There are an increasing number of reports that Russia’s attempt to use gas exports as a geopolitical weapon have backfired. Here’s Bloomberg:
Worse, Russia also tried to scare Ukraine’s friends out of the fight by wielding its brass energy knuckles, causing oil and gas prices to soar. But the West is now prying that weapon out of Russia’s hands, Clara Ferreira Marques writes, and will soon start bodying Russia with it. We’ve found workarounds for Russian energy; Europe is now swimming in so much gas it costs less than zero. Plus we’ve hurried up our embrace of renewables that will make Russia’s fossil fuels obsolete. And being deprived of foreign dollars and expertise will mean more of those fuels stay in the ground.
Another Bloomberg article discusses the long run implications for Russia:
Russia will never go back to fossil fuel exports at levels seen in 2021. Its share of internationally traded gas is seen shrinking from 30% last year to half of that by 2030. The country exported over 7 million barrels per day of oil last year, but the IEA estimates that falls by a quarter by 2030, even in the least-demanding scenario. By the mid-2020s, North America is exporting more oil than Russia.
I see two important lessons from this fiasco:
1. Most pundits (including some economists) underestimate the ability of markets to do a “work around” when the supply of a key good is restricted. We often read that it is technologically impossible to do without X, and that it will take many years to ramp up the production of alternatives. Recall that during Covid we were assured that it would take a long time to produce various quantities of vaccines, masks, Paxlovid, etc., and then production easily blew right by the pessimistic forecasts. I am not suggesting that supply constraints are never a problem (Europe still faces some problems this winter), rather that we should be skeptical about claims of how hard it will take to circumvent those restrictions.
2. Related to the first point, attempts to use trade restraints as a geopolitical weapon often backfire. I’m certainly not an expert on high tech products, but we need to be careful that attempts to embargo China don’t result in China doing a Sputnik-type project to develop its own production of cutting edge technologies. In a future crisis, what gives the US more leverage, a situation where the Chinese economy depends on sophisticated computer chips from Taiwan and the US, or a situation where China has developed its own industries (even if a bit less “first generation”) and has become mostly self-sufficient?
READER COMMENTS
Jon Murphy
Oct 30 2022 at 2:07pm
Two your point #1, I agree wholeheartedly. The second law of demand is a powerful force. As costs rise, people search or develop substitutes, and the demand curve becomes more elastic. I think we tend to underestimate people’s ability to adapt.
Regarding covid vaccines, I was one of those making dire predictions you mention. I was (happily) wrong because I didn’t think the FDA would remove their red tape to the extent they did
Fazal Majid
Oct 30 2022 at 3:30pm
China has clearly decided it doesn’t want to get dependent on Russian gas the way Germany did. Furthermore, they have found massive undersea gas deposits of their own. That leaves India as the other main potential customer, but geography makes it very hard to build pipelines to that destination, so unless Russia builds LNG terminals and infrastructure, their gas exports are toast. Those would have to be from Vladivostok, and would thus also entail building pipelines across the harsh conditions of Siberia, no mean feat.
Regarding China, their most likely response is industrial espionage, or more precisely an intensification of their already significant program.
Scott Sumner
Oct 31 2022 at 12:03pm
Thanks, interesting observations.
Ahmed Fares
Oct 30 2022 at 4:55pm
A quote from Robin Brooks with a chart in the link:
The collapse in European gas prices isn’t about an abundance of gas. It’s about lack of storage. Nothing about the fall in gas prices – whether in spot (white) or one year ahead (orange) – makes things in February or next winter easier. Because we can’t store all this cheap gas…
https://twitter.com/RobinBrooksIIF/status/1585232614239375360
Another quote from Robin Brooks with a chart in the link:
If you want an idea of the negative growth shock facing Europe, don’t look at spot natural gas prices (white). Those now just go up or down with the weather, since storage is full. Look at 3-year ahead prices (orange). Those are up massively from a year ago and have not fallen…
https://twitter.com/RobinBrooksIIF/status/1585598979785609222
Scott Sumner
Oct 31 2022 at 12:04pm
I agree that it will be a difficult winter, but nowhere near as difficult as the forecasts a few months back.
Jens
Oct 31 2022 at 12:30pm
The gas is temporarily stored on LNG tankers, which can be seen, among other things, in their transportation costs. That being said, the different scales for the two graphs shown together in the second tweet are somewhat misleading.
Mactoul
Oct 30 2022 at 11:58pm
Embrace of renewables?
What good it would do in depth of winter high with becalmed winds?
nobody.really
Oct 31 2022 at 4:28am
Good point. Ideally we’ll develop storage capacity for electricity. But Europe’s capacity to store electricity is as constrained as its capacity to store gas.
Beware generalizing between the US’s experience with solar power and Europe’s. Utilities design their systems to have the capacity to provide as much electricity as they think customers will demand at any given moment. Because most US buildings heat with natural gas, the US demand for electricity doesn’t increase as much on a frigid winter night as during a broiling summer afternoon. Because peak demand for electricity coincides with peak solar generation, US electric utilities with solar power can reduce the amount of non-solar capacity they build/buy.
In contrast, Europeans often heat with electricity, so European utilities build their systems to meet a peak demand occurring at 3am in February. That is, for every 1 megawatt of solar generation they rely on, they must build an additional 1 megawatt of generation powered by coal/gas/nuclear/hydropower as a back-up.
This scenario changes a bit as the technology for storing electricity improves. Storage technology exists, but under most scenarios it costs more to build a megawatt of storage than to simply build a one-megawatt generator using coal/gas/nuclear/hydropower, or to pay large industrial customers to turn off their electric-powered machines during emergencies. But if the costs of these other options increase–and they are–I expect that storage will grow more competitive.
Jens
Oct 31 2022 at 4:53am
It really depends … In Scandinavia and France, people heat a lot with electricity, in Germany and Eastern Europe rather not. In addition, the heating systems are very different in terms of their efficiency (heat pump vs electric night storage heaters) and the buildings in terms of their insulation. Moreover, climate change itself will have an impact on heating (and cooling) needs. General considerations are of limited help, rather very specialized models are needed to make reasonable predictions.
Jose Pablo
Nov 2 2022 at 10:37pm
“storage capacity for electricity”
How so?
Jon Murphy
Oct 31 2022 at 1:54pm
I will admit, I too, was originally skeptical on renewables in cold, less sunny and less windy areas. But I know several folks who are on renewables (one entirely Off the Grid) in Massachusetts and New Hampshire and they generate more than enough electricity for their purposes. So, it can be done (at least on a small scale).
Whether or not an entire nation should undertake renewables as their only source is a different question, of course.
Scott Sumner
Nov 1 2022 at 1:37pm
The key is to combine renewables with nuclear (as in France.)
TMC
Oct 31 2022 at 9:16am
Unfortunately UK’s new PM, Sunak, has reversed one of Truss’ few sensible acts. Allowing fracking. Frankly, even though I wish them well, it’s hard to do at times while they repeatedly shoot themselves in the foot.
Scott Sumner
Nov 1 2022 at 1:36pm
Yes, but the problem isn’t Sunak, it’s the Conservative Party as a whole. Truss had little chance of getting that enacted. Ditto for housing reform.
Thomas Lee Hutcheson
Oct 31 2022 at 11:46am
For this reason I think people overestimate the deadweight loss of a tax on net CO2 emissions that will achieve any given CO2 concentration goal.
Scott Sumner
Nov 1 2022 at 1:34pm
So do I.
Capt. J Parker
Oct 31 2022 at 1:07pm
Good post. And yet, whenever I look back at the history of the oil price shocks of the mid and late 70’s, I’m still shocked at the hammering taken by Real GDP in ’73 to ’75 and again in ’79-’83.
Scott Sumner
Nov 1 2022 at 1:34pm
I’m not convinced that oil was the primary cause of the “hammering”. I suspect that a sharp slowdown in NGDP growth played a bigger role.
Capt. J Parker
Nov 2 2022 at 12:45pm
Well, maybe. That was the the case from mid ’81 and also early ’80. But real output growth had already flattened out before then. Harder for me to see in the in the 73-75 timeframe.
Graph with NGDP here
(purple trendline represents a 10% annual NGDP growth)
I don’t doubt there is a case to be made that the policy response to the oil price shocks caused more damage than the shocks themselves.
vince
Oct 31 2022 at 1:55pm
“In a future crisis, what gives the US more leverage, a situation where the Chinese economy depends on sophisticated computer chips from Taiwan and the US, or a situation where China has developed its own industries (even if a bit less “first generation”) and has become mostly self-sufficient?”‘
A insult to the free trade argument?
diz
Nov 1 2022 at 4:49pm
I wouldn’t conflate “we have so much gas it’s trading for <$0” with “our gas supply situation is solved”. Gas demand is weather dependent and the reason they have so much of it is they paid a ridiculously high price to bid it away from other uses. It’s more of a short term overcorrection than a sign of plenty. If you’re going to be paying 100X more per mmbtu for gas in Europe than in the US you’re going to see some wholesale changes in their economy. Won’t be economic to produce much of anything with energy intensity.
Scott Sumner
Nov 2 2022 at 1:50pm
“I wouldn’t conflate “we have so much gas it’s trading for <$0” with “our gas supply situation is solved”. ”
Neither would I, which is why I did not do so here.
diz
Nov 3 2022 at 11:46am
No, that was more directed at the Bloomberg article:
We’ve found workarounds for Russian energy; Europe is now swimming in so much gas it costs less than zero.
This was largely accomplished by good weather and paying incredibly high prices for gas in the short term. Their economic system would be massively reshaped if they were required to pay the prices they paid to build that short term surplus. It’s not clear where exactly things would settle out.
From the economists point of view all that reshaping (mainly shutting down energy intensive industry, I think) would result in a new equilibrium with modestly higher energy prices (certainly not the $100+/mmbtu they paid of late) in the longer term.
Knut P. Heen
Nov 4 2022 at 10:03am
A warmer than normal October has reduced the demand for gas. The EU talked about a price cap on gas just a month ago.
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