In today’s Money Morning…Ukraine, Russia, and energy prices…EU’s quest for energy independence…looks like investors are also on board…and more…
Hi there from Marbella in southern Spain, where your editor is spending some time visiting family and friends — and keeping an eye on the conflict in Ukraine.
It’s been cold and rainy here, something that, in fact, doesn’t happen very often.
You see, Marbella has a microclimate, which means that it enjoys around 320 days of sun a year.
So with an average of 60 days a year where it could rain, the local tourism industry took an interesting gamble in the 1960s.
To attract sun-starved Northern European tourists, they started offering a ‘good weather guarantee’. That is, if it rained at any time during their vacation, tourists would get their money back.
The strategy paid off and Marbella is today a well-known European destination.
But anyway, with so much sun here, I was curious to see if rooftop solar had become as popular as it has been in Australia in these last two years I’ve been away.
The answer: it hasn’t. While there are plenty of windmills around, you barely see any solar panels…although that could change by my next visit.
Ukraine, Russia, and energy prices
It’s a worrying time here in Europe.
We were still going through the COVID-19 pandemic when a military clash started in Ukraine last week. Without minimising the loss of life and suffering, one of the big worries is energy.
Europe is quite reliant on Russian energy. About half of Russia’s exported oil (around 2.5 million barrels per day) goes to Europe. The European Union also depends on Russia for round 40% of its gas, which comes through pipelines.
Supplies were tight and prices were already high before the fighting started. In fact, as Daniel Yergin, author of The Prize: The Epic Quest for Oil, Money, and Power, put it, timing was key:
‘This was a very advantageous time for Putin to move. The oil market always goes through cycles, but it’s just gone through the most violent cycle that I’ve ever studied — from negative prices less than two years ago to an incredibly tight market. Whether Putin calculated that or not, he chose a time when oil markets are really tight, gas markets are really tight, coal markets are really tight, and he’s a big exporter of all three. So he’s a beneficiary of it. That gives him leverage. So whatever this terrible invasion is costing Russia, he’s making a lot of money from a higher oil price.
‘It’s noticeable that oil and gas were not directly sanctioned [by European countries]. And that’s because, you know, if they were to do that, you would really be hitting Europe. I mean, it would partly immobilize Europe. That’s why this is such a difficult situation.’
Since Russia invaded Ukraine, both gas and oil prices have shot up. At the moment, Brent crude oil is trading above US$105 a barrel.
And while energy continues to flow and so far, there’s been no disruption of infrastructure from the conflict, it doesn’t look like things will get any better for Europe regarding energy prices in the short term.
For one, the European Union has shelved the Nord Stream 2 certification for now. I wrote about the project back in December, but basically, it’s a gas pipeline going from Russia to Germany that would bypass Ukraine.
And then there’s the OPEC+ meeting, which is happening later today. Even with higher oil prices, it’s looking like they’ll be sticking to their previous plan of increasing by 400,000 barrels a day. OPEC had cut oil production after oil demand took a hit during the pandemic.
EU’s quest for energy independence
The conflict has driven Europe to a conclusion: they need to decrease their dependency on Russian energy.
And a solution is to accelerate the adoption of renewable energy — turn to renewables such as wind and solar to increase energy independence and cut reliance on energy imports.
In fact, Germany is already aiming at getting 100% of their energy from renewables by 2035, with German Finance Minister Christian Lindner describing renewable energy as ‘the energy of freedom’.
Looks like investors are also on board.
While last Thursday, most of the market was in the red after Russia invaded Ukraine, the European Renewable Energy Index increased 9.3% — the biggest jump since March 2020, when the pandemic hit.
One of the areas we’re seeing the most excitement in as EVs take off is in the commodities needed for the energy transition.
Lithium carbonate prices are already up 477% and graphite is up 22% year-on-year, as we head into a supply crunch, according to Benchmark Mineral Intelligence.
And one commodity to keep an eye on is nickel, with Russia being one of the world’s largest nickel producers.
Until next week,
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Selva Freigedo,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.
