The Electrification of Everything Runs Out of Gas in Hell

Do you remember when the ‘electrification of everything’ was going to make our lives easier…and save the planet on the side? Well, someone forgot to make sure we have enough electricity to do it…

Now that electric vehicles (EVs) are mainstream, my front doorknob uses electricity, electric heat pumps are replacing fossil fuels in places like Canada and the UK, and solar panels cover the skylines of the suburbs, blackouts, energy rationing, and power poverty are hot-button issues. Not to mention booming coal usage…

It?s worst of all in Europe, of course. But we’re talking about global markets here. And, even if the effect is slow and reduced, the Australian Financial Review already reports ‘Industry faces crisis as gas contracts may triple’ here too. As the principal national adviser for the Australian Industry Group put it, ‘most businesses are going to be rolling off existing contracts and into hell’.

But tripling is nothing compared to what’s going on in Europe. Which theoretically makes Europe worse than hell. A German CEO said he is worried about ‘a gradual deindustrialization of the German economy’.

I’m not so sure about gradual. And I’m not sure what a deindustrialisation of Germany leaves Germany with. But the CEO’s comment was with power prices at 530.50 euro. They’ve hit 1,000 euros since and 1,100 in France…no wonder one German city is considering turning off their traffic lights…

The list of companies shutting down or reducing production in Europe is growing very long. And that’s before rationing kicks in for winter.

A desperate solution that just creates more problems

The irony is that the shutdown of industry over impossible energy prices will only worsen inflation. It’ll create shortages causing Germany’s Producer Price Inflation to soar to impossible levels.

In the UK, the government is busy solving the problem. But not by providing more energy, of course. ‘Once Unthinkable Ideas Gain Traction to Fight UK Energy Crisis’, reports Bloomberg. ‘Orchestrated blackouts’ are on the menu, as are three-day work weeks.

The government wants to shut down the UK to save energy, which is an odd way of prioritising the two…

Despite the growing list of debacles, the electrification of everything continues apace. Anyone who backs down now is not a true believer. Canadian Prime Minister Justin Trudeau even claims that recent anger against politicians is caused by climate change…

On the street, things look different. While the UK, EU, and Greater Sydney are looking to ban the sales of petrol cars at some point in the future, the UK’s Telegraph newspaper has calculated that, in the UK, ‘electric vehicles will be more expensive to run than petrol equivalents from October as the latest price cap hike punishes drivers for going green’.

This comes before UK electricity prices are adjusted under the UK’s energy price cap again this winter, but after politicians and green campaigners touted the lower cost of running EVs over the past few months.

In fact, only two months ago, the Telegraph reported that ‘Surging fuel prices mean buying an electric car finally adds up’ and ‘More and more drivers are switching to electric cars as petrol motors become too expensive’.

As ever, those who buy into government programs and policies got the predictable outcome they weren’t looking for, especially with coal demand at an all-time high to produce its EV’s power, while we’ve got enough.

California hasn’t got enough. Newsweek summed up the consequences: ‘Californians Told Not to Charge Electric Cars Days After Gas Car Sales Ban’. It used to be funny, but now it’s just an example of energy policy worldwide.

What about heating — a service that is so important in Europe that some landlords must provide it before they can let their properties?

Well, that’s been caught up in the electrification of everything too. Several countries converted from polluting gas to electricity (generated by gas). The heat pump revolution is underway in the UK, for example.

Bloomberg reports on the consequences of the surge in electricity prices: ‘Nearly One in Four Britons Plan to Forego Heating This Winter’. And one major power provider expects half of UK households to be in energy poverty in winter.

With 60,500 deaths a year related to cold temperatures in England and Wales before the crisis, things aren’t going to go well this winter.

But perhaps I’m being a tad pessimistic. Perhaps people will be able to divert some of their money to pay for heating when they can’t spend it on food because of the food shortages that the government is worried about.

Or perhaps not, given the food shortages would be caused by blackouts…

At least those that stuck with gas heating instead of converting to electricity will be able to heat their homes. Unless the government needs the gas to prevent blackouts…

Then the homes that stuck with gas heating will have power but no heating…

What a conundrum!

But how much of this European energy crisis is really going to reach Australia? Well, on the one hand, that is entirely up to us. Well, it was.

Commodity markets aren’t as fungible as you might think

Securing long-term energy supply contracts before the crisis would’ve been the thing to do. In fact, I’ve never understood the drama over gas shortages in Australia. We can just buy the gas, same as everyone else. If we don’t buy the gas under the same long-term contracts as others do, then we shouldn’t be surprised when we don’t get it…

But back to the topic. Although energy markets like oil and gas are theoretically fungible, meaning a barrel of oil is the same everywhere, there are several reasons why this is not the case when it comes to how energy markets actually function.

You’d think that sales of Russian gas to Europe could just be diverted to China, while Europe buys its gas from whoever China was buying from, leaving the net effect a mere ripple of water in the overall gas market bathtub. But that’s not how it works.

For example, gas requires a lot of infrastructure. Germany’s lack of gas import terminals has left it reliant on Brexit Britain, ironically.

Also, it takes a long time to bring energy production online, which leaves little slack in demand and supply shocks, especially when the government is doing its best to stop you.

I’ve already mentioned that energy supply contracts tend to be long-term. This is to give the buyer and seller certainty. But it leaves those relying on short-term supply out in the cold because they’re fighting over a much smaller chunk of gas than total production — the little bit that isn’t spoken for yet. That’s why power markets are so volatile. They’re priced at the margin, not based on the market as a whole.

There are some advantages that flow from gas and oil’s fungible nature. For example, Greek ships and Chinese ports are selling lots of Russian gas to Europe indirectly enough to avoid EU and US sanctions and an embarrassing PR expose.

But, overall, the gas market really can be disrupted by the chaos we’ve seen because the market’s commodities are not fully fungible. And that’s why Europe’s energy crisis is creeping towards Australia.

It’s no wonder the Europeans are having a change of heart about their energy crisis. Politicians from Germany’s governing party are even demanding Germany reconsider sending weapons to Ukraine.

Another German MP has argued that opening Nord Stream 2 was the only sensible solution to the gas crisis.

The Japanese are happily signing away on gas deals with Russian suppliers. Deals that European companies were shut out of by sanctions, leaving the Russians and Japanese to benefit. And the Hungarians have commissioned the expansion of two nuclear reactors to be built by the Russians.

But nuclear power won’t come online until it’s too late. As UK politician Nick Clegg pointed out in 2010, ‘there’s no way they’re going to have new nuclear come onstream until about 2021, 2022, so it’s just not even an answer’.

Another solution to the lack of energy is, of course, hydrogen. Which requires what to produce it? That’s right, electricity! And a lot of it. So it’s a solution that worsens the particular problem we’re having right now? How novel for a government program.

Just wait until drivers who bought EVs when electricity was cheap discover that they’re facing blackouts and higher driving bills than petrol drivers while hydrogen gets produced by the electricity they need?

There will be Mexican standoffs between petrol, EV, and hydrogen vehicle owners at carparks and petrol stations around the country. No doubt hybrid owners will get a hard time for being noncommittal.

What’s really happened here is a classic example of government intervention. By pushing a single solution onto everything — green electricity — the government created a very fragile system with a single point of failure. As soon as green energy became scarce for any reason, the whole system would begin to go into crisis.

It was the same for oil, of course, which governments also promoted the adoption of. That’s what gave oil shocks their power and also what explains some questionable foreign policy in the Middle East for more than a hundred years now…

Henry Ford’s wife drove an electric car. And women preferred them. How different things could’ve been…

If the government stopped meddling in energy, it’s likely the system would be far more diverse and thereby robust to shocks. But there would also be significantly fewer political donations, so don’t hold your breath for the lights to come back on anytime soon.

Meanwhile, Russian corporate profits are up 25% in the second quarter, the ruble is above its pre-war levels, and the central bank of Russia is cutting interest rates.

And I thought lockdowns were a bad policy. But come winter, we might surpass them.

Until next time,

Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

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