“There are three bodies no sensible man directly challenges: the Roman Catholic Church, the Brigade of Guards and the National Union of Mineworkers”
Unfortunately, Europe now potentially faces an argument with its leading gas supplier as the Ukraine stand-off continues. Russia supplies around 30% of Europe’s gas demand each year (155 bcm), and more than half of this transits through the Ukraine into Europe (82 bcm).
There is no immediate threat. But last month, Russia threatened to cut off gas supplies to the Ukraine itself in a row over unpaid bills. It has now suggested these bills total $22bn, instead of the initial figure of $2bn.
The map above from the Financial Times highlights the potential difficulty this could cause:
- Those countries marked in red depend on Russia for >75% of their gas needs
- Turkey and Greece depend on her for 50%-75%
- Germany, Italy and the other orange-coloured countries depend on her for 25%-50%
- Even France and the Netherlands have some dependence
Of course, no threats have yet been made about these supplies. That would make little sense during the summer period, when gas purchases are seasonally low. But if the Ukraine issues remain unsolved, who knows what might happen as we move into autumn.
For the moment, Europe is busy increasing its storage of gas, with 38bcm already in tank, 48% of the possible total. And it is looking to increase LNG imports, with Lithuania and Poland both investing in new receiving terminals.
But Russia’s gas volumes are simply too large to be easily or quickly replaced. Whilst replacement will also not be cheap – current world market prices are high due to Japan’s decision to shutdown its nuclear facilities after the Fukushima tragedy. At the moment, Europe pays around $11/MMBTU, whilst Asian prices are $15/MMBTU.
Of course, shale gas might enable Europe to become self-sufficient in gas over time. But several countries have already allowed environmental politics to ban this option, whilst early exploration work in Poland has disappointed.
And, of course, there is also the question of Russia’s oil supplies. Central Europe is particularly dependent on these due to the pipeline legacy from communist days. But Western Europe couldn’t manage without Russian cargoes.
As Hyman Minsky warned long ago, too much stability creates complacency. And it is 40 years since the last major disruption on oil markets – when the Arab oil embargo led to motorists queuing for hours for gasoline in some major countries, including the USA:
- Its very easy to worry about possible risks from fracking when your home is warm, and the transport system is working normally
- But its too late to worry about finding alternate sources in the winter, if your major source of supply has just been cut off
As the blog has noted before, oil markets have drawn out probably the largest ever triangle shape over the past 5 years. The bulls and the bears have fought themselves to a standstill, and are exhausted. So the next price move is likely to be violent, either up or down.
China’s slowdown is most likely to be the catalyst for a price fall. But prices would almost certainly go up, and by a large amount, if markets start to worry that Europe could be held hostage over energy supplies later this year.