability for a Federal Reserve rate hike to 75 basis points for the Federal Open Market Committee meeting two weeks away is currently at 80% (intraday pricing versus 73% for September 6).
