Big News That’s (Probably) News to You

Europe and Russia are locked in an energy war that will probably bring collateral damage to your doorstep. Russia has won most of the initial battles and is likely to stay on top for a while, given Europe’s dysfunctional decision-making and the dysfunctional, blindly market-oriented advice coming out of Washington. But In the end, both sides will lose.

This may sound overly dramatic, since most of the action hardly registers in the mainstream media outside Europe. It doesn’t predictably get top billing even in Europe, except in the business press. All you see in the US is an occasional charge that Russia is “weaponizing” oil or natural gas, with no hint that the West is using energy just as determinedly — albeit less effectively — against Russia.

Have you read or heard that natural gas prices in Europe are now at more than 10 times pre-crisis levels? Or that obtuse (to be polite) EU rules mean that similar increases are flowing through into electricity bills — even though most of the electricity is generated by renewables that are as cheap as ever?

Those who can’t afford to pay such gas and power bills — which is most people even in relatively wealthy Europe — may not actually go without heat this winter. But it’s already September, and most European governments are still trying to figure out how to keep the heat and lights on without pushing their big electricity distribution companies into bankruptcy by forcing them to supply power to people and businesses who don’t pay their bills.

Sweden and Finland have just said they will “provide liquidity,” otherwise known as cash, to their big electric utilities in order to prevent them collapsing and possibly bringing the financial system down with them. The EU may well take similar measures next week, on an “emergency” basis, even though the crisis has been months in the making.

France has already renationalized its biggest power generator so it can use the company’s earnings to help finance state aid to households and businesses. The Germans are at Stage two of a three-stage scheme that will likely lead to full-on rationing of natural gas to industry by winter. Most fertilizer makers and a few other factories in Germany have already closed, and many more are likely to do so by deep winter, if not before.

This is not a minor recession. It’s a major economic crisis that will have major political repercussions.

Already, an estimated 70,000 Czechs took to the streets of Prague Sep.3 , with speakers from both the left and right — everybody but the centrists, who are in charge — many of whom advocate leaving the EU and Nato. Demands published by the organizers included cheap energy purchased directly from Russia. To add to the irony, the Czechs hold the rotating EU Council presidency at the moment.

The EU as an institution is under pressure and that pressure can only intensify as economic problems worsen. The UK’s departure may well not be the last. The demonstrators in Prague aren’t alone in their opposition to EU and Nato policies. Even in Italy, one of the original six EU members, a right-wing government that is at best skeptical of the EU may soon be in power.

Hubris played a big role in getting Europe and its US backers to this dangerous point.

The Western idea after Russia invaded Ukraine was to wreak havoc on the Russian economy by gradually reducing coal, oil and gas purchases and persuading or strong-arming other fossil fuel importers (Think China and India) to do the same. Instead, the Russian economy has stabilized, the Chinese are gradually replacing the consumer imports that dried up in Russia as Western companies walked away from often enormous investments in the country, and India and China are buying Russian oil like crazy.

Russian oil sales are holding up near pre-war levels, thanks to discounts that still leave prices way up on the year. They use payment systems that bypass Western financial sanctions — many of them developed to get around long-standing US sanctions on Iran.

Russian natural gas hasn’t done so well. Due to the inflexibility of transport and trading of gas compared to oil, there are no alternative purchasers for most of the Russian gas that isn’t being sold to Europe. Russian state company Gazprom’s sales volumes have fallen by almost 60% from year-ago levels, according to Russian data analyzed by Energy Intelligence. But with prices at many times “normal,” Russian earnings aren’t hurt.

Having the EU economy on the verge of implosion while the Russian economy is chugging along reasonably well is, at minimum, embarrassing for the US. The problem is that Washington doesn’t really want to stop Russian oil sales even if it could, since that would drive oil prices everywhere through the roof. They just want to prevent the Russians from earning so much.

The brilliant answer thought up by the US Treasury Department? Join with the EU in “capping” Russian oil prices at levels only minimally profitable to Russia. Not only will the US and Europe refuse to pay more than the cap (actually, the US has already quit buying Russian oil altogether), but they will also refuse to let their companies insure tankers that would take Russian oil to other countries that are willing to pay more than the capped price.

US and European companies insure most of the world’s tankers now and, of course, nobody else will step in to provide insurance in their place. Right? And of course, all those Chinese, Indian, and other companies that buy Russian oil will openly and honestly report what they pay for that Russian oil. Who would dare cheat? Duh.

All those absurd assumptions aside, the Russians had the nerve to counterattack. Not only will they refuse to sell oil to anyone who accepts the cap, Moscow said, but Gazprom managed to find a faulty valve that they could use as an excuse to halt more natural gas shipments to Germany. What nerve! Duh.

Are you confused now? The convoluted complexity of it all probably helps explain why this situation hasn’t gotten more coverage, except in the business press, where the potential impact on the earnings of the readers are much too important for it to be ignored.

What are some of the important repercussions that should make people outside Europe care?

At the broad economic level, inflation everywhere will be more persistent because international oil, natural gas and coal prices will be higher. More inflation means central banks will raise interest rates more, and the recession will be deeper in North America, as well as in Europe. Without the US buying so much, Asia could be hurt, too.

Supply chains that run through Europe will remain tangled for longer. For example, sky-high gas and power prices are causing Europe to close energy-intensive aluminum plants, which make aluminum for everything from beer cans to cars. More will follow. Europe supplies not just US but also Chinese factories with many components needed to make many other things.

At the energy sector level, natural gas is taking a beating from which it is unlikely to recover. North America, Russia and parts of the Middle East will probably continue to burn gas for electricity, but international gas sales seem destined to shrink, not grow, as some have been predicting. China and India decided months ago not to compete aggressively with Europe for limited amounts of natural gas shipped as LNG. They are revving up both coal and renewable energy instead.

This will mean bigger reported carbon emissions in the near-term from carbon-intensive coal, but a quicker end to fossil fuel-fired electricity altogether as renewables grow more rapidly. And the increase won’t be too big on the emissions front if the economic slowdown is intense, since recessions bring less use of electricity overall. In the end, the climate could even benefit.

Like so much of what is going on in the world at the moment, though, the situation is volatile and frightening. One thing that’s certain, it isn’t a good time to ignore what’s happening in Europe, or to try and take a vacation in Tuscany or the French Riviera without reading or listening to the news. In fact, it’s probably a better time to hunker down and save up for some solar panels and an EV you can also use as a backup battery.