Russia has essentially cut off gas to Europe by claiming the Nord Stream One’s turbine is broken, magically, right before winter, according to Putin. 

Russian gas shipments, which Germany is particularly dependent on, have fallen 89% since last year. And the price of liquefied natural gas in Europe is four times that of a year ago and eight times the level of the US. This is the highest power prices have been in three decades. France's 56 nuclear power plants are running at half strength because of shutdowns over corrosion problems. And droughts have undermined hydroelectric power.

Since there's a limited supply of energy in a normal year, fluctuations of around 5%, 10% or 15% can be dealt with, but we are talking about 40% of energy being cut, which is a massive, massive problem. 

Heating and cooling demand is linearly tied to the number of degrees above or below 65 Fahrenheit on average. And so as the temperature goes above 65, people turn air conditioners on. As the temperature goes below 65, they turn their heaters on. So there's a linear demand for power consumption. 

There are three ways to mitigate a crisis. Number one is you can either cut base load, which is lighting and basic kind of operations. Number two is cut industrial production, which is already happening. A lot of fertilizer plants are shutting down in countries that are dependent on natural gas. And number three is heating and cooling. And that really ends up being kind of a market driven function, which is people asking “how pricey is this stuff?”

There will be significant price climbs for the kind of variable demand in heating and cooling. But for the price to go up by this amount is unbearable by the average household, the average small business or the average small building. It will cause critical failure across the economy, across the currencies, across debt markets. And there's real concern that ultimately it will be shutting off 40% of the energy supply to the continent leading into winter. 

This winter, there will be energy demand spikes because of the need for heating. So there's the cataclysmic problem of people actually being able to heat their homes. There's the industrial problem of parts of the economy shutting down. And then there's the currency problem of the governments needing to step in and bail out industries, buy super expensive gas, give it to their citizens and their businesses at a discounted price, and seeing their national and sovereign debt skyrocket, which is now expected to happen. 

And as a result, the British pound is trading at its lowest level since 1985. People are rushing to the street from Prague to Cologne and even in London, proclaiming that the governments aren't doing enough. They demand to stall the rate of inflation to make energy prices cheaper through government subsidies. Citizens are saying, “end this war now, get to the table with Russia, come up with a settlement and get the heck out of the Ukraine”. By the way, that's not everyone saying it, just to be clear, but there is this rising rioting protesting behavior happening across Europe, particularly in Eastern Europe, as a result of the Ukraine war. 

They're acutely feeling the effect and they're saying, "we need to stop this war now. We need to get out of the way. We need to let Russia turn the gas pipeline back on and we need to figure out a resolution, stop supporting Ukraine". And that's a voice that did not exist very loudly in the beginning and it's starting to swell. 

Firstly, an entire continent essentially allowed a 16 year old girl to dictate their energy policy. And when Greta Thunberg was able to shame an entire continent into basically walking away from nuclear, it put Europe in an incredibly fragile position. And at the beginning of this war, it wasn't clear how much damage the lack of Russian energy would do to the European economy, but now it's absolutely clear. 

The problem is you had these two goofballs. You had a goofball on the left, which was a 16 year old girl who knew nothing, and you had a goofball on the right, which is Trump, whose language turned people off, even though the message that he was delivering was 100% right. When Trump went to the United Nations, he was clear and right about the German reliance on Russian gas and the European reliance on gas not being a good dynamic. 

What we essentially did, what the entire world did, was turn a blind eye to science and turn a blind eye to mathematics and simple understanding of supply and demand. And so now you have the situation where the entire continent of Europe is probably on the precipice of failure. 

It has forced the Russian endgame. Which is essentially the following; Germany will probably be the first to capitulate, but it'll be a combination of the United States and Europe to negotiate some kind of a settlement. They have to fold. And the reason the settlement is necessary is because you are going to start to impact tens of millions of people's lives in an incredibly arduous way, and those people are asking their leaders to tell them why it's worth it. That's why you're seeing protests all around Europe. 

They need heat. People can't freeze to death in Germany, so they're going to have to fold in some way. Sure, you could reduce consumption by 10%, maybe 25%. That does seem reasonable, but there's still a huge gap here. 

There's a good report by Goldman Sachs called “Europe's Energy Crisis is at a Tipping Point”. This came out on September 8, and it says here that the price of natural gas in Europe used to just be €20 per megawatt hour. It's now above 200. So we're at ten times the ten year average in the market and winter isn't even here. So Europe is the Titanic, winter is the iceberg. The main difference between this and the Titanic is that everyone can see the iceberg and yet no one is really changing course. 

Liz Trust, the new Prime Minister of the UK, said that Ukraine can depend on the UK for support in the long term. Olaf Schultz said that Germany will support Ukraine for as long as it takes. Macron from France said that NATO will stand together and prevent Russia from winning the war. So leader after leader is doing the opposite of trying to figure out a compromise. 

So the fact of the matter is that the European leaders are increasingly out of touch with their own people. The agenda they are serving is not the agenda or the desire of their people to basically stay warm in the winter or pay reasonable energy bills. They are serving this larger foreign policy agenda. 

The problem is the stupidity of Western leaders and not thinking there's going to be retaliation. All you're hearing right now from Western leaders is indignation that Russia would cut off gas. 

Meanwhile, look at what we've done: you've got administration officials talking about the fact that we have commandos on the ground in Ukraine. You've got administration officials bragging about the fact that we are helping to paint targets on the backs of Russian generals so they can be killed. You have administration officials boasting about providing the artillery spotting so we could sink the Russian flagship. You've got Biden saying that Putin cannot remain in power. You've got Lindsey Graham saying that he needs to be assassinated like Caesar.  

What did you expect was going to happen? It was imminently predictable that the Russians were going to turn off European gas and create this crisis. 

What I think you'll see over the next couple of months, particularly because winter is coming, is there's going to be a lot of saving face. I think that Putin's plan is to go as far and as deep as he can into Ukraine so that he could eventually negotiate himself back out in a way that leaves him with what he originally wanted in the first place. And I think that there are certain strategic regions and assets that it's pretty clear and evident he wanted. And if he's gotten enough, in addition to that, he can give up even more so the sanctions are lifted and he can turn the gas back on. 

And then the face saving will be from the west, “hey, we got him to give up this”, “we got him to agree to non incursion”, “we got him out of there”. “We did it, we won!” Meanwhile, Putin will be smiling because he got exactly what he wanted. I think that's where this is all going to end up over the next several months, and if it doesn't there's going to be significant writing and civil unrest in Europe. 

There will be a significant economic effect because so much of Germany and so much of the broader continent is dependent on a stable low cost energy supply for the production of things. And if those things can't be produced profitably because the market won't pay for it, the economy will be shattered, and people will be really unhappy. Food will climb and the currency will be destroyed. And you know what happens when currencies get destroyed. All imports become inflated in price, and then you have inflation. If there isn't a resolution in the next few weeks, there will be civil unrest, there will be a really cataclysmic issue concerning economic effect. 

We are going to have to plow so much money into Ukraine to make them feel OK about what we're going to ask them to do in order to remove or to end the crisis. And so there's going to be a huge investment in Ukraine. 

At the end of the day, when you're in a position of comfort, you can focus on moral attributes and ethical perspectives that matter. But the minute that you are affected at home, where you cannot take care of your children or heat your house, all bets are off. 

Society is fragile, and if people can’t keep their kids warm, all hell breaks loose. This just goes to show you that if you're going to engage in proactive foreign policy, you need to make sure that domestically, you don't have any Achilles heels. And Europe had a massive Achilles heels, which is energy.

Western Allies are leading Europe towards a collapse

0 Comments