Posted on 09/06/2022 8:33:25 PM PDT by SeekAndFind
What is the scale of the energy challenge?
We got a very shocking sense of the staggering numbers involved in the existential, crippling European crisis earlier today when Norwegian energy giant Equinor echoed what Zoltan Pozsar said in March, warning that “European energy trading risks grinding to a halt unless governments extend liquidity to cover margin calls of at least $1.5 trillion." As Bloomberg put it, in its best non-Zoltan imitation, "aside from inflating bills and fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s putting pressure on European Union officials to intervene to prevent energy markets from stalling."
“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 company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.””
In other words, massive amounts of newly-printed funding (because with yields blowing up, Europe's fiscal stimulus will be over before it started unless central banks step in and backstop the latest energy hyperinflation bailout plans) will be required to avert an energy disaster. Alas, the final number will be even more massive, because overnight Goldman's research team published a must read note (available to pro subs), in which the bank looked at the scale of the energy bill challenge, potential European government responses and industry implications, and quantified the total damage. The numbers are staggering:
According to Goldman, Italian household energy bills could rise from ~€150 to ~€600 in 2023. Some more details:
"For most families and industrial customers, energy bills are renegotiated every twelve months; on our estimates, energy bills for most consumers will peak this winter. We estimate a c.€500/month cost for power and gas currently, implying a c.200% increase vs. 2021 when average bills were c.€160/month. Energy bills could approach €600/month in a zero flows (from Russia) scenario we believe (see here for more on this zero flows scenario). "
The trigger for this exponential surge in costs: since January 2020, 1-year forward gas and power prices – usually the reference when signing new energy supply contracts for families or industrial customers – have each increased by more than 13x. The following exhibit shows this evolution, rebased to 100.
For Europe as a whole, this would be equivalent to a near €2 TRILLION increase in gas and power spending (equivalent to c.15% of GDP).
Goldman next calculates that if current 1-year forward prices remain unchanged for the coming six months, supply contract renegotiations would lift the EU's power and gas unitary bills by c.200%, vs. 2021. As a reference, the exhibits below show (using Italy as an example) the unitary cost of energy (€/MWh) evolution of gas and electricity, for both industrial users and households.
In this nightmare scenario, Energy bills would constitute over 20% of EU household gross disposable income.
The next table shows a sensitivity analysis in the surge in energy bills for Europe, depending on the development of gas and power prices.
And while Goldman does not say it, the biggest winner from this historic transfer of wealth - one which sees Europe's standard of living implode as disposable income evaporates going instead into staples like power and heat... is none other than Vladimir Putin.
But we already knew that: last weekend Credit Suisse repo guru Zoltan Poszar published what may have been the most insightful snippet of the entire European energy crisis (to date) when he extended the infamous "Minsky Moment" framework to Europe, and specifically Germany, which he said "can’t cover its payments without Russian gas and the government is asking citizens to conserve energy to leave more for industry." He then elaborated that "Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage: in Germany, $2 trillion of value added depends on $20 billion of gas from Russia… …that’s 100-times leverage – much more than Lehman’s."
Guess what: Russian gas will never cost $20 billion again, and meanwhile the margin call on that 100x leverage is now due.
So what solutions could governments use to cushion the consumer hit in Europe? According to Goldman, two come to mind:
Windfall tax on European utilities would have very little impact (only €30bn of income per year).
Price caps in power generation would be more effective and could save €650bn p/a. This is based on fact that a large part of power generation costs less than the marginal source of energy. These could follow the example set in Spain, where there are two co-existing caps:
But price caps would not fully solve the affordability issue, as the increase in gas and power bills would still be +€1.3 tn, or c.10% of GDP on the team’s estimates.
This is why Goldman believes that the introduction of a "tariff deficit" might eventually be needed, to spread the recent spike in bills over 10-20 years, and allowing the Utilities to securitize promptly these future payments. Although this scheme would limit demand destruction, it would smooth the increase in tariffs, limit the near-term decline in industrial production, and largely defuse regulatory risk.
Whatever the band aid solution that is applied, however, the reality is grim. And while we wait for the latest Zoltan note to quanity it in a way only he can, the math is simple: Europe can't print more nat gas, oil, coal, etc, so one way or another, it will have to offset the surge in costs, first in commodities and then in all downstream chains, which in the very near future will mean governments will soon be subsidizing Europe's cost of living as the alternative is a violent revolution. In short: we are about to see the printers go brrrr like never before, if only to prevent Europeans from going brrrr this winter...
Much more in the full Goldman note available to pro subs.
I support Ukraine but this is where the EU would have to come to their senses and come to terms with the Russians. They’ll drop their sanctions in return they get to buy Russian gas. Otherwise, it’s lights out in the EU.
Green lunacy leads to the collapse of civilization. If Europe had not abandoned coal and nuclear powered electricity over the past fifteen years, this crisis would not have happened. People will not only suffer but they will die.
The EU is going down the Euro used to be worth 1 dollar and 12 cents not too many months ago now it’s 1.01 euros to a dollar.
The Greenies need to be lynched. This is criminal.
Went down 20 cents in less than a year.
Why can’t they just eat cake?
If only they had installed more windmills and solar cells.
You got it. They have bought the green lunacy hook, line and sinker and are going to pay dearly. On top of it, the green kooks are working to shut down meat production because of nitrogen emissions. A huge amount of energy goes into food production and a huge amount of natural gas is used to make urea to fertilize crops. They are going to face a triple-whammy with skyrocketing energy prices, skyrocketing fertilizer prices, and government efforts to put lots of farmers out of business.
Could this finally lead to a real revolution of the people against the idiotic elites?
Heat or eat.
Aren’t sanctions wonderful?
/s
Peasant revolts have seldom ended well.
That’s right and it equals EVIL.
Will Reach 20% Of Disposable IncomeCancel Netflix - LoL!
Gee...recreation through procreation.
That could end the non-Muslim “declining birthrate” problem!
stupid is supposed to hurt
Don’t they have a lot of trees? Pellet stoves are a great, efficient heat source.
“ Why can’t they just eat cake?”
The Germans are talking about firing up their nukes and burning brown coal, and they’ve entered into negotiations with the French to buy Nuke electricity.
HAHAHAHAHAHAHA!!!!!!!!!!!
Watched German TV 2 nights ago...they were interviewing people who got the ‘increase’ letters from the natural gas provider.
So here was a well-to-do retiree (probably 80) and his wife (mid-60s), with a 160 sq meter home (roughly 1700 sq feet). By German standards, it’s huge...three times the space of a normal retired couple. His warning letter said the quarterly pre-pay amount will add up to around 9,000 Euro (roughly $9k). They had been expecting something in the 2,000 Euro range. They stood there in total shock.
Moderator then went to two other couples...in each case, the yearly amount was going to be three times what they paid last year.
They will survive the winter, but you can forecast zero vacations for 2023’s summer, new car sales to halt next year, and mega-recession (unlike the current inflation period). Here’s the ‘cherry’ for the cake...the same thing will repeat in 2023’s winter.
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