My annoyed rant from 2008 still applies concerning the German 'dependence' on Russian gas: The figures did not change substantially.
Only 22.5% of German primary energy 'consumption' is from natural gas
8-9% of total. If you think this enables Russia to blackmail Germany into anything serious, you need to catch up on historical perspectives. And an oil embargo wouldn't be nearly as relevant because they would export most of it to the world market instead and this is where we buy crude oil anyway.
Now if we look the other way, it becomes clearly visible that a cut off of EU-Russian natural gas trade would crash their economy within two years or so, especially if coupled with a financial embargo. They depend on mineral fuels exports almost as much as Persian Gulf countries do.
Merkel could survive a lengthy gas embargo in office*, but Putin could likely not.
Merkel could survive a lengthy gas embargo in office*, but Putin could likely not.
S O
*: To gain and maintain power is her only core competence anyway
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In respect to oil no dispute, we buy from a global market.
ReplyDeleteIn case of NG the situation is not so clear. 45% percent of the imported NG goes into industry, 45% into heating, 10% are used for generation of electricity, half of these 10% could very likely be substituted with coal.
If Germany lose 30%-35% of her imports and we have an average winter, at least half of the NG for industry would have to be relabeled for heating. This is the best case.
When in neighbour countries people start freezing to death I bet even more would be transferred to support them.
I guess we would see at least ten thousands of additional unemployed workers in Germany as a direct result of chemical industry working at 50%. As some bulk chemicals would become a bottelneck the fall out would be even larger.
Whether Merkel would survive two years is an interesting question. :-)
The positive aspect would be, that the energiewende would suddenly get political support again. 2-4% reduction of NG demand (and oil) per year would change a lot and would be not that expensive. The result would not be in the interest of Russia.
My take is, short term options are quite good for Russia, however, the strategic situation changes dramatically in a 10 year timeframe.
Ulenspiegel
We could have a drop of about a hundred billion € without going into negative trade, so whatever complaints there would be in case of an embargo, they would still come from a position of luxury.
DeleteWe can furthermore cut down on natural gas needs rather easily - there was just no serious incentive so far. I keep my flat at 20.5°C during the winter, but could make do at 18°C easily. The energy saving would be substantial. We're far from freezing to death.
There are also natural gas reserves of approx. a sixth of an annual consumption, equating almost half a year of imports from Russia.
I do not assume that we Germans freeze to death, however, in Bulgaria, Poland, and Romania the situation was already critical in winter 2012/13, we saw many dead people. A deliberate and timely 100% cut of exports would hit these countries very hard and we would be pressed to deliver what we can.
ReplyDeleteThe real problem is that in a cold winter 30% less NG means 2/3 of the industrial demand is in danger, nothing we can substitute on short notice. A shortage of some bulk chemicals may lead to a little chain reaction, esp. when these products can not be bought in sufficient quantities on the global market because German companies are main producer.
I do not see a long term Russian thread, however, a good chance for effective actions in the next two or three years.
OTOH a protracted low level economic war would hit Russia much more than Europe.
Ulenspiegel
It's true that Russia can't effectively blackmail Germany (or Europe in general) by turning off the taps.
ReplyDeleteI think focusing on primary energy consumption is misleading however. Natural gas can't be easily replaced in many of its roles. Chemical industries mostly can't switch away from natural gas to inferior feedstocks like coal tar anymore, or at least not quickly. There is no substitute for natural gas as a reducing agent as far as I know. Gas turbine powerplants can't switch to other fuel sources. A Russian gas embargo would cause substantial problems and hardship, not collapse.
Of course, such an embargo is very unlikely to begin with--Russia wants the money.
A European embargo of Russian gas would harm Russia, but just as the reverse example it would not collapse Russia. Russia earns 70% of its export revenues from oil and gas, and the majority of that is from Europe. An effective European oil and gas embargo of Russia would perhaps eliminate half of Russia's export revenue. This would not collapse the Russian economy.
If Russia's export revenue were halved, its trade balance would reverse and be negative 86 billion dollars annually, or about -4% of Russia's nominal GDP. Russia has foreign exchange reserves of close to half a trillion dollars, so there would be no trouble financing the trade deficit in the short term.
In the medium to long term, restoring a positive trade balance would not be difficult. Quotas or stiff tariffs could be imposed on non-essential imports (e.g. German luxury automobiles). The ruble would decline in value, which would lower the dollar market price of Russian exports and increase demand for them. As a decline in commodity exports would increase unemployment, domestic demand would go down and with it import volume. Over time, new supply routes would also be created to sell oil and gas to Asia instead of Europe. Russia could also increase its armaments exports by for instance selling advanced SAMs and fighter aircraft to Iran that is has thus far refused.
The real winner in any West-Russia trade war will be China, which will be able to get preferential access at reduced prices to Russian resources and technology. The West's relentless antagonism of Russia is arguably an even greater strategic mistake than the Global War on Terror (GWoT).
The 498 bn reserves are highly questionable.
DeleteTransportation bottlenecks isolate China from most of Russia's resources, so they couldn't draw on much more than so far.
Look; Russian natural gas is one important energy supply amongst many for Germany.
Meanwhile, the natural gas sector is one of only two major and greatly successful sectors of Russia's economy. Russia would still be miserable in Putin-style if the energy prices hadn't risen so much.
They're clearly dependent on it, and this is not just about the first order effect of foreign exchange inflow: Domestic capital investment would react to the worsened outlooks a lot.
Look at the United States, where a relatively much smaller construction sector bubble did burst and left huge damages done.
Is it possible to replace gas imports from Russia with biogas produced at a higher price domestic?
DeleteWhat exactly is questionable about Russia's foreign exchange reserves? Even the US Treasury Dept. doesn't dispute that Russia holds $200bn in Treasuries--are the other reserves in doubt? Why wouldn't a country which has enjoyed trade surpluses for many years have considerable reserves?
DeleteIt is true that "transportation bottlenecks" means that Russia can't immediately supply gas to Asia. The pipeline infrastructure simply does not exist. That's why I noted it as an option for the medium to long term. China is not the only obvious customer either. Japan is one of the world's largest gas importers and currently pays some of the world's highest prices.
There is no doubt that a sharp drop in natural gas exports would harm the Russian domestic economy, but bear in mind that oil & gas are now down to 18% of Russian GDP--lower than Norway. Obviously a depression in this sector would have sharp knock-on effects on the rest of the Russian economy, but it would not cause it to collapse.
I don't agree that Russia would still be miserable without the large increases in energy prices. The Russian economic recovery began after its 1998 default and devaluation, whereas energy prices did not begin to strongly rise until 2003. Obviously the Russian economy wouldn't have done as well, but besides numerous ex-Soviet countries experienced decent economic growth without oil and gas (Belarus for instance).
Housing construction peaked at 6.3% of our GDP and is currently down to 2.3%. The long-run share of GDP from 1980-2007 was 4.5%. The housing collapse did harm our real economy, but the huge damages were primarily caused by housing's connection to Wall Street.
I honestly have no idea how Gazprom is connected to Russia's financial sector, so I can't comment on what an EU-gas blockade would do to Russia's banks.
All "bio" energy that's not about using waste is an inefficient usage of area at best.
Delete@Thorfinsson:
DeleteOfficials won't disrupt international finance systems needlessly by questioning such figures. Russia did not only have a couple years of trade surpluses; they also had troublesome years earlier during which they had deficits. And I doubt that most of the oligarchs' money transfers were accounted for by statistics.
Kurt asked: "Is it possible to replace gas imports from Russia with biogas produced at a higher price domestic?"
ReplyDeleteThe irony of the current situation in respect to biogas is, that biogas is used for baseload electricity generation, farmers are payed a high price (20 cent/kWh) to provide the cheap product baseload.
If we switched all biogas from baseload generation to peakload, i.e. we do not pay for electricity but for purified methane, we could very likely replace all of the imported NG, the missing baseload would be provided by hard coal, which has excess capacities.
However, the overall potential of biogas/biomass is quite limited in Germany. Best case is that 10-15% of the demand could be covered.
By far the cheapest solution which has an impact is to improve the insulation level of buildings, goal must be to reduce consumption by 3% per year.
Ulenspiegel
The energy efficiency (or money efficiency, don't remember) of even more insulation has come under scrutiny recently.
DeleteThe savings potential is in the context of a major crisis elsewhere; we don't need to heat to 20-20°C during winter, but can make do with 17-18°C. This - even if applied only in office and other work spaces - would mean huge heating energy savings.
The industry can also switch rather easily within few years towards more coal use for the chemical industry; worth about 1-2% NG savings.
The year-to-year fluctuations of consumptions (7% recently) dwarf the short term savings potential in no-crisis mode, though.
SO wrote: "The energy efficiency (or money efficiency, don't remember) of even more insulation has come under scrutiny recently."
ReplyDeleteIt was a study ordered by the KfW. Their assumptions in respect to future energy costs were overoptimistic in case of oil, only 1% higher price increase than inflation rate, and even for NG quite optimistic.
If you used 2%, you would get even with their other asumption a positive return within 20 years.
However their most critical flaw was not to assume that thermal refitting is usually performed when other refitting work is anyway due. Therefore, DIFFERENTIAL COSTS must be seen, not the absolute costs.
A correct thermal refitting strategy is still the cheapest appoach to reduce imports of fossil energy.
SO wrote: "The savings potential is in the context of a major crisis elsewhere; we don't need to heat to 20-20°C during winter, but can make do with 17-18°C. This - even if applied only in office and other work spaces - would mean huge heating energy savings."
That is only a short-term fix. The long term approch must include the reduction of heating energy. Of the German final energy demand of 2500 TWh more than 1000 TWh (!) are used for the heating of buildings and water. There is no realistic chance to substitute this 1:1 with REs.
However, reduction by 50% and providing the heat with heat pumps would reduce the damand to 150 TWh electricity, something we could handle with ease.
SO wrote: "The industry can also switch rather easily within few years towards more coal use for the chemical industry; worth about 1-2% NG savings."
Here I disagree. Industry only needs 300-400 TWh process heat at higher temperatures, however, the hardware is optimized for NG, a switch to coal is in most cases not possible, even electrification -powerplants run with coal or we build more REs- requires new production facilities, which are very expensive. Here the refitting of buildings is much more efficient.
NG is >80% used in industry for providing heat, in contrast, oil is >80% used to provide chemicals, that are used as feedstock.
SO wrote: "The year-to-year fluctuations of consumptions (7% recently) dwarf the short term savings potential in no-crisis mode, though."
Of course we have a 20% difference for heating demand in warm and very cold winters. But this can of course backfire. Assume a winter like 2012/13 and a reduction of NG imports. You freeze, or you lose 50% of your chemical production.
Ulenspiegel