Europe is the centre stage of an unfolding crisis in energy.
The sheer magnitude of this impending catastrophe is astounding.
And it really feels to me like it could be a pivotal moment in history. One of those rare moments that sets the winners and losers of the decades to come.
One thing’s for sure…
It’s going to be a cold winter in Europe.
Let me explain more…
Jail time for energy ‘thieves’
As Goldman Sachs wrote on Friday:
‘Samantha Dart, a senior energy strategist at Goldman Sachs, expects the real effects of the shutdown to still be ahead, especially for ordinary citizens.
‘“This is a very painful process and it’s impacting the European population in many different ways,” she says. “Ordinary people haven’t even felt the full brunt of this situation.”’
But they’re about to…
Germany has mandated cuts to energy use of 10% and wants every other EU country to do the same.
How will they do this?
Well, there’s an extraordinary clip here of a German finance minister explaining how select small businesses (i.e. bakeries, cleaning companies, etc.) could simply shut shop for a while until energy prices come back down!
Believe it or not — though I’m pretty sure you will believe it — this guy studied poetry and has no prior business or economic experience.
If these are the kinds of ‘leaders’ Europe has at the helm right now…
Even Switzerland, long considered a nation of smart, logical thinkers, is looking a tad radical.
They’re proposing making it a crime to heat your home to over 19 degrees!
I’m talking actual prison time here.
Imagine the scenes in 2023…
‘What are you in for?’
‘Armed robbery. You?’
Those Brexiteers to the North aren’t in much better shape…
As you can see here, UK energy bills are also set to go parabolic:
Source: Energy Monitor
Social unrest is building.
And a grassroots movement called ‘Don’t Pay’ is trying to get one million signatures from people pledging not to pay their next energy bill on 1 October.
They’ve 170,000 signed up so far.
So, it’s no surprise that incoming UK Prime Minister Liz Truss just announced an energy price cap of £2,500 this year for households.
It’ll cost the UK £130 billion plus another £40 million for small business relief too.
That’s £170 billion all up.
Good for short-term votes, maybe, but terrible for long-term economics…
From energy crisis to financial crisis
Here’s the thing…
This figure is a whopping 5% of the UK’s economy (or the entire health budget) to fill a gap of just one year’s heating bill.
What about the year after that?
Or the one after?
The EU is in an even worse financial pickle…
It was reported late last week that European trading desks are facing at least US$1.5 trillion in margin calls.
A margin call is when you have to stump up more money on a leveraged (using debt) trade you got wrong.
Right now, because of the extreme volatility in energy prices, a number of big firms are stuck on the wrong side of trades they can’t get out of.
It seems inevitable that the European Central Bank will step in to rescue them at some point.
And this could turn the energy crisis into another GFC (great financial crisis).
As Marty Bent of TFTC wrote recently:
‘At some point soon the liquidity problem is going to hit a point where the European Central Bank’s hand will be forced and they will turn on the money printer to bailout the energy sector. This could mark a pivotal point on the road toward Weimar 2.0 on a global scale.’
He’s referring to the Weimar Republic era between 1921 and 1923, when Germany went through a period of extreme inflation, as you can see here:
Make no mistake, the euro as a currency could start to unravel very fast if the ECB go down this road…
You can’t print energy
The fantasy economy of fake money has finally come up against the real economy of energy. And it’s been a rude awakening.
The cold, hard truth is that you can print all the money you want.
But you can’t print energy!
And economies ultimately run on energy, not fake money.
There’s a deeper topic here on how the 50-year fiat money experiment — currencies backed by nothing and created at will — is in its death throes.
But I’ll save that for another day…
The immediate problem is simply having enough energy to live on.
And countries who’ve left themselves vulnerable on this are about to face the consequences of this fact.
Not just the first-order consequences of bankruptcies, layoffs, winter deaths, and more — as bad as they are.
But also second- and third-order consequences of inflated money, unsustainable debts, destroyed currencies, and even perhaps the breakup of the EU.
Unfortunately, too many people in Europe have let ideology and wishful thinking overrule the realities on the ground when it comes to energy policy.
But that’s now changed virtually overnight.
Let’s be clear…
Security and supply of reliable base load power is now the single most important priority for every country in the world.
As new UK PM Liz Truss said:
‘We will tackle the root causes of high prices to make sure we are never in the same position again, and end our short-term approach once and for all.’
She’s said North Sea oil and gas will be ramped up right away with a view to securing energy sovereignty by 2040.
Most other countries will look to do the same.
For some, this means turning back to nuclear.
Germany has reversed its stance and said it would keep at least two nuclear plants online. Japan has indicated it will restart a number of its plants in a post-Fukushima shift. And China and India are pushing ahead with major plans too.
The renewable industry will also see a significant surge.
For example, Tesla just announced a lithium hydroxide plant in Texas last week. Elon Musk called it ‘like minting money…’
Everyone is now mobilising to respond.
And as an investor, there’s a world of opportunity in energy for you.
The hardest part will be deciding which way you want to play it.
Editor, Money Morning
PS: I came across this fantastic Twitter thread last week. It explains why the EU is also going to have huge issues managing their electricity grid going forward.
If you’re interested in energy or energy policy, I strongly recommend you read it as it lays down a number of facts your average commentator won’t be aware of.
But as I’ve written above, with energy, understanding the truth matters!