“The strongest of all warriors are these two: time and patience.”
Ukraine is giving the media their next Covid-level dose of excitement, but highlights just how quickly events creep up on markets. Unwise decisions years ago by western governments in terms of energy security and global priorities have created the current crisis. It will have massive effects on energy transition, global growth and bodes ill for European stability.
The Unstable World of The Geopolitics of Energy
One of the services offered by the Morning Porridge is to worry about stuff you maybe aren’t worrying enough about… Markets are fixated on day-to-day noise, so it’s sometimes easy to miss the big stuff – especially when it’s remained out of sight, festering over the horizon and unnoticed until comparatively recently.
It was just a few months ago I warned Energy Security was the critical stress point for the global economy in a Porridge Special – The Looming Energy Crisis: People Are Going to Die This Winter. Since September 2021 that Energy Security narrative has come to dominate the threat board. Now it is morphing into a geopolitical crisis for the West; across relationships across the Atlantic and within Europe – and has long term consequences for climate-change energy transition, the stability of the Euro, and global growth.
The Geopolitics of Energy, of which the Nord2 pipeline is just a footnote, are perhaps a bigger threat to market stability than Ukraine, Inflation or Rates. These are binary problems – but the repercussions of a breakdown in the Global economy’s traditional order, the relationships between Europe and the US as highlighted by current unravelling crisis, is something we haven’t seen in decades.
In terms of energy transition, we blithely assumed we could build windfarms, solar power and shut down fossil fuel overnight. Wrong. It’s a 30-50 year process for which the West has done almost zero planning. And as for wind farms – well, the latest climate data shows wind speeds have fallen significantly (10-15%) over the last 20 years, and are predicted to fall further.
The current gas price spike highlights energy insecurity and potential fracture points in the closely connected global economy. These have massive implications for future growth and alignment, and how global markets develop and reopen. As ever it’s a case of consequences, consequences, but I will caveat it with my No2 market mantra: “Things are never as bad as you fear, but seldom as good as you hope.”
There are two sides to every divorce…
Generally, Americans are staggered at just how stupid European nations have been in their energy policies, furious they have engaged directly with Putin’s Russia, and have abandoned the shared vision with the USA of Democracy and Capitalism that has been was so successful since the war.
The key culprits are perceived as Europe’s two leading nations – while both have failed to secure their energy, the French are playing up their diplomatic pretentions by setting up Europe to deal direct with Russia sans USA, and the Germans are playing their own naked self-interest with both Russia and China. Oh, and blame the Brits for pulling out and destabilising the whole thing..
Americans tend to believe the perfidious Europeans have betrayed their holy alliance with the USA.
Bollchocks says Europe..
They blame the disintegrating Atlantic Alliance on America. It’s Europe feeling betrayed by the USA. Successive US administrations have left Europe marginalised. Bush regarded them as second tier allies to be bullied. Obama’s Asia pivot proved he was disinterested in the continent. Trump was downright rude and insulting, which Germany and France particularly will never forget. Biden looks weak. He will likely be followed by some iteration of Trump version 2.0 – which will spell deeper aggressive protectionism and the de-facto end of the Atlantic alliance.
Game, set and match to China and Russia?
It could all have been so different….
In the 2010s I wrote about how the shale and fracking revolution raised the prospect of the US becoming a net exporter of cheap oil and gas. That could have heralded a major strengthening of relationships across the pond, and become a key positive factor for European growth freed from reliance on less worthy suppliers. In her role as Obama’s Secretary of State Hillary Clinton pushed hard for European Energy Security – and many European states including Spain, the UK, Poland and France built new LNG regassification import facilities – but plans to develop LNG as a key strategic resource never really developed.
Of course, it doesn’t help that Angela Merkel doomed Germany to energy insecurity by shutting Nuclear power, and disinvested Germany from the LNG project in favour of Russian gas, leaving Germany now dependant on firing up coal stations. (The Brits aren’t much better, deciding to trust energy security to the market rather than maintain gas storage facilities.) Today, its doesn’t help that Germany’s new government has the political maturity of a 3 year old child – with little commonality on priorities between the parties.
Ukraine is the epicentre as the tectonics of energy politics shift. Call it blackmail, or call it business.. but Russia doesn’t need Europe’s gas market.. its got a willing new partner in China. Long-term no one hates socialists as much as socialists, so I don’t expect the Russia/China partnership to last long… but long enough to change the world, and cause ructions in the West.
Like all unanticipated consequences, we haven’t figured out just how significant the breakdown in Energy politics between Europe and the US could prove to be.
Even more worrying is the fault lines Germany and energy security have exposed within Europe. Whatever Brussels thinks there is no consensus among the nations of the European Union on basic matters such as common voice in diplomacy, and certainly not in Energy Security. It’s exposed the problem at the core of Europe: Europe needs to speak with a single clear voice, but no nation is willing to compromise its Sovereignty.
The only commonality between Euro members is their apparent ability to get their energy security wrong. There is very little alignment on trade policy either – meaning Germany is dancing to its own tunes with China and Russia, while other nations don’t have a clue what happens next. UK arms shipments to Ukraine are being flown around Germany just in case the new German traffic light government coalition gets upset at the prospect of upsetting Russia… The Ukrainians will be very greatful for 5000 second hand Landwehr helmets.
Europe was always unfinished business, but the hope was that since the European Sovereign Debt crisis 10-years ago, and the success of ECB head Mario Draghi’s “do whatever it takes” policies, the continent was coming together in a workable consensus fashion. Instead, it’s more likely we see fault-lines widen.
This year all the inconsistencies at the heart of the European problem will likely be exposed. Especially in debt. Brussels is flexing its muscles over its control of European financial sovereignty – making clear to financial wastrels like Italy that access to European bailout/recovery funds come at a cost of meeting Brussel’s targets.
Italy has increased it’s national debt by 21% over the past two years despite promising to reduce it. Greece is up 20%, while Spain’s debt grew by 26%. In Italy’s case youth unemployment remains over 25% with the full unemployment level stuck at 10% in a no-growth economy where the size of the untaxed black economy is over Euro189 bln! Nothing is fixed – and Germany remains unwilling to pay Italian and French pensions, and will insist on higher rates and austerity.
Last night I watched hours of pre-match analysis on the coming Ukraine/Russia war. Scary stuff.. and it struck me very clearly.. Putin doesn’t need to invade Ukraine. The damage is done.