🔋Natural Gas Paradox

US and European contradictions lie at the heart of the European energy crisis and empower Russia.

Jul 20, 2022

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LNG Exports May Rise as Russia Invasion Creates Demand - Bloomberg — Bloomberg

Natural Gas

The Russia Ukraine war has acted as a major disruption to the entire world, let alone the people experiencing war in their own countries. A hot debate has been sparked as to what share of the blame the energy crisis in Europe is due to Russia’s invasion, the subsequent sanctions by Europe, and the energy transition to renewable energy. I get very skeptical when single source explanations are provided for things as complex and damaging as an energy crisis in Europe (i.e it’s Putin’s fault or it’s renewables fault). To what share the blame is to be placed is not my job, nor my aim. I am merely here this week to discuss the problems and strange dynamics going on in the natural gas market.

Natural gas, albeit a greenhouse gas emitting fossil fuel itself, has done the most of any technology or energy source in abating fossil fuel emissions. Since the shale revolution first began at the turn of the century, natural gas has been expeditiously displacing coal use in the United States as a primary energy source.

When natural gas (methane) is burned, it reacts with oxygen to form carbon dioxide and water. It is a much cleaner fuel source than burning coal or oil. As natural gas became a larger share of energy production, annual carbon dioxide emissions have decreased substantially. Methane leaking before it is burned is a problem as methane is a more potent greenhouse gas and takes away some of the benefit of natural gas, but this can be improved with better procedures in place. Furthermore, the coal emissions that were reduced in the US were largely outsourced to other countries like China with less environmental regulations, so the emissions are still occurring.

European Energy Crisis

The European energy crisis is a terrible situation and unfortunately could’ve been avoided. We are seeing and will continue to see people pay the price for foolish government policy as the summer turns to winter and as Russia gains further leverage as energy supply globally is further constrained. Germany for example has seen electricity prices 10x (and 3x even before the Russian invasion of Ukraine). Germany gets roughly half of their energy from renewable sources, 13% from nuclear, and the rest from fossil fuels. In effort to reduce emissions they have been one of the most progressive countries to deploy wind and solar. Furthermore, they are an anti-nuclear nation which has shut three nuclear plants recently, and is debating closing the remaining three. They are finding out that their outsized share of renewables has not acted as a stable source of electricity amidst the current geopolitical climate seen by the drastic price increase. Due to the shortcomings of their fleet of renewables along with attempts to sanction Russian oil and gas whom they’ve become entirely dependent, Germany is re-starting coal powerplants to provide energy for the nation.

As discussed above, coal is a worse fuel than natural gas in terms of greenhouse gas emissions. Pair that with shutting down nuclear and Germany is having a hard time continuing the emissions reductions they have seen over the last decade. Check out this article on an in depth look at the German situation.

As economics tells us, price increases are due to increased demand and/or lower supply. Mixed with an increase in demand post covid lockdowns, countries around the world are now realizing the realities of a lack of capital investiture in energy infrastructure over the past decade. This undersupply of key commodities mixed with ill-informed policies have done things like raise prices of oil, gas, and food and give Putin the leverage and financial ability to fund his Ukraine invasion. On the bright side, Japan has decided to introduce nine new nuclear plants while Belgium and Germany are postponing the shutdown of theirs.

European Natural Gas

In an effort to help Europe in their effort to sanction Russia and not use Russian oil and gas, the United States has promised to help supply liquefied natural gas (LNG) to Europe to offset what they need. The problem is that we cannot send enough to satisfy the demand. Europe needs 45bcfpd of LNG (billion cubic feet per day) and 15bcfpd of that comes from Russia via pipeline. US total LNG export capacity is ~12bcfpd and the current administration has not been friendly to investment into fossil fuels which is why this number is not eagerly increasing. Furthermore, the Freemont LNG facility recently had an explosion which caused prices lower domestically, but nearly double in Europe in which it was supplying. On top of that, a new EPA requirement for those pesky emissions that natural gas sometimes has is coming into play in August and will damper 50% of the LNG exports several months (from Texas and Louisiana sites). This will certainly not help Europe out of their energy crisis or deter Putin from his offensive in Ukraine. In contrast, it will cause more hardship for Europeans all while Russia is seeing record profits resulting from the western policies and lack of investment into creating more supply of oil and gas in the US and Europe.

As if that’s not enough, the Nord Stream pipeline connecting Russia to Europe is currently down for maintenance, leaving some to wonder if will Russia will even turn it back on or play hardball with the west this way. Even if they don’t halt the flow of natural gas now, that option is always open in the future (maybe in the winter when Europe is really backed into a corner and the US has drained much of its strategic petroleum reserve?). For a much more knowledgeable and concise overview of the realities behind LNG markets and what it means for Europe I highly recommend reading through this thread.

Doomberg @DoombergT

1/ As a fuel, natural gas has many compelling attributes. It burns cleanly and efficiently. It produces electricity and useful heat with less CO2 emissions and far fewer toxic byproducts than coal or oil. It is also abundant and ubiquitous.

Conclusion

Higher gas prices domestically are certainly difficult, but it pales in comparison to what has been allowed to happen in Europe. As Russian flows are at lows this week for maintenance, Germany has decided to ration water and electricity all over the country. Maybe this is an acceptable short term solution, but how long would they be able to keep it up? And how long will the public support it, especially in the winter when people are cold and are having a hard time affording their food and housing. Historically, people don’t take kindly to a lowering of their standard of living.

Steve Hanke @steve_hanke

SANCTIONS ECONOMIC FALLOUT: Germany has started to ration hot water, dim its street lights & close swimming pools. Why? To tackle the energy crisis caused by the sanctions Germany has imposed on Russia. Welcome to the unintended consequences of sanctions!

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On a better note, their are positive things going on and that could be done to solve a lot of these issues. Many countries are postponing shutoff or permitting new nuclear power plants to provide cheap emission free energy. Further, if a safe investment environment for natural gas and other commodities globally was allowed, not only could it be used to displace coal emissions, but also decrease Putin’s energy profits by lowering prices via increase in global supply.

Many people think that the advancement of renewable energy should only be accelerated in a time like this. While I do believe that more energy is better than less, Germany is a pretty clear case study in why wind/solar alone are not ready to take over the job yet (if ever). Lowing energy input costs have been a large driver for the cheap wind/solar, which has been reversed since the covid lockdowns ended. The reality is that grid storage and a cheap and reliable source of polysilicon and other resources are not ready to fully transition us to wind/solar on nation scales.

Hopefully we can wake up, move to a more sustainable future while preserving and even improving people’s standard of living, all while not emboldening authoritarians to invade and reek havoc... but it starts with natural gas.

-Grayson

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