Energy Prospectus

Notes below are from OilPrice.com

The recent oil price surge triggered by rumors of an impending OPEC+ production cut has hit a ceiling and even though the meeting is just a week away, focus has shifted towards aggravating macroeconomic environment, dragging ICE Brent down to $100 per barrel. Inflation has roared back into public debate, however, this time around it is not the United States in the limelight but Europe. With almost every single major country seeing double-digit inflation and still not yet seeing the peak, the European Central Bank is already testing the idea of a steeper-than-expected interest rate hike of 75 basis points. And this might still be far from the end.

- With the euro zone already in recession territory and most governments mulling the possibility of blackouts, the economic prospects of Germany are worsening by the day amid plunging German stocks.

- Germany’s largest gas importer Uniper (ETR:UN01) requested an additional €4 billion of bailout money from the German government, having already fully drawn down an additional €9 billion credit line from state lender KfW.

- Soaring energy costs have resulted in Germany recording its first monthly trade deficit since 1991 this June, with the German economy becoming more dependent on China in H1 2022 amidst increasing investments, despite political pressure on Berlin to pivot away from Beijing.

- Seeking to halt runaway power prices, the idea of implementing a Europe-wide gas price cap is increasingly gaining traction, with rumors circulating that the September 09 emergency meeting of EU countries is aiming to do just that. < Asia will love this because they will be able to outbid Europe for LNG cargos.

OPEC+ Supply Cuts Getting Real. With most of OPEC+ heavyweights continuing to bemoan the alleged disconnect between paper and physical oil markets, with the United Arab Emirates and Nigeria joining the ranks of such countries, the chances of seeing a concerted production cut are increasingly higher. < This will send WTI back over $100/bbl. BTW Saudi Arabia could not meet their production quota in July.

IEA Eyes More SPR Releases. With the 180-million-barrel U.S. SPR release coming to an end in November, the head of IEA Fatih Birol advocated more strategic stock releases, saying that members should consider them whenever the prospect of supply disruption emerges. < Before the end of Joe Biden's first term, the SPR will be drained completely. Are we real stupid enough to follow Europe down this rabbit hole???

August 30, 2022
The German Weapons Shortage
By: George Friedman

Germany’s foreign minister suggested this week that Germany cannot send more of its own weapons to Ukraine because it has deficient supplies. If this story is true, it means that Germany, with the largest economy in Europe, does not have the facilities to rapidly produce more weapons – despite pledging money for the production of weapons for Ukraine. The money matters, but only to an extent. The capacity of other NATO countries to provide weapons to Ukraine has production limits as well. Although the German problem was anticipated from almost the beginning of the war in Ukraine, and Germany has provided cash in place of weapons, there are several considerations.

First, as is widely known, Europe and Germany are facing a very cold winter as Russian energy exports decline. It’s possible that the German weapons “deficit” is a concession to Russia, but it’s highly unlikely: Berlin could not do this without it being widely known in NATO, where member states' weapons capacities are known and production is tracked. This would get out to the Ukrainians, Poles and Americans. We would have heard about this by now.

More important is what this tells us about NATO. NATO is supposedly the guarantor of Europe’s national sovereignties. Germany, Europe’s premier economy, had enough weapons to provide a small degree of support to Ukraine. But the hard truth is that the Ukraine war is a relatively minor, if tragic, conflict in the overall European picture. If Russia were to take Ukraine, including its far western border, it would theoretically be in a position to move farther west into NATO countries. The United States, the United Kingdom, Poland and potentially France have significant force capabilities, but the United States would shoulder, by treaty, the main burden. If this situation came to pass, another Cold War and potentially another U.S.-confrontation would follow. Therefore, Germany’s failure to create a defense industry commensurate to the size of its economy is inappropriate and raises questions about the rest of Europe’s production capacity.

This problem arose from the European myth that war is obsolete and that the primary purpose of Europe is to build perpetual prosperity. The EU motto, after all, is peace and prosperity. The former was regarded as obvious, and the latter followed. Europe compounded this myth by constructing a quasi-state, in the form of the European Union, that was solely focused on economic well-being, with the added purpose of creating a European identity. Military affairs were left to individual states. Since the United States was a member of NATO and, as such, anchored Europe’s military security, Washington became the de facto guarantor of European security.

Germany’s weapons deficit reveals as much. Given its position as the largest European economy and as a NATO member, it is reasonable to have expected Germany to maintain or build weapons production facilities out of a sense of responsibility. It could have also led the EU writ large in creating weapons production capacity or fostering the growth of a European military. Since the EU’s annual gross domestic product is roughly the same as America’s, that would have allowed the Europeans to absorb the risk of waging a Ukrainian war with European weapons and forces.

Since a war in Europe was farfetched when the EU really got rolling, no one wanted to fund such an undertaking, leaving it to NATO, and therefore the United States – a most cost-effective measure. But the underlying truth is that the EU consists of members who don’t much trust each other. The command structure of a European military would be hotly contested, and the growing power of some countries would surely be discussed.

It is dangerous to be rich and weak. Such nations are frequently seen as a tasty meal. That is how Europe appears to global predators. The United States, which is both rich and strong, has to defend Europe because the wealth, technology and knowledge of Europe in the hands of other states might imperil the United States. The Europeans have for centuries mastered the art of using weakness effectively.

I do not regard the German production shortfall as a cause for real concern. But in the long run, the European belief that the Continent faces no threats, or that the U.S. will assume the risk and cost of defending Europe from whatever risks do exist, can last only so long. It is better perhaps that Europe remain militarily weak. History shows that a well-armed, divided continent is savage beyond imagination. Armament and disarmament are both troubling. Something that is not an issue now always becomes a frightening issue in Europe eventually.