President Putin is depending on decadent demand. He is depending on European consumers and bourgeois politicians to succumb to high prices and chilly room temperatures.
Putin has restored General Winter to a prominent place in Kremlin councils. He hopes this month’s temperature extremes will return to Europe in dramatic winter garb. January is Berlin’s coldest month with an average low of 29°F and high of 38°F.
In recent years natural gas has generally provided between one-fifth to one-quarter of the European Union’s total energy mix. There is considerable variation nation to nation.
Natural gas fuels roughly one-fifth of EU electrical generation. This ranges from over 40 percent in Italy and Netherlands to less than 15 percent in Germany or barely more than 5 percent in Denmark.
Last year more than 40 percent of EU natural gas consumption was supplied by Russia. Since February 24 this proportion has plummeted. Flows vary by season. I’m not confident of a current comparative statistic. But several credible sources (here and here and here) indicate that Russia’s EU market share for natural gas has been reduced by at least one-quarter, maybe as much as one-third. But, once again, dependence on Russian flows differs considerably by region. Hungary, Slovakia, Italy, and the Czech Republic are much more exposed to reductions in Russian flows than other EU nations.
Europe has significantly increased imports of non-Russian LNG. In June for the first time, US LNG deliveries to Europe exceeded Russian pipeline deliveries (more). The US would almost certainly be exporting even more if the Freeport LNG facility was still operating (and price-pull could be found). Qatar and Algeria (more) are also increasing LNG flows to Europe (more). As of July 25, EU natural gas domes are about two-thirds full. [Below is a map showing current LNG terminals and natural gas pipelines. At the source map natural gas storage facilities can also be located.]
Yesterday, July 26, The European Commission announced decisions intended, “to reduce gas use in Europe by 15% until next spring. All consumers, public administrations, households, owners of public buildings, power suppliers and industry can and should take measures to save gas. The Commission will also accelerate work on supply diversification, including joint purchasing of gas to strengthen the EU’s possibility of sourcing alternative gas deliveries.” According to S&P, a significant proportion of this reduced consumption may also be teed-up by price-driven reduced demand (see chart below):
A 15% voluntary gas demand reduction target aligned relatively closely with a Platts Analytics’ estimate of demand destruction due to high prices. Gas demand in Northwest Europe would fall by 13% between August 2022 and March 2023 compared to the five-year average demand for the period, Platts Analytics modelling showed. Based on its TTF price forecast of Eur125-140/MWh, demand would be reduced in the power sector through maximum coal and oil switching, while industrial demand is forecast to drop by 15%.
President Putin has cut back Russian natural gas flows to Europe. He has not cut off these flows. As long as any Russian natural gas is going, this gives him potential leverage to cut further or promise increases. The cuts so far are enough to cause European economic (and political) friction (and to significantly increase prices being paid for what is delivered). Putin perceives that time is on his side. Maybe the Atlantic hurricane season will wallop US LNG exports. Maybe General Winter will descend on Amsterdam to Warsaw with the coldest temperatures in two centuries. He is confident that contemporary European consumers — and voters — are effete, weak, self-indulgent, and can eventually be distracted from any concern for Ukraine… much less what might come after Ukraine.
Yesterday the host of the EU energy consultations said, “… everybody understands that this sacrifice is necessary. We have to, and we will, share the pain” (more). Putin is not alone is perceiving time as a potential ally.
The sharp and mostly unified NATO (plus) response to the invasion surprised Putin. But it now seems clear enough (to him) that this was just reflexive sentimentality. With the help of some snow and ice, his debauched neighbors will, he now expects, turn against their current political leaders who will then turn to him to restore flows…
WEDNESDAY AFTERNOON UPDATE: The words above (and charts below) were posted about 0600 Eastern this morning. Natural gas prices were already moving higher. They continued to do so as the promised Gazprom cutbacks materialized. According to the Financial Times: “European gas prices jumped higher on Wednesday after Russia followed through on its threat to further reduce supplies to the region, increasing the risk the continent could face shortages in the winter months. Gas prices rose as much as 13 per cent on Wednesday as flows on the Nord Stream 1 pipeline were cut to just a fifth of normal capacity.” (More and more and more.) Prices might be even higher (and will move higher) when China’s demand for energy recovers. EARLY THURSDAY MORNING: European natural gas prices eased overnight and, so far, this morning on indications that the lower flows from Russia are, in fact, flowing.