Wednesday, October 29, 2014

It is always about energy

One of the reasons that Apollo 13 is one of my favorite movies is that there is a scene where the ground crew is trying to figure out a way to get the crippled craft home.  They are talking about the various strategies when John Aaron, (played by Loren Dean) delivers his "power is everything" speech wherein he lists the many things that will fail if the batteries go dead.  It's quite a list and at the end, the crew is dead.  Now I have no idea if this scene is fictionalized but I know several things that make it true to life.  1) John Aaron truly was a man with more than his share of good judgment and phenomenal problem-solving skills.  He was in the room because of his abilities—not because he had a privileged upbringing or an "elite" education (Southwest Oklahoma State, anyone?) 2) The reason everyone paid attention to him was because these were rocket scientists who were forced to consider energy issues every day.  While most folks in the industrial countries live lives of such ease they can treat energy as just another detail, people who designed devices that could transport humans through the cold vacuum of space KNEW that energy is always a matter of life and death.

I have never been in space but I had an experience similar enough to make me shudder whenever I recall it.  It was a very dark February night in North Dakota.  The wind was howling along in the 30-40 knot range—enough to violently shake the car.  The temperature was around -25°F (-32°C) and dropping rapidly.  I was about 30 miles (50 km) from home on a road with almost no traffic or settlements and the gas gauge was in the red.  I was scared shitless.  I only had gotten my driver's license a few weeks earlier so I didn't have a lot of emergency planning experience.  I figured that if I ran out of gas, I might survive for two hours in the car or 10 minutes outside of it.  That was my "power is everything" moment and I have never forgotten it.

The story below is about the Germans contemplating the possibility that Russia could cut off her natural gas this winter.  Officially, the response to this possibility is that it might cause a few inconveniences but that good planning will pull everyone through.  But apparently, there are some John Aarons in Germany who are warning that everything most certainly will not be OK.  Their report was leaked to Spiegel.  Suddenly, the German grown-ups are having their own "power is everything" moments.

Everyone seems to be hoping that Russia will decide that it is in their best interests to keep selling their gas.  As Richter asks so arrogantly below, "What are they going to do with the gas that gets pumped on a daily basis to Europe, and particularly to the largest consumer, Germany? Inhale it?"  No mein Wolf, if they don't sell it this winter, they can always sell it next winter.  Germany will still need energy and replacing the infrastructure to substitute for Russian gas will require years of planning and construction.  In this case, the "power is everything" argument extends to the realms of geopolitical gamesmanship.

And economics.  One of the reasons why I find the economics profession so childishly goofy is that virtually none of them even BEGIN to treat energy seriously.  Perhaps instead of being miseducated at Harvard, Chicago, or Stanford, they might opt for one of those physics degrees from Southwest Oklahoma State.  Because Aaron was right, power IS everything!

LEAKED: What Happens to Germany if Russia Turns off the Gas

by Wolf Richter • October 21, 2014

One of the threats, or perhaps the threat, hanging over the EU due to the sanctions fiasco has been the possibility that Russia could shut down the pipelines and stop deliveries of natural gas to European countries. It would be a way to escalate the crisis and force a solution of one kind or another.

It would do enormous damage to the Russian economy. What are they going to do with the gas that gets pumped on a daily basis to Europe, and particularly to the largest consumer, Germany? Inhale it? Because there is no infrastructure in place to export that gas in those large quantities to other customers that are not part of the pipeline system. It would cut foreign exchange earnings and government receipts. It would devastate Russia’s natural gas industry. And it would curtail any desire by other countries to ever rely on Russia’s energy exports.

But it wouldn’t be a big deal in Europe, said G√ľnther Oettinger, European Commissioner for Energy, when the Commission released its gas “stress test” last Thursday that had ostensibly been designed to test what would happen if Russia stopped pumping gas to Europe for six months over the winter.

“For the very first time, we have a complete picture of the risks and possible solutions,” Oettinger said. Sure, some countries, particularly Estonia and Bulgaria, would have problems, but…. “If we work together, show solidarity and implement the recommendations of this report, no household in the EU has to be left out in the cold this winter.”

Apparently, like the infamous bank “stress tests” before it, this stress test had one purpose: generate soothing words that make people feel confident everything was under control, that they didn’t have to worry, that they could just keep plugging.

In reality, even for Germany – which is not nearly as dependent on Russian natural gas as Poland, Finland, Estonia, or Bulgaria – it’s a dreadful scenario. That’s what emerged from a report by the German Federal Energy Ministry that was leaked to the Spiegel. The report, which even Parliament hadn’t seen, became part of the risk analysis that the Federal Economy Ministry sent to the European Commission in late August – and to the very same Vice-President of the European Commission responsible for Energy, G√ľnther Oettinger. He has known about the facts at least since then. Nevertheless, as part of the Commission’s gas “stress test,” he continued spouting off his falsely soothing words.

The analysis examined what would happen in Germany if Russian gas supply were completely turned off for six months during the winter. It would reduce gas supply by 23 billion cubic meters, when typically Germany uses 51.2 billion cubic meters during that time. That’s a 45% cut!

But only a small fraction could be compensated for from other sources:
  • 2 billion cubic meters from additional LNG imports
  • 0.75 billion cubic meters from additional imports from Norway
  • 3.0 billion cubic meters through fuel switching at power plants, for example to oil, and by non-delivery to certain customers with cancelable contracts.
It would amount to less than 6 billion cubic meters, to compensate for a shortage of 23 billion cubic meters. After a short time, even though gas storage facilities are 96% full, the government would have to proclaim an energy emergency, which would give it the power to decide who gets gas and who doesn’t.

Gas would be allocated in sequence based on a hierarchy of four groups, according to the report:
  • Protected customers (mostly households, but also gas-fired power plants that supply heat to customers)
  • Gas-fired power plants that are deemed indispensable for energy supply
  • Industry
  • Other gas-fired power plants
Group 1, so mostly households, use 26 billion cubic meters. Group 2, indispensable gas-fired power plants, use another 2.4 billion cubic meters. Combined, they’d use up 28.4 billion cubic meters, more than the available gas. The rest of the customers – industry and other gas-fired power plants – would get nothing. Theoretically.

But it gets complicated, the report found. This is the theoretical distribution. In reality, “it is technically difficult in a distribution network, to separate protected customers from non-protected customers.” Hence, households that should be getting gas might well run out as their gas was used elsewhere.

Industry would lose much of its electricity as power plants that aren’t deemed indispensable would have to shut down. Forget heating those manufacturing plants, or turning on the lights, or booting up the robots…. Production would plunge. Layoffs would soar. The supply chain would collapse. A cut in gas supply would generate enormous economic costs, the report said. And even the lucky ones who would get gas would have to deal with dizzying price spikes.

With this move, self-destructive as it might be, Russia could lay waste to Germany’s industrial power, at least for a while, and it would wreak havoc that would then ricochet around the world as German export orders would remain unfilled, and as imports would grind to a halt. The costs would simply be too large to contemplate. And that’s why the report had been kept secret, and why even the German parliament hadn’t seen it, and why Eurocrats had gone all out with their soothing words to mollify the population.

Russia still has $396 billion in foreign exchange reserves, though they’re shrinking, and a strong balance sheet, though it’s weakening. But it has a host of issues, apparently. Read… Why Moody’s Cut Russia to Two Notches above Junk. more

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