Energy War in Europe
Putin’s war is being fought on many fronts. A real war in Ukraine, but also an economic and energy war in the rest of Europe.
This week our guests are David Sheppard, FT Energy Editor based in London and Derek Brower, US Energy Editor for the Financial Times and FT Energy Source Editor based in New York.
Here are some of the questions Jackie and Peter asked our guests: Assuming that Russia was at fault for the sabotage of the Nord Stream 1 and 2 pipelines, what could be the motivation? How difficult are the high energy prices for residential and industrial energy consumers in Europe now? So far, the energy war has been fought in the gas markets, but are the oil markets next? European governments are offering energy price caps and subsidies to shield consumers from high prices, is this the right approach? In June, Putin predicted that Europe will have a surge of populism that will oust the current governments. Is Italy a one off, or do you foresee government change towards more right-wing leaders in other EU countries?
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Episode 169 transcript
Disclosure:
The information and opinions presented in this Arc Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the Arc Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Welcome to the Arc Energy Ideas podcast, I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian, and welcome back. Well, it’s an important day in Canada today, it’s the Truth and Reconciliation Day. And Jackie, I must say you’re looking lovely in your orange outfit.
Jackie Forrest:
Yeah, I even got the button and stuff.
Peter Tertzakian:
Yeah.
Jackie Forrest:
So I think it’s an important day. It’s our second one and it honors the children who never returned home and the survivors of the residential school system here in Canada. History that I didn’t actually know about until the last several years. It’s not something that we were taught about in school. My daughter now is in elementary school and she’s learning about it, so I think this new generation’s going to have a lot more awareness than we did.
Peter Tertzakian:
Absolutely, I grew up in the 60s and 70s and really there was no talk of it. So it’s really an important truth and reconciliation awareness moment, so it’s good.
Jackie Forrest:
It should be about recognizing things that happen in the past but also helping to change the future. And I’d like to talk about this on a future podcast, but this week we heard about Enbridge Pipeline selling off minority position to 23 different Metis and Indigenous groups. Altogether it’s going to bring about 10 million annually to those communities. I think that’s a really interesting story and hopefully we’re going to see more stories like that in terms of participation by Indigenous groups in some of these projects that are in their traditional lands.
Peter Tertzakian:
No, I feel that the awareness is broad based now, not only sort of in civil society but in corporate Canada and beyond. So it’s really an important day and important to celebrate it. But today, we are going to be looking overseas and we have a couple of special guests, don’t we Jackie?
Jackie Forrest:
Yeah. We’re really excited to invite Derek Brower, US Energy Editor for the Financial Times and the Energy Source Editor. And David Sheppard, the FT Energy Editor based in London. Welcome.
Derek Brower:
Thank you. Nice to be here.
David Sheppard:
Thank you.
Peter Tertzakian:
Well, it’s really good to have both of you, given what’s going on overseas in the Ukraine. Of course, Russia invaded the Ukraine February 24th, 2022. And as we record, Vladimir Putin has declared annexation of four regions in the Ukraine. At the same time, we have all sorts of other things happened this week, including the sabotage of the Nord Stream 1 and 2 pipelines, completely shutting off the gas, I think permanently, I think we can say, to Europe from Russian supplies. We’ve also got Russian forces reportedly surrounded in the town of Lyman. And boy, it’s really an ugly kind of situation over there. Give us a perspective on the ground from Europe.
David Sheppard:
The situation is undoubtedly tough in Europe right now. We’ve seen over the past, well almost coming up for about 15 months. This started before the invasion, in fact, that Russia started using the energy supplies to try and gain some leverage. We saw them squeeze subtly, surprised last year. That’s obviously ramped up massively in the last few months, particularly since June, when they first cut supplies on the Nord Stream 1 pipeline coming into Germany. And since then, it fallen to just about 20% of what they would’ve been in any normal year. And as Russia was supplying 40% of Europe’s gas prior to the war, that’s a huge volume for Europe to try and replace quickly.
We’ve seen massive price increases, we’ve seen warnings about blackouts come this winter. But right now, well there’s a very real war happening in Ukraine, no doubt, is also in an energy war. And well that’s very much live, we are also in a kind of false period of that. Because until we get to the winter, we don’t know quite how bad things are going to get. Right now energy demand is relatively low in the kind of summer and early autumn months here. The real worry is what happens when we get to winter. And for now, we can’t rule out quite just how bad it might get.
Derek Brower:
Yeah, I’m based in New York and I was in Europe over the summer and I had to really step back a bit and think about how different things feel in Europe. I used to live in Europe, obviously, and I’m from the UK and it really struck me that, in North America right now, we are really quite unaware of just how serious things could get in Europe. The price action has been extreme, I mean that’s the first thing. So natural gas prices, it equivalent of almost $400 a barrel, 10 times what they might be in the US for example. Electricity price is going through the roof. And a real sense on the ground from people thinking, my parents for example, whose utility bills are forecasts to quadruple or were forecast to quadruple before the UK government stepped in. But there’s a real sense on the ground of potential panic, as David said, we don’t know how bad it’s going to get in Europe until the winter sets in. But there are a lot of fear, it feels like a continent is on the precipice of a true energy shock.
Jackie Forrest:
Well, and Derek, you have a unique experience too because you were actually in the Ukraine covering the situation there for the financial times. Can you just tell us a bit about what it was like on the ground there?
Derek Brower:
Yeah, I mean this is the other thing is that, as bad as it is in wealthy Western European economies and is bad, it’s much worse in Ukraine right now. My experience, I was there covering the war for the FT during the summer. It was very hard, obviously, but my impression was that there are basically three wars happening in Ukraine at once. There is the very brutal artillery war that’s being fought in the East. And as Peter said at the outset, as we record right now, Putin is advancing his claims and annexed or declared the annexation of four more areas of Ukraine, 15% of Ukrainian territory. But there’s this one war that’s happening in the East, very brutal, almost first world war style artillery conflict and that is terrible. And then there is an economic war that Russia is waging on Ukraine. It is deliberately targeting, early on in the conflict destroyed its refinery, for example in Kremenchuk, that’s caused fuel shortages. The economy has been decimated or more in past six months or seven months since the invasion. And then there’s a third conflict… Part of the economic conflict by the way, was blockading the ports which was crucial to Ukraine exports. That blockade down in the South and there’s ports in the Black Sea has been lifted, but it’s still very difficult for Ukraine to export stuff. And then there’s been this third conflict which has being waged on the civilian population and that is almost a conflict of terror being accomplished by the constant threat of missile strikes on civilian targets. When I was there, Kyiv was bombarded, I guess, it was bombarded. These are civilian areas. Just today, there was a civilian convoy of trucks struck again, I think another 25 civilians killed.
Ukrainians, even hundreds of miles away from this artillery conflict that’s being waged in the East are living with the threat of a random missile strike that hits a shopping mall or an apartment complex or a sports center. And that’s a real war of terror that the Kremlin is waging on the people of Ukraine. It’s been fascinating to watch and it was fascinating, when I was there to watch how resilient Ukrainians are in the face of it, this with Western support, which has been critical.
Peter Tertzakian:
So multidimensional war, I guess is what you’re saying, Derek. But David, I want to come back to you on the one dimension which is the weaponization of energy and some of the comments you made, some of the perceptions here is that it’s just going to lead to people just being cold or freezing in the winter, but it’s far beyond that because we have entire industries that just cannot afford to operate. And so you it’s like a wholesale shut down of segments of the economy, throwing people out of work. I mean isn’t that the really damaging part of all of this?
David Sheppard:
Potentially, I mean at the moment, I think is important to emphasize that we don’t yet know. And I think I would be surprised if we get to the point for at least in the kind of wealthier Western European countries, if we see people freezing in their homes. There is going to be a pressure, a price pressure, not to turn the heating up as high as it normally would be, to try and conserve that way. But yes, the wider economic fallout of this, definitely coming round because the first place that you see demand come down or demand shut in is generally going to be business and industry, which are less likely to be subsidized by the government. But saying that in the UK, we have effectively, though the government has effectively, agreed to subsidize all energy costs for six months for industry, more like two years for households on the heating and cooling side.
But for industry itself, yes, there is this expectation that there will be a recession. We’ve already seen energy intensive industries shutting down, shutting in or scaling back production, just too expensive or gas price is 10 times what they were. And you’re much more exposed to the wholesale price cause you’re getting that bill comes through pretty much immediately. Households, I mean it’s a hodgepodge of different systems across Europe as to have households actually pay for their energy. Sometimes you’re not feeling that impact of higher prices till three or six months down the line. So it’s less immediate for the average Joe in the street. But the news has been dominated by this. For industry, it’s been happening already for a year or so. And certainly industries like fertilizers, glass making, steel making, anything that use it, its huge amounts of energy as and input cost.
You’ve either had to scale back or find ways to substitute. So we’re seeing a pickup in fuels that we thought were being resigned to history when it comes to generating electricity. Oil burning, for example, coal in the UK which had been run down to almost 0% of the energy mix, is now back again. So it’s challenging. I think very quickly, there is another point, anyone who’s seen what’s happening in the UK in the last week or so, we’ve seen the pound sterling fall to its lowest level in history versus the US dollar. Now that was partly a major political misstep or economic miscalculation by the new Prime Minister and the Chancellor. But the roots of it stemmed from in many ways this energy crisis because you have together such a substantial bailout package for people in homes and businesses that markets have convert. You’re talking £150, £200 billion sterling over the course of the project. It’s a huge sum of money, that’s like an entire year is worth of income tax. It’s like everyone in the UK doesn’t pay income tax for a year. That’s how much it would cost.
Peter Tertzakian:
Wow.
Jackie Forrest:
So, you’re talking about the fact that some people are not going to see it because of government spending money, but the cost to that is the fiscal situation and it gets you through the winter but then there’s the economic cost maybe to the economy due to the fiscal situation.
David Sheppard:
Yeah.
Jackie Forrest:
Well, let’s talk about the big news this week. Nord Stream 1 pipeline, which for, just gives some context, delivers gas from Russia directly to Europe to Germany underwater. And there’s Nord Stream 2, which was a second pipeline that was scheduled to flow gas for the first time around the time of the Russian invasion of the Ukraine. And at that time Germany decided to not put that new pipeline in service. So we have these two conduits that bring a lot of gas right into Germany from Russia. So September 27th, news broke that Nord Stream 1 and 2 both had gas leaks and NATO says this is a sabotage, it’s not an accident.
Now some people are pointing their fingers at Russia saying, ” Well Russia probably sabotaged this important piece of infrastructure that would bring gas to Europe”. I don’t really understand why Russia would want to damage this infrastructure that could bring them economic benefits in the future and gives them leverage. I mean the fact that it operates means that they have leverage that they could turn it back on again. What would be Russia’s motivation do you think, to sabotage this type of infrastructure?
Derek Brower:
First thing to say is that we really don’t know yet, it’s very mysterious. And it does seem extraordinary that Russia would blow its own pipelines up. That said, it’s also extraordinary that Russia would take on the invasion of a neighboring country and commit what seems to be one of the biggest geopolitical blunders in the past couple of decades. We do know that Russia is actively shredding its reputation as a reliable supplier. So doing something this extreme is to blow up the Nord Stream pipeline system, isn’t strictly out of keeping with the way it’s been behaving. I think that it’s possible that there’s almost a scorched earth move by elements within Russia. Perhaps, Putin wants to make sure that if there’s any hint of anybody who would like to settle their conflict and do a deal with Europe in future, that’s off the table, who knows?
You have to look around, it does seem clearly that it was sabotaged. You have to look around at who cui bono, who would benefit from this. Very few people benefit, but probably Russia is the one that’s left standing as the country that can tell Europe yet again that it is in charge of European energy security, not Europeans. And that’s a pretty profound threat, especially just as a new pipeline from Norway has come on stream very close to where the punctures in the pipeline have happened. So it seems to carry some resonance for Russia’s playbook of threatening and reasserting its energy prowess over Europe.
David Sheppard:
I think there’s an element of the Russian playbook being as well, not presuming it is then we don’t know what a hundred percent certainty, but from people I’ve spoken to who understand a lot about the Russian thinking, there’s an element of instilling fear in Europe. They’ve already kind of squeezed the gas supplies, cut them right back. But Europe is still a wealthy continent, overall. And what Europe has done ahead of the winter has been able to buy in lots and lots of LNG that could provide natural gas on seaborn tankers from around the world. Storage levels in Europe have actually got quite high. Gas prices remain extraordinarily high, but not quite as high as they were a month ago. The people were getting a little bit more comfortable that maybe things were going to be okay getting through the winter. And it’s certainly not beyond the Russian playbook start going asymmetric at this stage. Militarily, they don’t want to get in a fight with NATO what we think, certainly hope not, given, they started nuclear status.
Peter Tertzakian:
Yeah.
David Sheppard:
But by doing something like destroying these pipelines, cutting them off. And I agree with Derek, there may be something internal within Russia as well about not wanting to negotiate or have that as an option, that there is an element of fear being instilled. It’s not just the pipeline explosions we’ve seen. There has been lots of reports recently, particularly in Norway and Denmark of unidentified drone sightings near oil and gas rigs, near infrastructure.
ConocoPhillips, huge American company, they’ve come out today, they’re Norwegian branch saying that they’re raising security levels. There have been unidentified drones spotted near some of their own rigs in the Norwegian portion of the North Sea. So you’ve got this sense of fear coming back into the market a little bit in the sense of, “Okay, is Russia sending a warning here? They’ve not been able to squeeze European submission through cutting their own supplies”. What happens though, if other supplies get cut on the winter. Norway is now supplying 25% all the EU’s gas, they’ve replaced Russia is the biggest supply of gas in the EU. These things are vulnerable, they’ve shown that pipelines are vulnerable.
Peter Tertzakian:
Yeah, it’s a full scale energy war as you point on. That’s the gas side of the story. And I think the anti’s going to go up here in December because there’s the oil side as well. And of course, the Europeans are saying we’re not going to buy any more Russian oil after that point and potentially more sanctions and tell us what you think is going to happen in December on the oil side because if the Russians stop flowing oil altogether to Europe, that’s another whole dimension of energy insecurity.
Derek Brower:
Peter, you and David both use the term Energy War and I think we need to realize we are in an energy war with Russia, right now. And I think on the oil side, this may get even more alarming in the coming months. And the way that would work is that Russia reacts to the idea of a price cap. And I’ll just back up, the price cap idea is this idea, proposed by the Treasury Department in the US that importers of Russian oil only pay a certain amount, yet to be determined to buy that oil from Russia. And if they do that, if they agree to this price cap, then they will be exempted from forthcoming bans on insurance provided by European and UK insurers to vessels carrying Russian oil. So it’s a complex way to make sure that there an energy price or an oil price spike when the European embargo starts.
Russia has said, however, that it will not supply oil to the countries that observe this price cap. And the response to the US government has been, “Well, don’t believe everything Russia says and it’ll be in Russia’s interest to keep doing this”, and so on. And I think to link it back to what’s just happened with Nord Stream 1 and 2, what we can see is that Russia isn’t necessarily obeying the rational economic actor argument that might prevail in Yale Economics Department where they decide that a price cap idea might work. Russia is, as David said, pursuing or has the potential to pursue increasingly asymmetric responses in this energy war that we’re fighting. And one of them, we should not discount, one of them is that it may simply cease to supply oil or reduce its supplies of oil to the global market and that will of course deepen the problem that we’re having with energy supply around the world, add to inflationary concerns and so on. It is a very alarming prospect.
Peter Tertzakian:
Yeah, it will come at a time when the strategic petroleum reserves have already been somewhat depleted over the course of the last six months as we’ve been sort of shielding the price escalation potential of the barrel of oil too.
Jackie Forrest:
Yeah, I guess that’s always, there’s still some room there, but yeah, a lot of the extra capacity has gone there. And I think it’s important, this December 5th, there’s two pieces to it. One is that, oil is not supposed to go by sea into Europe. But the bigger one, Derek, that you just kind of referred to is that, ship cannot have Western insurance if it’s carrying Russian oil. So that could really not only affect shipments into Europe, but it could affect countries like India who now can’t get tankers that can bring that oil. So it could create this energy shock to be much broader than just impacting Europeans.
Peter Tertzakian:
Oh, yeah.
Jackie Forrest:
If that means people in India and China can’t get oil either.
Peter Tertzakian:
Well India and China, and I’ve always said, and I think you alluded to it, Derek and David, at the beginning of the podcast, that people outside of Europe don’t fully appreciate the extent of the severity of the situation. And I always tell people here, like eight time zones away, we’re in the land of plenty when it comes to energy and I don’t think we have a full appreciation of the situation, but it will ripple back here. There’s no question in my mind, as the price of natural gas as a potential and oil to go higher, we will start to feel it here for sure, especially in the winter months.
Derek Brower:
And also there’s the prospect, frankly, of a global recession that we haven’t really talked about. But this is, as David said, energy is one of the main factors in inflation and the macroeconomic impacts that are being seen in countries like the UK right now. It’s a key factor in that and a lot of people forecast there’s going to be a global recession in part triggered by the inflation that is partly being caused by energy. And the last thing the world needs right now with that kind of quite gloomy prospect on the horizon is an escalation in oil prices. I mean the one thing you could say is that maybe the prospect of recession, prospect of loss of demand keeps an oil priced spike at bay or maybe the US government, which is very laser like focused on keeping prices down ahead of the midterms, maybe will continue to intervene in some way to stop this happening. But it is definitely a risk.
Peter Tertzakian:
Yeah.
David Sheppard:
I think there’s a challenge as well. Even if Russia thinks, “Okay, we can keep selling to India and China”. The sanctions are not quite as strict as those we’ve seen on countries like Iran. If someone can get a ship and they’re happy to sail it, without insurance or with insurance from a, let’s call it a nontraditional market, it would be that state back to Indian insurance or something similar, that oil in sea can be concealed, but the market seems very sanguine about this right now. The view among a lot of oil traders seem to be, “Hey, they’ll find a way, there’s going to be effectively a gray fleet of old oil tankers consignment what let the oil get out, or the EU is going to roll back in the sanctions in some way because they don’t want price spike and the US is leaning on them”. I’m far from convinced about this.
The thing that a lot of people don’t seem to calculate in, is that for Russia, to historically have sold much of their oil into Europe, it’s a very short journey time. You run a tanker out, you run it back again, it’s a round trip per week, you’re back in a dash, you want to sail that oil to, or not the same distance, far greater distance to India or China, wherever else. It’s not just that one ship is tied up for days. When you’re pumping out, exporting 5 million plus, million barrels of oil every single day, the volume of tankers you need when that journey time goes from a week to two months to sail it all the way around to China. And find at times Russia can use the Northern Sea in the summer months, it can’t in winter. It is a very long way.
So the sheer volume of tankers that get tied up at that point is just massive. And I don’t think, from everything I’ve looked at, there’s little suggests there’s enough tankers that are going to be willing to operate in that gray market, who you’re not having gold plated European levels and insurance and reinsurance and so on.
Peter Tertzakian:
Right.
Jackie Forrest:
Well, and this is why the US is pushing so hard for this cap, so that we can continue to get the Russian oil and not have the disruption. I guess what Derek said, I guess, he’s not so convinced that Russia will go along with it, although up until now they’ve been happy to keep selling oil and they do need money. But like you said, Derek, maybe logic doesn’t prevail here.
Derek Brower:
They do need money, but also beware that they have other ways that they can intervene within the oil market without necessarily cutting their own supply first. First of all, they can for example, shut down the pipeline that comes through Russian territory from Kazakhstan. If you speak to Chevron and Exxon and companies that use that pipeline to get about a million or 1.4 sometimes of oil out of central Asia through Russia to the Black Sea. If you talk to them, they’re actively trying to find other ways to get that oil out because they fear this. Russia’s already shut it down a couple of times in recent months for somewhat spurios reasons. So that’s a lot of oil that can take off the market. It also can intervene and it has used its presence in places like Libya to cause problems and so on. And of course it’s still a member of OPEC Plus where there’s a meeting coming up the day after this podcast goes live, I believe, where OPEC may decide to trim some production, cut production, we don’t know yet, but Russia will have a say in that as well.
David Sheppard:
It’s also the case that, one thing that’s often forgotten in this, as we’ve seen in the European gas market to an extent is you cut supply, oh no, you’ve lost volume. But that price goes up a lot, you can quite easy supplant it. I mean it is basically, the classic OPEC playbook on steroids.
Peter Tertzakian:
Yeah.
David Sheppard:
Lower volumes, higher prices.
Peter Tertzakian:
Yeah.
David Sheppard:
Russia takes out 2 million barrels of David’s production. Okay, maybe that’s not great for a long term, but maybe, en route they take fuel for maintenance and so on. You can just dump a million barrels of old pretty rubbish marginal fuels, taking out 2 million barrels, but the price has gone up 200%. You’re probably still in the money at that point.
Peter Tertzakian:
Yeah, I agree fully. I mean there’s this real sense of naivety about energy security still I think in the western countries and not in Europe. But certainly in North America, I think there’s a lot of naivety. But getting back to tankers, can we talk about LNG tankers for a minute because we have Chancellor Scholz from Germany, jetting around the world, came through Canada looking for LNG, went to the UAE, secured some supply. Can you give us the sense of the state of increased LNG supply to Europe?
Derek Brower:
I’ll start with the US and David can answer about what Europe’s doing on the receiving side. The US has maxed out. It is supplying as much LNGs it can to the global market. Most of that LNG at the moment is going to Europe. US has become, by far the biggest LNG supplier to Europe now. And that’s because Europe’s been bidding for the cargos. But as LNG producers in the US keep reminding me, they don’t own the gas, once it’s set sail, the buyer does. And the buyer sometimes is an Asian buyer or portfolio buyer and they decide where it goes. It just happens to be that the market’s favored Europe lately, partly because of China. China hasn’t been buying as much, so Europe’s been able to buy more American LNG. In terms of capacity expansion, there is some coming, there are a couple of FIDs that happened in the past year, so there is a bit more coming, but not quickly.
There is no more at the moment. The cupboard is bare, in terms of how much more LNG Europe can expect from the US in the short term. Canada will supply a bit more to Asia, ultimately from the West coast. And there will be the resumption of supplies from Freeport, which was struck by fire, the Gulf facility offline from fire, that’s pretty imminent. So that’s a bit of extra supply for Europe. But the long and short of it is, on the supply side, there ain’t much more globally that can be done until the FIDs have been taken lead to supplies that come on stream in 2 or 3, 4, 5 years’ time.
And just my last point about this is that even though Europe is desperate for more natural gas, there isn’t a huge incentive right now for developers or it’s very difficult, let’s put a different way, it’s very difficult for developers still to get financing for projects because there’re still long-term uncertainties about natural gas demand. You look at Driftwood LNG, Charif Souki. Legendary Charif Souki, could not even manage, even in this market, where natural gas prices are so high in Europe and so much cheaper in the US, I.E., there was a classic arbitrage right there. Even the legendary Charif Souki was unable to get the financing to get his huge LNG project across the line. So there’s a problem on the LNG supply side coming down the pipe as well.
Peter Tertzakian:
Yeah. Can you comment on something I didn’t really think about much because of you, in reference to once it’s on a ship, the suppliers don’t own it and it can go anywhere. My understanding is that some of the Asian subcontinent countries, Pakistan and others are upset with Europe because they feel that the European situation and Europeans are driving the price of natural gas so high and there’s sort of almost this anti-European sentiment. Is that what you’re hearing as well?
David Sheppard:
Let’s be quite blunt about this. Europe is taking the LNG that it can because it needs to. They’re doing it at the expense in many ways of rural countries in Asia, a lot of the time. Sometimes that’s just straightforward, we’re prepared to pay more and that’s where the gas is going to flow. Other times it goes a bit further, we have seen trading companies literally agreeing to pay penalties embedded in the contract and say, “Oh sorry, we weren’t able to deliver, so we’ve got to give you 20%, 50% of the contract”, because the price is so high they can get in Europe that they’re essentially saying, “Tough luck guys, we’ll pay that penalty will still make out like bandits”, because that’s how strong the demand is, in Europe right now. Now that’s unfortunate in a lot of ways in the short term, some countries are having real energy troubles right now.
Pakistan for example, we’ve seen which have got enough problems with the floods and so on, you’ve seen. But there is also an environmental question further down the line. We’ve got a bunch of countries that we’re starting to say, “Okay, we’re going to listen to people in the West and we want to try natural gas rather than coal”. Natural gas should be in seaweed, at least when it’s burnt, 50% the CO2 emissions, that we’re seeing coming from burning coal. They’re not going to trust this in the future. So you’re going to issue 5, 10, 20 years down the line, where countries that you were hoping actually they can move on to gas and maybe take some of the gas as Western countries move even faster towards renewables and other forms of cleaner energy who are just going to say, “That’s not for us. We’ve tried it and frankly we got screwed over. So we’re more likely just to stick with coal for just now. Thank you very much indeed.”
Jackie Forrest:
Yeah, and David, I think you’re going to see the implications here right away. We have this November climate meeting coming in Egypt. All these countries that are being told they need to reduce their emissions. Meanwhile, Europe’s happy to steal all the natural gas and I think it’s going to affect cooperation on climate issues. And you’re going to see that probably more near term and it’s going to have longer term impacts.
Derek Brower:
It’s not just that actually, Jackie, because… I hundred percent agree, people look at Europe and they see hypocrisy, essentially. The European Investment Bank has just reiterated that it won’t fund fossil fuel projects in the rest of the world while Europe’s taking the rest of the world’s natural gas when it can and also is reactivating its own coal fired power stations. It’s pretty extraordinary that Europeans are still, for very laudable reasons, they want to fight this climate battle as well. But they’re still telling poorer countries that they can’t use the same kind of energy that Europeans themselves are using at the moment.
Jackie Forrest:
Well let’s go back a little bit to some of the longer term impacts, but David, you talked at the beginning about how hard it is on people in Europe households and businesses and that the governments are shielding this by putting on price cap. Well, there’s lots of different policies being talked about putting price caps or subsidies in place and this is going to cost the European governments hundreds of billions of dollars. When the real solution to this is really to move more quickly to clean energy and get off fossil fuels. Do you think that these hundreds of billions of dollars that are being invested, they’re kind of counterproductive in a couple ways.
One is, they take away the price signal and so demand would be higher because consumers aren’t seeing the high prices. But also they take money away from some of the longer term solutions. Like for instance, if those hundreds of billions of dollars went into putting new windows and insulation in every house in the UK, for decades to come, we’d be saving more energy. Can you contrast a little bit, is that the right solution giving the subsidies or is it better to put that money into accelerating the clean energy?
David Sheppard:
I think it’s both, certainly. I mean that’s the political reality of this. The energy crisis is so acute that I do believe that governments needed to act, they didn’t really have an option. The damage to the economy, they damaged the household finances, was going to be so great that they had to act. But it is also true that yes, in an ideal kind of world, you wouldn’t be subsidizing very expensive fossil fuels right now. That money better to be spent on trying to move towards… Well, yeah, first of all, greater efficiency, the quickest way to reduce your demand for highly including very expensive fossil fuels. But also to build out the green infrastructure and other clean forms of energy, be that nuclear, whatever countries focus on to get away from importing fossil fuels long term.
Now the issue is that the governments, as they often have to, are trying to ride two horses at once here, and that creates its own problems. We have seen commitments, particularly in the EU, to invest more in renewables. We have seen in the UK to an extent, renewables, nuclear, though they’re also pushing on fossil fuels again, which some people are quite upset about thinking, “Look, there’s no way that the UK can drill their way out of this mess really”. So why bother? You’ve got to focus on what the future is, not what the past was. So yeah, it’s complicated, right? You’ve got a short term issue that governments have to address and that is, people simply cannot afford to heat their homes, have the lights on, to have the normal functioning of an economy.
Peter Tertzakian:
Yeah.
David Sheppard:
You do risk in that, exacerbating the problem, both by having demand be higher than otherwise would be, and by tying up money, hundreds of billions that could have been used to do the better thing. I think part of the lesson here is, for other countries, for other regions is, do it now, don’t be waiting until you’re in the crisis. Because when you’re in the crisis, that money’s going to have to go to solving the short term problem. You want to invest now and find ways to reduce your reliance on very expensive, very volatile fossil fuels that you probably do not control the flow of globally, so that you’re not exposed that way.
Peter Tertzakian:
I mean, there seems to be an increasing clash between climate hawks who say “No fossil fuels”, and those on the ground basically are pleading for energy security and affordability. And so that’s happening on a high level, on a policy level, but on the ground it’s happening amongst the people. And if we go back to June 2022, Vladimir Putin spoke at the St. Petersburg International Economic Forum. And basically, at that forum he predicted that Europe will have a wave of populism, a shift to the right as people can’t handle the affordability and just basically want regime change. We, I think, saw that it’s to be determined exactly how it’s going to manifest itself in Italy with the election of George Meloni. What is the sentiment politically in Europe? Is Italy just a one off or are we going to see more radical politics as a consequence of this in Europe?
David Sheppard:
It’s certainly possible that it isn’t just a one off. We see, whenever you get an economic crisis and then, oh, this is an energy crisis, it’s rapidly becoming an economic crisis too, that people will look for sometimes dangerous solutions. We’ve seen that time and again throughout history. So there is a risk there and that’s part of what person’s trying to achieve. I mean, he has the advantage of not really needing to worry about being voted in terror. He can turn around and say to the countries that are, to be fair, quite steadfastly opposing them in Europe despite paying their facing and say, “Well, that’s great, but you might not be in office in six months time, I will be, almost certainly”. Now that’s maybe a little bit less certain than it was a few months ago, but it’s still the way he views the world, I think.
Derek Brower:
Yeah, I think, if you look at the polling, what’s surprising actually is that, a lot of these countries haven’t yet turned against the idea of supporting Ukraine, for example, which is what some people expected. The polling in Germany, for example, says that they wish the German government or some of the polling does anyway, I wish the German government a bit more engaged with Ukraine and so on. There isn’t actually evidence that they’re turning back from support for Ukraine, if that’s a proxy for the wider debate about energy. There is, I think a lot of media chats, especially in right-wing media about renewable energy being to blame for somehow for this crisis of fossil fuel supply and so on. But even that seems to have died down a bit recently. In the US, I think that debate is alive as well, but the US government actually seems somewhat cleverly to have ridden both horses, as David described it.
They have achieved this huge clean energy plan through the IRA, the Inflation Reduction Act, and they’ve also managed, whether they can be totally credited with this or not, to drive down gasoline prices in the US bit in recent months. And so there seems to be slightly more chance that they come through this. Of course, the energy crisis in the US and Canada is nothing compared with what Europeans are going through, but it is a place where this debate about whether the world can bank on fossil fuels or renewable energy to secure their energy is playing out as well. Just in a slightly different way.
David Sheppard:
It’s very noticeable to me, that when this debate comes up with being my mentions on Twitter or emails I get sent by readers, it’s often the North American side for the ones who are really playing out this, “Green energy is to blame, this is our future if we follow you down this path”. And it’s like, “Guys, look the numbers”, the numbers do not suggest that clean energy, which is actually producing more and every other supplier of gas and everything else except for Russia, is producing more than they were in 2019 or 2020. So there is a bit of a false narrative that is revolved around this. Don’t get me wrong, Europe has messed up big time here, in a massive way, by allowing themselves to be so reliant on Russia. And part of that did feed into the idea that, “Oh, we can invest in renewables and other things because we’ve got a safe supply of gas that will keep coming no matter what.”
But the idea that this is somehow that this energy price is the fault of wind farms or investments in solar, it’s for the birds, it does not make sense. The numbers… Anyone who’s in the industry that looks at that, does not think so. I have to say thankfully, governments of most political stripes in Europe have largely come out still seeing they’re going to push on with building out renewables, building out net zero targets and getting to that point. Nuclear will see a comeback too, I’m pretty certain on that. That’s the kind of slightly tougher approach you like, but that takes a long time, while we are in a scenario whereby you can add a lot of wind, a lot of solar very quickly, and versus the fossil fuel prices we’re seeing right now, it’s still looks relatively cheap.
Jackie Forrest:
All right. Well, we’re coming up to the end. This has been a fascinating conversation. One last question very quickly is, what is the European view of Canada as it relates to them as an energy supplier?
David Sheppard:
In terms of Canada, I think most people in Europe, it’s not too on the radar right now, Canada so much. Yes, Germany has been visiting and talking about potential LNG supplies and so on, but because it’s not in a position right at this moment to be sending large amounts of LNG to Europe, it’s not as much a part of the conversation right now. For the most parts, Europe continues to look at Canada as it normally look at Canada as the slightly more sane version of the Southern neighbor.
Derek Brower:
I think also one of the point on this is I think, among European politicians, there has been a different tack in that, there’s an appreciation that I think energy security is really paramount now, and that does involve in all of the above solution, doesn’t just involve renewables, involves everything. And so to that extent, I think they look across at North America in general, and I include Canada in that as a potential friendly energy supplier that they need. I think the days when they were beating up Canada for about to erect new barriers to buying oil from Canada, I think those days are probably passed, frankly. And if they could get more LNG from Canada, they would bite the handoff, whichever developer in Canada could get the LNG to them, its just they know that there isn’t a pipeline out to these coast right now that could feed an LNG export plant.
Just look at what Frans Timmermans said when he was in New York last week for the General Assembly, Frans Timmermans being the Vice President of the European Commission. He said, “Don’t Americans, please”, I would extend this to all of North Americans. “Please keep, we need your LNG. Don’t be put off by other plans to hold back on LNG supply or to contain or constrain your exports. We need your LNG”. That kind of picks up on the mood of European politicians right now. They’re desperate for whatever energy they can get. And if Canada could supply it, they would be, as I say, they’d be extremely happy indeed.
Peter Tertzakian:
Well, it’s been a very sobering discussion. Thank you so much from the Financial Times, Derek Brower and David Sheppard. It’s really important for us to hear in our audience, the physical and grim realities of the war that’s happening in Europe and Ukraine. But also, the broader economic energy war that we discussed. I’ll be heading over to Europe next week to see myself firsthand what’s happening there and you’ve certainly given me advanced insights. We hope to connect with you again maybe in a few months, just to hear what’s happening in the middle of winter when I think it’s going to get quite difficult, but we hope not. And until then, we wish you both very well and thank you again for being on our program.
Derek Brower:
Thank you.
David Sheppard:
Thank You.
Jackie Forrest:
Thanks again, and thanks to our listeners, if you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
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