Category: Uncategorized

Coal for the cold

Speaking on September 10, the President of Ukraine said:

This will be the most difficult winter in the whole world… Russia is doing everything to break the resistance of Ukraine, the resistance of Europe and the world in 90 days of this winter. Because this is what Russia hopes for. This is its last argument. The last one, I am sure of it: the cruelty of the winter period, which is supposed to help when the cruelty of man is not enough. And we must be ready – not to break down, not to split, not to deviate from our path. There are 90 days ahead, which will be more crucial than 30 years of Ukraine’s independence. 90 days that will be more crucial than all the years of the existence of the European Union. Winter will determine our future and the risks.

This week’s controlled shut down of the Zaporizhzhia Nuclear Power Plant reduces Ukraine’s grid capacity by 5700MW or almost one-tenth of the nation’s pre-war electric generation capacity (more and more).

What Russian cyberattacks did not achieve is now being advanced through military actions and intimidation.

Earlier this week Euronews reported, “Russia has been accused of attacking power stations and other infrastructure in eastern Ukraine on Sunday, which caused widespread outages. The bombardment ignited a massive fire at a power station on Kharkiv’s western outskirts…” (more)

Forty-four natural gas-fired power plants contribute about 10,000MW to grid capacity. Ukraine’s natural gas storage facilities are less than one-quarter filled.

Coal stocks are, however, reportedly more than double 2021’s winter-ready inventory. Since June Ukraine has banned all coal and most energy-related exports. Twenty-one coal-fired plants constitute more than one-third of Ukraine’s grid power capacity. Coal-fired capacity can be maximized, but is not sufficient to replace lost nuclear or natural gas. Overall demand for electricity has fallen due to war-time economic disruptions. New capacity is being developed, but is unlikely to be available this winter.

Still, Ukraine apparently now has sufficient confidence in its coal-fired capacity that it may provide urgent support to neighboring Poland. While Poland is Europe’s largest coal producer and exporter, before the war Poland was also a major importer of cheap Russian coal (sell high, buy low). Since April Warsaw has banned imports of Russian coal and is now facing a significant shortfall in stocks needed for electric generation and household heating using lump coal (more and more and more).

Ukraine’s calculus seems to be: If our coal plants continue to operate, we have sufficient coal stocks and replacement flows to generate at capacity. We cannot use more coal than current capacity. If the Russians continue to attack our coal plants, we will not be able to fully utilize these coal inventories. Earlier this month, President Zelensky said, “We have sufficient volumes for ourselves and we can help our brothers to prepare for this winter.”

This map and the chart above originally appeared in Power Technology

European Energy Flows

Nordstream 1 is closed (Nordstream 2 never started). Natural gas continues (rather amazingly) to flow west from Russia through Ukraine to Velke Kapusany then farther along (more and more and more). Current Natural Gas inventories in Europe range from a low of about half-full in Latvia to two-thirds full in Bulgaria to more than 90 percent full in Britain, Denmark, France, and Poland. The EU average for natural gas in storage is hovering around or above 85 percent of available containment.

European electrical generation typically depends on natural gas for one-fifth to one-quarter of its energy mix. The need for natural gas is typically (but not always) a bit less in summer (first chart below) and a bit more in winter (second chart below). But core capacity to power the grid is largely fixed, barring major infrastructure changes. With access to Russia’s natural gas now seriously compromised, grid generation this winter will use more coal, nuclear, and non-Russian natural gas (more and more and more). This is the supply-side contribution to a solution (more and more).

The EU is also moving toward an ambitious demand-management effort. (Britain is not.)

Tuesday, September 13, the European Commission proposed:

To target the most expensive hours of electricity consumption, when gas-fired power generation has a significant impact on the price, the Commission proposes an obligation to reduce electricity consumption by at least 5% during selected peak price hours. Member States will be required to identify the 10% of hours with the highest expected price and reduce demand during those peak hours. The Commission also proposes that Member States aim to reduce overall electricity demand by at least 10% until 31 March 2023. They can choose the appropriate measures to achieve this demand reduction, which may include financial compensation. Reducing demand at peak times would lead to a reduction of gas consumption by 1.2bcm over the winter.

Efforts by the EU and its members states to reduce energy consumption began in the weeks following Russia’s invasion of Ukraine. As the summer ended, these efforts have escalated (more and more).

Much will depend on winter weather. As previously noted, for President Putin colder is presumed to be much better.

Both charts above were generated by EnergyMonitor

Inflation’s role in demand destruction

Since March 2020 American consumers have wanted more of many food products than there has been capacity to supply these food products (more). The first chart below displays real personal consumption expenditures for food. The second chart shows an index for US food manufacturing. Even after several months of consecutive declines, food demand remains well above 2019 levels, while food manufacturing outputs have remained consistent with or only slightly above 2019 levels for most of the last two years (more).

Given this imbalance of demand and supply, prices have increased to test the depth and persistence of this demand. Given the tight labor market, volatile operational costs, and recent increases in the cost of capital, suppliers have been reluctant and/or constrained in their ability to increase manufacturing capacity. Increasing food prices have (as the real PCE chart below suggests) begun to re-balance demand in the overall food category. There is still a ways to go before supply capacity and real demand are balanced.

This morning’s Consumer Price Index for August confirms that US food prices continue to increase. According to the Bureau of Labor Statistics, “The food at home index rose 13.5 percent over the last 12 months, the largest 12-month increase since the period ending March 1979.” (See third chart below.)

These price increases and their rate of change are reducing real demand. As of the end of July there was roughly $40 billion in “excess” monthly food demand still to be shed. The August PCE will almost certainly show more such shedding. Once the excess is mostly gone, the CPI arc should begin to flatten or even decline… as long as pre-pandemic sourcing, manufacturing, and distribution capacity can be maintained. On a seasonal basis, the US food manufacturing sector is — so far –demonstrating an ability to fully deploy existing capacity. In July 2022, for example, this sector produced a bit better than three percent more than July 2019.

US Railway Squeeze

[Updates Below} Yesterday, Friday, September 9, US railroads began to prepare for a possible strike. Here is what BNSF told its customers, “Due to the possibility of an interruption of service when the cooling off period expires September 16, we will begin to take steps to manage and secure the shipments of hazardous and security-sensitive materials as early as Monday, September 12.”

Reuters reports, “A railroad work stoppage would cost the U.S. economy $2 billion per day in output and require 467,000 long-haul trucks daily to handle shipments diverted from rail – [far, far, far (Palin note)]exceeding supply… “Additional insecurity placed on the still fragile U.S. supply chain – as we recover from COVID and other supply chain stressors and move towards the holiday season – will harm the economy at large and individual Americans,” according to the American Trucking Associations (more and more).

Bloomberg explains, “Railroad workers’ complaints are similar to those of other employees who have threatened to walk out in the wake of the pandemic: They’re overworked, understaffed, and underpaid, and they’ve been operating without a contract for more than two years.” (more and more)

The United States Surface Transportation Board gathers significant near-time data on railway performance. Supply Chain Dive has created a visual dashboard that converts some of this data into comparative reports over time meaningful to the human mind. (An example below for BNSF through September 7.) Please see their railway performance dashboard. Many thanks to Matt Leonard and Nami Sumida.

September 12 Update: Nice overview of current railway flows and bottlenecks from Bloomberg (more and more).

September 14 Update: Very helpful breakdown of commodity impacts of the potential strike from S&P. Good overview of current status of negotiations from Reuters.

September 15 Update: Early this morning a tentative agreement was reached (more and more). Threat of an imminent strike has been avoided.

California grid: demand management

[Update Below] Yesterday, September 6, at 17:48 Pacific Time the California Office of Emergency Services sent the following mass text message:

“Conserve energy now to protect public health and safety. Extreme heat is straining the state energy grid. Power interruptions may occur unless you take action. Turn off or reduce nonessential power if health allows, now until 9pm.”

In the next seven minutes demand for grid power declined 1.2 gigawatts and continued to drop. See chart below (more and more and more). An emerging — potentially cascading — threat to sufficient supply was mitigated by well-timed, well-aimed action that engaged a well-prepared target.

September 8 Update: Wednesday evening and overnight headlines are once again similar to California Avoids Blackouts (more and more). When a big risk avoided is also big news, the risk context is clearly higher than desirable.

September 10 Update: Supply and demand continued to play cat and mouse with California’s grid. Late this week a second cat — in the form of tropical storm Kay moving north from Baja — increased risks (more). But as Kay bounced into the heat dome, SoCal temperatures fell and the new cat turned (mostly) out to sea. (More on demand management and related duck curves from a UCLA engineer.)

California’s Constrained Grid Capacity

[Updates Below] According to the National Weather Service in Sacramento that region and most of California will experience, “a prolonged period of dangerously hot conditions with record and near record temperatures up to 105 to 115 degrees. Limited overnight relief, especially in the foothills… The most significant heat is forecast to occur Monday and Tuesday with excessive heat continuing through at least Thursday.”

According to the California Independent System Operator (CAISO), “We are facing a load forecast of 48,817 megawatts and energy deficits between 2,000 and 4,000 megawatts for Monday, resulting in the highest likelihood of rotating outages we have seen so far this summer.”

Real time balance of supply capacity and demand can be monitored at the CAISO website. Late afternoon local time today and tomorrow are when rolling blackouts are most likely to be implemented to avoid even worse outcomes. Below is how the emerging deficit is reported early this morning by CAISO. More and more and more and more.

September 6 Update: As Wellington supposedly said of Waterloo, “It has been a damned nice thing — the nearest run thing you ever saw in your life.” Below are charts displaying Monday, September 5 demand and supply. Very close, but “rotating outages” were avoided for one more day. CAISO reports that demand behavior has been crucial to balancing flows. Imports (interchange) from neighboring regions were also important (please see below). For today the ISO is projecting “supply deficiencies of 400 to 3,400 MW between the hours of 5 p.m. and 9 p.m.” California time. The Sacramento Bee has a helpful overview (more).

Black Sea: fragile flows grow

[Update Below] Grain and other agricultural flows from three Black Sea port are persisting (see first map below). Reuters reports, “A total of 61 cargo ships carrying around 1.5 million tonnes of food have left Ukraine under a deal brokered by the United Nations and Turkey to unblock Ukrainian sea ports…” (more)

This Black Sea flow is now sufficient to effectively compete with Australian grain exports to Asia. According to S&P, “when Ukraine started offering wheat in Asia in early-August, payment and banking issues as well as high freight cost and insurance were key concerns. However, as the flow of ships from Ukraine increased, confidence in cargo execution has grown, an Indonesian buyer said.

Ukraine’s principal port at Odesa is less than 100 miles from the frontlines at Kherson (see second map below). The fragility of current flows were underlined on Tuesday when Russian artillery hit grain silos at Mykolaiv (not one of the ports protected under the UN/Turkey agreements with Ukraine and Russia).

September 2 Update: As a quick mention in a round-up of several food-related reports, Bloomberg notes, “The grains sector has reduced a price spike of about 40% in the first half to around 10% this year to Aug. 30 as the Corn Belt harvest approaches. The bias is tilted toward a downward phase of the commodity price cycle into year-end…” Canada’s harvest looks good. US grain production has been mixed. Not bad overall, but not good enough to make up for shortages elsewhere.

Jackson Mississippi water system

The Mississippi Emergency Management Agency is providing ongoing updates on the response to the Jackson water crisis. See below for related summaries and updates.


Upstream Sourcing: Water is sourced from the Pearl River, Ross Barnett Reservoir (just northwest of the city, see map below), and six wells drawing on the Sparta Aquifer. The Pearl River typically flows through Jackson at a depth of under ten feet. Flooding that began on August 22 reached over thirty-five feet on August 29. This morning (August 31) the river level continues to be above thirty feet.

Upstream Processing: Water is treated for safe consumption by Jackson residents at the J.H. Fewell plant (originally constructed in 1908 to draw on the Pearl River) (more and more) and the O.B. Curtis plant, originally built in the late 1980s to draw on the Ross Barnett Reservoir (more and more). Each well also injects chemical treatments.

Midstream Distribution: Pumping is required to feed the distribution network. Some primary pumps failed well before the last several days of flooding. Backup pumps failed on Monday, August 29, according to some reports. [There are conflicting reports on the location and cause of pump failures.] Water towers are not being consistently refilled. Flooding combined with aging infrastructure has exacerbated leaks and breaks in water mains. The related loss of water pressure has reduced network flow by at least forty percent. The current quantity and quality of distributed water is insufficient to serve the population.

Downstream Consumption: The water system has been operating with a boil order since July 29 due to quality concerns (more and more and more). Because of the flood-related processing and distribution issues outlined above, early this week the Governor of Mississippi, explained, “we do not have reliable running water at scale… It means the city cannot produce enough water to fight fires, to reliably flush toilets, and to meet other critical needs.” According to Mississippi emergency management officials, 10 tractor trailer loads of drinking water arrived Tuesday and 108 more truckloads are en route. More than 160,000 water consumers are impacted. On August 30, President Biden declared an emergency and directed FEMA, “to coordinate all disaster relief efforts which have the purpose of alleviating the hardship and suffering caused by the emergency on the local population, and to provide appropriate assistance for required emergency measures, authorized under Title V of the Stafford Act, to save lives and to protect property and public health and safety, and to lessen or avert the threat of a catastrophe in Hinds County.”

Very Preliminary Strategic Assessment: While Lake-Mead-like events are an increasing threat (more), sourcing is not the most common cause for supply chain challenges. As in Jackson sourcing can be both abundant and redundant, problems should still be anticipated.

Especially for significant concentrations of demand, flows usually depend on concentrated processing and/or distribution. The two water processing plants serving Jackson are obvious critical nodes. Such nodes usually host a set of interdependent functional bottlenecks. Pumps are an example — as are grid connections, chemical supplies, competent personnel, and much more. [The August 30 Mississippi EMA Incident Command Brief specifically calls out, “Both O.B. Curtis and J.H. Fewell water treatment plants lack sufficient Class A Operators and maintenance staff.”] Bottlenecks can become chokepoints. Especially for “significant concentrations of demand” (aka lots of people), restored functionality of preexisting bottlenecks is almost always the only sustainable, practical solution.

In many cases, extended stress eventually prompts an amplified shock (more). Since at least 1980, the city of Jackson has experienced a steady decline in population, from just over 200,000 then to just under 150,000 today (more and more). Roughly one-quarter of the city’s residents meet the federal definition for living in poverty. The median household income is $40,000, compared to a national median of over $67,000. The ability to pay for a wide range of city services, infrastructure maintenance, and anticipatory adaptation has seriously degraded overtime. Jackson is not unique in this regard.

September 1 Update: According to the August 31 Incident Command Brief pumping has resumed — and surged — at the J.H. Fewell plant (more). A new backup pump has now been installed at the O.B. Curtis plant. Total volumes remained about forty percent below normal most of Wednesday. Pressure of about 87 pounds per square inch is needed for optimal flows. On August 31 40 PSI was measured in many locations. Most elevated water towers are reported to be nearly drained. Some improved system pressure is anticipated by this morning. Distribution of bottled drinking water and bulk water is expanding.

September 2 Update: According to the September 1 Incident Command Brief as of 1800 Central Time on September 1, water volume was close to 57 percent of authorized network capacity. An average pressure of 74.3 pounds per square inch was being measured for the full network. Achieving 87PSI has been the goal. Last evening at least one elevated water tank remained empty, a second was almost empty. There are ten tanks serving the surface water system, all are considerably less than full. There are three elevated tanks serving the well system. I don’t know about the ability of the Jackson water system to sequester pressure zones. Pressure usually builds overnight as (– if) usage declines. Reestablishing the network’s volume and pressure will restore sanitary and fire-suppression capacity. A fully pressurized system also reduces the risk of water contamination. Long before the recent flood-related shocks, Jackson’s water system has experienced serious challenges maintaining minimum drinking water standards. Human hydration will require continued boiling and distribution of bottled water until the preexisting network is restored to close to full capacity — both in terms of quantity and quality. Friday afternoon update: The mayor of Jackson reports that discharged water from the O.B. Curtis plant has now achieved 80PSI for a sustained period. Six of the tanks serving the surface water system are now at a sufficient level to support system-wide pressure and progress is being made with the remaining. The mayor is now concerned that higher pressures may increase the number of pipe ruptures.

September 3 Update: The most recent Incident Command Brief suggests an improved ability to sustain progress on building water volumes and pressure, but continued challenges with intake and pumping capacity at the O.B. Curtis plant.

September 4 Update: Sounds like there was significant progress yesterday (Saturday). According to the Incident Command Brief volumes discharging from O.B. Curtis are increasing. Last night total flows were equivalent to 63 percent of authorized system capacity. Systemwide pressure is reported at just over 80PSI. Most elevated towers have achieved a sufficient level to sustain pressure. Barring a new disruption (not impossible), towers should have further filled overnight. If the current PSI can be maintained, priority can shift from water quantity to quality… which in any case has also been receiving attention. Current conditions substantially enhance sanitary and fire suppression capacity. Water quality issues long preceded the current crisis. (More and more and more).

September 5 Update: Volume and pressure are now sustainably restored. Intake, discharge, pumping, and tower levels are now sufficient to supply demand. So far the distribution network has mostly maintained its integrity. Water quality remains insufficient for safe human hydration. (Here and here and here and here).

September 6 Update: Progress continues on maintaining quantity and improving quality. Further information here and here and here.

On September 15 at 1:00PM Central Time the boil order in place since July 29 was rescinded. Further information here and here and here.

Map generated by PolicyMap based on 2020 Census

Today’s discount, tomorrow’s tragedy

In the near-term — such as the next eight weeks — there are risks to supplies of refined fuels serving US demand, especially in the Northeast. Current diesel inventories in New England and Central Atlantic are anemic. And every hurricane season, there is some risk that a major hit in the wrong place could disrupt highly concentrated Gulf Coast refining and distribution capacity, which is the principal source of supply for the East Coast.

In the mid-term — such as the next eight months — there are risks to supplies of energy serving European demand. Reduced fossil fuel flows from Russia have increased demand (and prices) for energy from elsewhere including the United States. There are some comparatively mild forecasts, but winter is coming. Major efforts to build inventory are underway (more). But mid-winter resupply will be much less predictable — much more liable to disruption — than in the recent past. Energy-related economic, social, political, and national security risks are rising… and not just for Europe (here and here and here and here and here).

In the long-term — such as the next eight years and more — there is a risk of accelerating climate change. According to an IPCC Special Report, “Without increased and urgent mitigation ambition in the coming years, leading to a sharp decline in greenhouse gas emissions by 2030, global warming will surpass 1.5°C in the following decades, leading to irreversible loss of the most fragile ecosystems, and crisis after crisis for the most vulnerable people and societies.” Reducing the use of traditional fossil fuels is an important element in “increased and urgent mitigation.”

These risks are related (I trust this is not a surprise). Because of long-term risks related to continued use of fossil fuels, fewer investments have been made overtime in maintaining, much less expanding legacy energy sources. Since 1992 over ninety US refineries have permanently closed (more). This has removed more than 6 million barrels per calendar day of capacity. US refining capacity is now more concentrated and, often, farther removed from demand than ever before.

As a result, near-term risks of US supply disruptions are higher than ever before, especially for places like New England and the mid-Atlantic that are far away from major sources of supply. There have been times when a mismatch in the Northeast’s supply and demand has attracted European — often Russian — refined product across the pound. This is much less likely to happen this winter. One of the reasons New England and Central Atlantic inventories are underwhelming is because Europe needs so much more from the US to replace what is not coming from Russia. The pull of high prices is attracting US diesel inventories to push outward toward Rio or Rotterdam or wherever the price is highest (here and here).

In an August 18 letter to several leading US refiners, the US Energy Secretary tries to counter the pull of higher prices. She wrote, “Given the historic level of U.S. refined product exports, I again urge you to focus in the near term on building inventories in the United States, rather than selling down current stocks and further increasing exports” (more and more). The threat of hurricane season was specifically referenced. In effect, the US energy secretary is arguing that the global diesel market is under-estimating the risk of hurricane season. The diesel price at New York Harbor ought to be higher. Well… maybe she is not saying that, given the risks of domestic inflation and related political risks. But pricing is how markets resolve risk differentials. [Increasing the risk of sky-high fuel prices will probably minimize actions to limit US exports.]

Markets are not infallible. Markets should not be our only risk-management method. But for other methods to equal or exceed the power of markets great clarity is needed. For too long humans discounted the risk of climate change. Now that climate change is belatedly, reluctantly, and inconsistently acknowledged by most, we have tended to discount the risk involved in making the energy transition required to mitigate climate change.

For too long many discounted the risk of Putin’s authoritarian hubris. Even with plenty of prior examples, troops massing, and pseudo-historical justifications for invasion on offer, Europe increased its dependence on Russia’s energy.

All of these risks have been discounted largely because positively engaging such “uncertainty” has seemed too expensive. As my father often says, “You get what you pay for.” My grandfather said, “The customer will forget about prices, but will never forgive poor quality.” [There is increasing evidence that my grandfather’s once-upon wisdom has now been overcome by events.]

What we have paid for is tightly constrained capacity that is sufficient to meet typical US demand and help close the gap elsewhere, as long as disruption or destruction does not hit the wrong place too hard. If a CAT-4 or 5 hurricane or earthquake or cyberattack or fire or a long list of other threats takes down the wrong place for long enough, even maximum seasonal inventories will not be enough to avoid cascading pain. This combination of high prices and poor quality suggests our previous discounts were delivered with hidden time-bombs.

TARA is a nice summary of our risk management options: We can Transfer, Avoid, Reduce or Accept risk. Discounting and denial are other words for accept.


August 31 Additional Comment: More than one reader has complained about the title for this post. “Strained alliteration.” “Hyperbole.” “A better choice would have been Today’s discount, tomorrow’s expense.”

Thank you. This feedback is helpful. Recently I have been leaning into snarky or cynical. I will work to straighten up.

I will also offer that for me a true tragedy requires a heroic character to make self-subverting choices. Tragedy is not just a terrible event, it is the consequence of good intentions gone seriously awry.

July Personal Consumption Expenditures

This morning’s July report suggests a largely unchanged consumption glidepath. Nominal consumption increased 0.1 percent from June. Inflation adjusted consumption was up 0.2 percent. (See first chart below.)

While many discretionary expenditures (e.g., non-durable goods) have flattened or fallen, other factors — such as shelter costs — are keeping consumption historically high. The Bureau of Economic Analysis notes, “The $23.7 billion increase in current-dollar PCE in July reflected an increase of $33.3 billion in spending for services that was partly offset by a decrease of $9.6 billion in spending for goods. Within services, the largest contributors to the increase were spending for housing and utilities (mainly housing) and for “other” services (mainly international travel). Within goods, gasoline and other energy goods was the leading contributor to the decrease.” (More and more.)

Fairly steady durable goods spending and reduced spending on food-at-home and non-durable goods means production and distribution capacity has mostly caught-up with increased demand. It is, however, helpful to acknowledge how much higher demand remains. In terms of chained 2012 dollars, in July 2019 total consumption was $13,161 billion. Last month US consumers spent $13,959 billion. That’s about double any previously encountered rate of change, with even higher and volatile rates in between.

Two months ago, based on PCE patterns percolating in the May report and prior, I attempted a prediction:

I hypothesize that between May and September we will see food-at-home real consumption gradually decline by another seven to ten percent and then flatten or incrementally increase. I hypothesize that durable goods and services will begin to show slopes similar to 2022 food consumption. I also hypothesize a more rapid rate-of-change than that for food between last November and April. These are deniable hypotheses. I am not sure. It does seem plausible. If this happens, demand and supply will be closer to equilibrium.

So far my hypothesis for food seems to be happening (see second chart below), even if at the low end of — or below — my guess (more). Given June and July PCE results, it is almost time to acknowledge I was wrong on durable goods and services. I was expecting durable goods to continue (and accelerate) its April-to-May decline in consumption. I expected services to be supported by summer spending, I did not expect a sustained decline before September. But the consistent increase in real service spending is stronger than I anticipated. Batting 300 is only good in baseball.