On July 11, Nord Stream 1, one of the major natural gas pipelines coming out of Russia that supplies gas to Germany, will be shut in for 10 days of maintenance. This at a time when Europe is already starved for natural gas heading into what could be the most painful winter yet.
And it’s not just the heating fuel that Europe is exposed to. In a wonderful piece by Doomberg today, here’s a full look at the impact on manufacturing in Germany.
Last week, the Wall Street Journal published an important story about how sanctions on Russia – however justified the motivation to impose them might be – are beginning to backfire in ways Western leaders seem to have been unable to calculate in advance:
“For years, BASF SE, one of the world’s largest chemicals companies, built its business model around cheap and plentiful Russian natural gas, which it uses to generate power and as feedstock for products that make it into toothpaste, medicines and cars.
Today, dwindling Russian gas supplies are proving a threat to the company’s vast manufacturing hub here—the world’s largest integrated chemical complex spanning some 200 plants. Earlier this month, Russia started throttling back its supply of gas to Germany and other European countries. In response, company executives are doing what was unthinkable just a few months ago: considering how to potentially shut down the complex if gas supplies fall further.”
It is a major problem for all of Europe and it’s showing up in charts like this.
Germany’s trade surplus is gone. It’s foreogn trade balance came in at negative €1bn in May, which is the 1st negative print since 1991 and is drive by the combined impact of energy problems (prohibitive costs) and related weakness in manufacturing. You only need to look at power prices to understand the challenge, and one of the drivers of inflation.
Without manufacturing, you lose jobs. Without jobs, you lose purchasing power. And without purchasing power, our consumer driven economy is sort of F’d. More than sort of.
So to strategy 101. If I were advising Putin, I would accidentally have the Nord Stream pipeline maintenance last a month. I would drain Europe of natural gas, forcing prices ever and ever higher. With the Freeport LNG facility limiting exports from the U.S., there are very few alternatives. I would crush their economy completely. Shut down factories. Destroy towns. Ruin lives. All without firing a single bullet. While Europe (and the U.S.) continue to support the Ukraine’s war efforts, the ruble is at a 7 year high. While we impose sanctions on Russia, we have driven Russian oil to trade at a $40 discount, which is being consumed at the same rate as before, but by China and India instead of Europe. In essence, American and European customers are subsidizing Chinese and Indian ones and still, Russia fights on because it’s higher than at any time in 2021. Put it all together and it’s bad news for the West, and Putin knows it.
There are two paths forward for the West. Sue for peace, admit Finland and Sweden into NATO and be very clear that if Putin attacks a NATO country, there will be nuclear war. Otherwise, if we care so Much about Ukraine, start it now. We know the latter isn’t true, which means that the former is the only path forward for the world to get the energy that it needs.
One final tidbit. I saw this on LinkedIn and it’s a wonderful brain exercise when you think about COVID and climate change and the energy and food crisis. Why are politicians screaming about demand (I.e. reducing it)? Lose weight (free), drive less (free), live in apartments near town and cook only what you need (free). This story puts it in context.
A banker made the economists think this when he said:
“A cyclist is a disaster for the country’s economy: he doesn’t buy cars or doesn’t borrow money to buy them. He doesn’t pay insurance policies. Doesn’t buy fuel or pay to have the car serviced or repair it. He doesn't use paid parking and doesn’t cause any major accidents which means there is no need for multi-lane highways or emergency crash response medical teams.
He is not getting obese. Healthy people are not necessary or useful to the economy. They are not buying the medicine. They don’t go to hospitals or doctors. They don’t buy fad diets or $20 smoothies.
They add nothing to the country's GDP.
On the contrary, each new McDonald’s store creates at least 30 jobs— including cardiologists, dentists, dietitians and nutritionists— as well as the people who work in the store itself.
Choose wisely: do you really want the economy running on a bicycle or a McDonald's?
~ Emeric Sillo
We answered that question a long time ago. Whatever seems easiest, most convenient, fun. And then one day we look up and realize that we can't find directions without a GPS, can't fix our own cars when they break down, can't even raise our own food. "Wal E" world is here. For a business that probably runs disaster drills in its plants at least yearly, to not have run a business "disaster drill" around what would happen if its primary source of feedstock and fuel runs out seems, as the article says, unthinkable. Yet how many businesses are in the same place? How many operating companies can tell you where the exits are from the meeting room but can't tell you what they would do if their internet connections were cut? The old fashioned world used clipboards, pens, and pieces of paper - knew what was going on in the field, and can still find their data history even when they changed computer systems 5 times. Fuel forethought in the world that's soon to come. The trouble with an optimized system is that it's rigidly bounded by the conditions it was optimized under. We're shifting the boundaries of a lot of those systems this year.
It's a very good thing for the world that you and I are not advising Putin, honestly. I would've shut the gas out months ago.
Joke aside, I would very much appreciate NATO's leadership not bringing the world to the brink of a nuclear war, seeing as the biggest contributor to NATO is thousands of miles away from Russia but we're within the closest range. How hard exactly could it be to negotiate a peace? I'll tell you: as hard as you want it to be.