One of the threats, or perhaps the threat, hanging over the EU due to the sanctions fiasco has been the possibility that Russia could shut down the pipelines and stop deliveries of natural gas to European countries. It would be a way to escalate the crisis and force a solution of one kind or another.
It would do enormous damage to the Russian economy. What are they going to do with the gas that gets pumped on a daily basis to Europe, and particularly to the largest consumer, Germany? Inhale it? Because there is no infrastructure in place to export that gas in those large quantities to other customers that are not part of the pipeline system. It would cut foreign exchange earnings and government receipts. It would devastate Russia’s natural gas industry. And it would curtail any desire by other countries to ever rely on Russia’s energy exports.
But it wouldn’t be a big deal in Europe, said Günther Oettinger, European Commissioner for Energy, when the Commission released its gas “stress test” last Thursday that had ostensibly been designed to test what would happen if Russia stopped pumping gas to Europe for six months over the winter.
“For the very first time, we have a complete picture of the risks and possible solutions,” Oettinger said. Sure, some countries, particularly Estonia and Bulgaria, would have problems, but…. “If we work together, show solidarity and implement the recommendations of this report, no household in the EU has to be left out in the cold this winter.”
Apparently, like the infamous bank “stress tests” before it, this stress test had one purpose: generate soothing words that make people feel confident everything was under control, that they didn’t have to worry, that they could just keep plugging.
In reality, even for Germany – which is not nearly as dependent on Russian natural gas as Poland, Finland, Estonia, or Bulgaria – it’s a dreadful scenario. That’s what emerged from a report by the German Federal Energy Ministry that was leaked to the Spiegel. The report, which even Parliament hadn’t seen, became part of the risk analysis that the Federal Economy Ministry sent to the European Commission in late August – and to the very same Vice-President of the European Commission responsible for Energy, Günther Oettinger. He has known about the facts at least since then. Nevertheless, as part of the Commission’s gas “stress test,” he continued spouting off his falsely soothing words.
The analysis examined what would happen in Germany if Russian gas supply were completely turned off for six months during the winter. It would reduce gas supply by 23 billion cubic meters, when typically Germany uses 51.2 billion cubic meters during that time. That’s a 45% cut!
But only a small fraction could be compensated for from other sources:
- 2 billion cubic meters from additional LNG imports
- 0.75 billion cubic meters from additional imports from Norway
- 3.0 billion cubic meters through fuel switching at power plants, for example to oil, and by non-delivery to certain customers with cancelable contracts.
It would amount to less than 6 billion cubic meters, to compensate for a shortage of 23 billion cubic meters. After a short time, even though gas storage facilities are 96% full, the government would have to proclaim an energy emergency, which would give it the power to decide who gets gas and who doesn’t.
Gas would be allocated in sequence based on a hierarchy of four groups, according to the report:
- Protected customers (mostly households, but also gas-fired power plants that supply heat to customers)
- Gas-fired power plants that are deemed indispensable for energy supply
- Other gas-fired power plants
Group 1, so mostly households, use 26 billion cubic meters. Group 2, indispensable gas-fired power plants, use another 2.4 billion cubic meters. Combined, they’d use up 28.4 billion cubic meters, more than the available gas. The rest of the customers – industry and other gas-fired power plants – would get nothing. Theoretically.
But it gets complicated, the report found. This is the theoretical distribution. In reality, “it is technically difficult in a distribution network, to separate protected customers from non-protected customers.” Hence, households that should be getting gas might well run out as their gas was used elsewhere.
Industry would lose much of its electricity as power plants that aren’t deemed indispensable would have to shut down. Forget heating those manufacturing plants, or turning on the lights, or booting up the robots…. Production would plunge. Layoffs would soar. The supply chain would collapse. A cut in gas supply would generate enormous economic costs, the report said. And even the lucky ones who would get gas would have to deal with dizzying price spikes.
With this move, self-destructive as it might be, Russia could lay waste to Germany’s industrial power, at least for a while, and it would wreak havoc that would then ricochet around the world as German export orders would remain unfilled, and as imports would grind to a halt. The costs would simply be too large to contemplate. And that’s why the report had been kept secret, and why even the German parliament hadn’t seen it, and why Eurocrats had gone all out with their soothing words to mollify the population.
Russia still has $396 billion in foreign exchange reserves, though they’re shrinking, and a strong balance sheet, though it’s weakening. But it has a host of issues, apparently. Read… Why Moody’s Cut Russia to Two Notches above Junk
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Hmmm…. Back in my misspent youth I spent three years in Germany. I was in Bayreuth which is in northern Bavaria. The cold there is severe to say the very least. The short supplies of heating gas for homes and business alike, especially if the winter is colder than usual, will be a real political problem. Not sure how people will react, but they won’t be smiling.
Yes, shutting off the gas would have negative consequences for the Russian economy. But Russians have experienced privation for centuries, first under the czarist system and then under the communist system.
Westerners in general and the US Government in particular really don’t understand Russian history. As the US and its European lapdogs sanction Russia in an effort try to evade responsibility for the Ukrainian debacle fomented by the US State Department, the Russian people rally around Putin.
I don’t know what Putin will do, but it would certainly be no surprise if Putin cuts off gas to Europe.
“As the US and its European lapdogs sanction Russia in an effort try to evade responsibility for the Ukrainian debacle fomented by the US State Department”
You mean Russian aggression in Ukraine, an independent state? But hey, Russians see conspiracies everywhere. Russians cannot fathom how anybody may want to get rid of a corrupt thief for a president and actually want to approach European standard of living as Russians are used to corrupt dictators, even love then. So as the result, Russians see it as American or European plot. After all seeing enemies everywhere and thinking everyone is out to get Russia and everything is about Russia makes them forget their own problems.
Wonderful report Wolf! Just reinforces my contempt for all governments, which includes the American, German and Russian of course.
As much as I like to read your blog, this particular article offers very shallow and incomplete analysis. Earlier this year there was a comprehensive research done at EU on what would happen if RuSSians cut off all gas. They looked at both the supply and demand. There were over 20 factors mitigating the gas shortage – while your article offers only a few. Long story short, if all mitigating factors are applied they will compensate for all RuSSkie gas plus another 10-20 bcm to spare. Just one simple example – how about lowering thermostats by 2C in offices? This can be legislated. How about increased LNG imports? Oh yeah – they will cost more but while the EU will cough, RuSSia will choke on their own vomit.
Again – I like your blog – so please take as a constructive criticism.
Yosemite, keep in mind that Germany would be losing 45% of the supply it needs to get through a normal 6-month winter period. You take 45% away, lowering thermostats by 2 degrees won’t move the needle. Japan lost 28% of its power supply after it shut down all nukes. And it did so gradually, over the course of over a year and had time to prepare for it. They built an enormous amount of emergency power generators during that time. They went through super-human efforts to mitigate the shortage. Even then, it had rolling blackouts, supply chain problems, sweltering offices in the summer, shutdowns and production cuts … and they only lost 28% of their electricity supply, not 45% of their primary fuel. So it seems the current risk assessment that the Spiegel got its hands on is a lot more realistic than the study you mention.
Oops! …, That’s a real pig! Wolf! Thanks for this “tremendous” article and dire warning, because if you remember your recent article in October 7th – “There’s no Reason to Panic” about German Miracle Economy – I commented,
“Well, it seems as though this is what we have all been finally looking for: – The snowball which starts the avalanche! Now, I stipulate that this downturn in the German economy is going to gather momentum, enough to sink the whole of Europe.
What better time could this have happened? When Russian sanctions are going to come rolling in – on this tide.
Then, we have the reality of sinking “Deflation”. I would prefer to say “crushing deflation”. To counter the inflationist’s arguments of soon coming hyperinflation.
Now, I do conjecture that we will see some very strong inflation, in respect to food and energy prices. Especially, when the effects of Russia’s sanctions begin to bite.”
Because you stated in that article:
“it was reported that demand for German goods dropped 5.7%, the worst monthly drop since 2009. Foreign orders plunged 8.4%, with orders from the Eurozone down 5.7%, but orders from all other countries – and that includes Germany’s two largest and all-important export destination outside the Eurozone, China and the US – down a fabulous 9.9% (made me wonder what the statisticians did to keep it out of the double digits, which would have been utterly embarrassing).”
“Signaling an accelerated contraction in German retail sales,” is how the report phrased it. Germans are closing their wallets: 39% of the retailers reported year-over-year sales declines.”
Well, Wolf. This glaring report of yours, unquestionably, is the “nail in the coffin” – the signal – for a great German Depression, exactly as it was in the early 1930’s!
The problem with the implications of this report is, Wolf: How, Germany is looking at a potential doubling of its gas prices in just a few months, and even higher gas prices a year on from now. The consequences of such a gas embargo from Russia are “stupendous”.
The saddest thing of it all is, Russia has done no ill to Germany, except the EU/US wanted to meddle in its sovereign affairs; for a country in which no EU country would allow Ukrainian migrants in; where, even Ukrainian brides have to go through rigid entry tests, and then, when the EU had always strongly opposed and resisted Ukrainian entry into the EU, suddenly – they are now European!
Unfortunately, this report is so provocative, I would be very surprised if President Putin does not take advantage of this.
Do you remember MAD? Mutually assured destruction in the economic sense comes to mind when I look at what would happen to Germany AND Russia, if Russia cuts off the gas. And so I think BOTH countries (and other European countries dependent on Russian gas) will try VERY hard to avoid that scenario. That’s a good thing.
I hope that rational minds will prevail. But my hopes in this regard have been disappointed many times before :-]
Wolf? You are disappointed? Gerald Celente rightly encapsulated what you just said, by saying:
“Sanctions are a declaration of war!”
Unfortunately, for us all, those EU/US officials want “US” to pay the ultimate price for their war, when they are not prepared to go out to the battlefield to fight for us; yet who are so willing to go and press that button!
Forgive me for saying this Wolf but, “the writing is now on the wall,” as we, the common people, are well – truly screwed!
Germany will buy gas from Russia and we will do nothing about it!
What’s the German for “Cut some firewood, boys!”
“Schneid Brennholz Jungs”!