Just How Bad Will the Energy Crisis Be in Europe This Winter?

mother is actually visiting the States at the moment. She lives in Austria, so I'm getting a firsthand picture of a lot of the stuff that's going on there in terms of attempts to save energy in the middle of a heat wave, I might add, and she even had to She had to trade in her car for she says, for something more efficient and reasonable in the current climate. So she gave up this very like gas guzzling convertible

in order to get some efficient like sedan. Well that's uh, that's the goal, right everyone, Everything becomes a little bit more efficient. Conservation is the pain? Would she come on the podcast? I don't think so. Okay, but you know, there's a lot going on in Europe with energy at the moment, and it's pretty clear now. You know, we touched on this a little bit earlier in the year, the potential for an energy crisis in Europe, and it

now looks like Europe is firmly in one. So, for instance, if you look up the benchmark gas features in Europe Dutch t t F contracts, I think they're still hovering around like two hundred euros, which is pretty close to a record high. We know that before Russia invaded Ukraine it was responsible for something like of Europe's energy imports. That has obviously dropped quite a bit as Russia sort of cuts off gas supplies. But the big question is what can Europe do to offset this and exactly how

bad could things get this winter? Yes, this is the key question. How bad will there be a big shortage? You know in the summer you can sort of, you know, not run the air conditioning is hard, or maybe you know a lot of places don't even have air conditioning, etcetera.

Open windows is what my mother keeps telling me. It's worth noting, by the way, that Dutch natural gas features contract that you quoted is to around two euros is you know, is eleven So I just think it's really, you know, for some context, just an absolutely insane jump and the gas shortage or the gas crisis part of it, but also a lot of attention paid lately to the state of the French nuclear industry, disrepair, lots of shutdowns, reactors not operating, So there is a confluence of factors

really putting the squeeze on Europe right now. Yeah, and again, like it is just crazy to think how far we've come, both in terms of prices, which you pointed out, but just in terms of the actions to try to contain this crisis. Because I remember when Pierre and Durand came on the show, um, you know, in the spring, and he was talking about, oh, Europe might have to ration and energy and that seems so extreme at the time, and you know, fast forward a few months and that

is exactly what is happening. There's a scramble not only to save energy, but also a scramble to store as much gas as possible. So I am very very pleased to say that we are going to be speaking with two people on this topic today. We're going to have a real discussion around the issue, get some varying viewpoints. We're gonna be speaking with Heavy a Blast. He is, of course a columnist over at Bloomberg Opinion and an

expert on all things energy. And we are also going to be speaking with Alex Turnbull, who we've had on the podcast before. He's a fun manager based in Singapore and also a researcher in global energy. So thank you both for coming on the show, Thank you for having me. Thank you very much. So have it. Why don't we start with you. Let's let's just do the basic question. How bad do you think things are going to get

in Europe this winter? Well, it's gonna get bad. And allow me to give you a personal example and also show you how bad I am at investments. I use recently. I use recently close the purchase of a house in London, in West London. I resisted for many years. I was very happy with my flat, but I wanted a garden, as every middle class British person likes. And you know I did that probably at the very peak of the market. So that's how bad I am. So I was used recently.

I'm just doing my moving and I was thinking how bad it will be if I could not carry my gas and electricity contract. That I have and it's you know, fixed for for for a number of months still ahead, and I have to start from the scratch, just get a new electricity and gas contract on the new your property and currently paying about a hundred and thirty five pounds per month for electricity and gas in my current flat.

If I have to get a new contract because prices have gone so much up and because every utility in the UK is already factory in the big price increase that we're going to get from October, my bill will go monthly from a hundred and thirty five pounds to

four hundred and seventy five pounds per month. That is how bad it's going to get now using mine, working class families getting electricity and gas bill, unless the government makes an intervention of anything north of four hundred, four hundred and fifty pounds, which is more than five hundred dollars per month used for electricity and gas put aside castoline prices, that's how bad it's going to get in terms of the impact of the cost of living crisis.

And that is across Europe. What is happening in the UK is very similar in Germany, where utilities are already warning consumers that the utility monthly charge is going to double at the very least starting on the first of October. So Alex, I want to bring you in, you know, as have you mentioned, his energy bill is going to soar, and of course we're going to see that across Europe if people haven't already had that rerating kick in already.

But it's one thing for prices to surge. It's another thing for say, people do not have power, maybe people do not have heat, or probably more likely industry in some countries has to shut down because it's uneconomical. What do you see as the sort of you know, is there risk of something beyond it's just more expensive and something more sort of fundamental hit and shortages that's coming winter.

I think in the short term it's very hard to do a lot of substitution, which is, while we saw not a lot of change in industrial gas demand in Europe around last winter, there was a sense in which everyone was kind of frozen in place, but you're already starting to see quite substantial substitution for industrial demand. The problem is is that as a consumer, it's Harvier points out, there's not a lot you can really do in the short term. But you know, here's where my story of

buying the house comes in. I bought a house briefly before COVID in in Australia, and I was planning on putting solar panels on it, but then I kind of got locked out of the country for two years because of Australia's COVID controls, and my tenant, who was not happy with the change in power prices, basically said like, if you want to put solar on it, and I said, yeah, I actually I love to do that. And so that's already knew about seventy their power demand UM and their

power bills. So in places like Australia where you are similarly impacted by issues of gas and coal, price has been the marginal pricing source of demand, and it's certainly South Wales. UM. You can type of media action and I think you're going to say a lot more of that over time, but but that does take time, and that demand destruction not in a bad way, and a sense that people workout ways to consume less while preserving

their lifestyles. That is a multi year process and so in the short run, people can't really cut their consumption much but at a time that does tend to happen, you know. I think the real lesson is to be like Tracy and when you buy a house, discovery that you actually have a mountain of coal in your basement, which is something Tracy revealed to us in a recent episode. That's like the ultimate hedge is to buy a house

that comes with coal. Don't worry, guys, I too bought at the top of the market, so yes, I have some commodity exposure to offset that purchase. But yeah, Alex, I mean I mentioned the benchmark gas contract in Europe earlier, hovering around like two hundred euros, and Joe pointed out that that's up from nineteen, you know, just a little while ago, but it has come down a little bit, like there does seem to be some moderation recently. What's

driving that? Is that a sign that maybe we're turning around the corner as some of these energy savings kick in, or as Europe starts to reach its gas storage target. I'm allowed to make any definitive comments here. On the one hand, I'll point out that if you talk to your friendly prime broker about wanting to trade something which

realizes about volatility. On a good day, you may find that actual risk taking capacity in these markets is heavily constrained and the information in prices is not quite what it once was. UM. So that there's that. UM. The other thing I would point out is that that can be both to the upside or to the downside. So we saw a similar dynamics in coking coal for much of this year when people were concerned about USh and

supply getting taken out of the market. But then China open the border the Mongolia and mongol, so you took seven million tons out from Russia, but then actually China just board it all more or less, and then you also had Mongolia into the market for thirty six million tons run right currently. So as a result, coke and cole went from say two fifty dollars to six briefly

and is now back to two hundred dollars. So, UM, I don't think we're going to get a kind of supply d s X macin in gas or high caloritic value coal to fix Europe's problem that quickly. Have you can you sort of give us the broader picture of how you wait the different factors driving up European prices right now because obviously everyone is, you know, quite aware of the stress and the tensions between Europe and Russia

over the war and the declining exports. But then of course you know there's also and this has gotten more attention than the last couple of weeks, the French nuclear industry has is operating a diminished capacity. France is currently an electricity importer as opposed to an exporter. Like you know, there's there's multiple factors and how would you attribute them? So, Joe, You're right, there multiple factors that they are driving here the market on gas. The most important one certainly is

Russia restricting supplies to Europe. You take Germany as an example, Supplies are down eighty percent from where they were normally, and that is a completely political decision by Bloodymid putting to put pressure on Europe and drop the support on on Ukraine. Then in electricity, the situation in France is

certainly the main driver. About fifty percent of the nuclear reactors in France are not working at the moment, Most of them are on maintenance revised, just checking for cracks on some welding, and that it has really forced France to import and usually last quantities of electricity from every neighboring country, which is putting pressure on gas because that means that we are consuming more gas for for power generation. Looking forward, well, a lot of the situation in Europe

is gonna depend, I think on three factors. Number one is what Bloodymid Putting does in the next few weeks and months, whether he shuts down completely supplies or not. Number two is the weather. How call is going to be the winter in Europe or how warm. If we get a mile winter like last year, Europe may be able to whether the problem without much of an additional problem it's really called in Europe, then there is trouble

in Europe. It it's called in Japan. There is also trouble in Europe because it means that Europe is going to have to compete with Japan for llergy supplies. And the other big question, and Alex was talking about this earlier, is how much consumers from myself to the big companies are going to be able to save this winter. We are beginning to see signs that demand in the industry is coming down. That's in part due to high gas prices.

We are beginning to see some substitutions, some companies trying to run on fuel oil or diesel some of their operations. And I think that consumers are going to save quite a lot of gas, in part because, to be frank, I don't want to be hit by a four hundred seventy pounds and months bill for my electricity and gas. So yeah, I'm gonna put my thermo state a bit lower. And how those factors are going to interact over the

next three months it's going to be the key. But the big problem for policymakers and for traders is that you cannot really model properly two of those factors. I mean, you could make assumptions on savings, how much demand substitution is gonna be, you could, you could really try to attempt to answer that question, but you cannot really answer the question of what bloody mill Puttin is going to do and how call is going to be the weather four months from now. And that is why it's so

difficult and so volatile the market right now. And Alex said add to that that there is very little liquidity, so the information on the price is rather imperfect at

the moment. That's really interesting. So I take the point that it's difficult to predict what Putin is going to do, and it's probably difficult to predict exactly what the weather is going to be this winter, But could you make an assumption about how or could you try to model how well prepared Europe is for the possibility, for instance, that Russia just cuts off all the gas, because I think at the moment, like the flows through nord Stream something like one to of normal capacity. What if they

just go away? How prepared would Europe be for that scenario? If the flows of North Stream were to stop, let's say tomorrow. You know, we we are not nearly there. We will we will, we will not have enough gas in the storage to make it through the whole winter

without having to save significant amount of gas. That means demand destruction in the industry if we can't build inventories to the eighty percent target or nine percent target that Germany has put itself to, the Hargert higher target by October November and then putting shuts down completely gas supplies. We will make it through the winter barely, but we will make it through the winter. But that's gonna still require very high prices because you need to you need

to make sure that some industries are not consuming gas. Uh, you have a combination of putting cats supplies, say September October, and we have a cold winter. While that really requires some significant savings on energy, and that will require the German government effectively taking control of the energy sector and saying you can consume, you cannot consume because we need to. We need to make sure that every home has enough gas for hitting. The priority will be the homes and

everything else will be secondary to that. But all of those scenarios also create a problem. Even if we make it through the winter without massive troubles us with having to I mean, an economic recession is given, but you know, without additional pain beyond that, we are in a very precarious situation for the following summer and the following winter. So this becomes a bit of a multi year problem.

So even if you make it through the winter in twenty three, then you emerge in March of twenty three in a very low situation of inventories and probably with not enough time to rebuild inventories for two in any meaningful way. So then you have another year of problem, another year of high prices. Look, it's not how to put it, I mean, it's not really good. It looks

very challenging. Best cases scenario we make it through the winter without significant trouble, having to reduce demand in the industry and paying very high prices similar to now that I think it's best cases scenario. Worst cases scenario is we have to race on gas significantly and paying even higher prices than today. Alex, what is your assessment of

the inventory situation right now? And then you know if this is like you know, we're not just talking winter, and like, is there more capacity to import gas besides nord Stream, like through terminals or is that just completely maxed out basically, I I guess on on inventor is currently depending on how you can figure your model, we're in the seventies now. In terms of storage, there's still to my it's pretty aggressive storage builds ahead of us.

So we will be, by my estimates, you know, in the mid eighties by the time at peaks, which is generally a very good place to be in terms of storage levels. Um and if you look at your break down the nodal consumption of the way they present the data in Europe and industrial demands already down a lot of places, and some of that were easier saving some of that SF moving more of ammonia production to the States, but that's in. Industry is already very much doing its bit.

If you assume households do very modest levels of demand constraint, I don't think the winter is going to be that stressful. However, every marginal gigga jewel that comes into Europe giggle, what our or however you want to measure gas, the gas has to come out of the lergy market, and that is very tight. And the reason that's tied is because it had to grow to accommodate Europe very quickly. When it's normally had quite moderate, sort of mid to high

single digit growth at best. It's had to grow almost this year and that's not easy to do. And the reason that's tied is that you cannot get a lot of incremental gas into the market without more energy landing capacity in Europe which is coming in, but also more export capacity from the US. So over time, I agree, it's a multi year process, but that's spread between US

gas prices. Henry hub and what that translates to into um TTF will converge towards Henry Hub plus a spread over times US gas becomes essentially linked to global lergy prices. Historically it was linked, but but it sort of broke because the we suddenly hit a constraint in terms of export capacity and demand in Europe. Just real quickly, to what degree alex is this? You know, aggressive demand for energy in Europe? How is it spilling over to other

llenergy importers? And I'm thinking, you know the natural gas depend in Asian countries, like what is this sort of like global knock on effect. It was quite funny as an Australian because it very quickly blew up Asian ellergy prices where cargoes had to be rerouted or China due to lockdowns consume less gas, so resold cargoes and spot

markets innovated them to Europe. But then in Australia people thought they were sort of immune, and then by April May, Australian power prices started moving very aggressively up because the European grid will first burn gas if it can, we'll consume it. If it can't get that, it has to burn coal. And the coal it burns is six thousand killer cow coal, which is exactly what it's produced in the Hunter Valley of Australia, where most of Australia's Eastern

grid's power plants are. So it's it's everyone has got swept up in this to one shape or form or another. I want to bring Heavier in on the same topic. Really, I mean, it has been a pretty rapid adjustment the way the LERG market has done this. And you know it used to be a fairly fragmented market and now it's increasingly globalized because of all these pressures and some other factors. How do you see that shaking out, Heavier and how does it sort of change the dynamics of

the energy industry as a whole. Well, clearly, the ability of Europe to tap the llend market has really saved the day for Europe. This has happened only ten fifteen years ago, where the global lending market was not nearly as developers is today, and the ability of cargo's was much lower, particularly on the spot market with the ability to reroute carrigos, Europe will have had a big problem

and the dependency on Russia was much much higher. So the lending market is offering a relievable to Europe in so many ways. Um. I mean, one of the things that we have seen that to me is very interesting is Europe. But the Many is outbidding everyone else in the market taking the llergy. That's one of the reasons

we have these very high prices in the market. I mean, on fundamentals, as Alex was pointing out, we should not probably have two hundred euros permica the hour of gas because the inventories are builting in the right direction and we should have enough gas um if putting was to keep the flows. But obviously we need to continue outbidding the whole market for llergy supplies, and for that we need to sustain very high prices in Europe for that

to happen. What's happening there is that a number of countries that were starting to rely on the global llengy market for supplies middle middle income and poor countries and thinking the likes of Pakistan or Banglades or even India are now being um. They're seeing now that European nations and European utilities campaign much higher prices, so they're not

getting the cargos that they were expecting. Some of the cargos that this will be going into Asia at the moment I rerouted into you Rope, and we have seen power supply problems in the likes of Banglades or Pakistan,

which is affecting the textile industry. So in a way it may be a case where Europe avoids the black house that many of us we have been talking and fearing, but only because the black house move somewhere else, somewhere else that they cannot really pay the price that Europe is paying for the llergy and then the black house are happening in Pakistan or Banglades, but the black house

are actually happening. It's used differently, and that global ellergy market is allowing that arbitrast to happen that without it, well, it will not be happening in the black house will be happening in Europe because we will not be able to get in off GUS real quickly. Is there any prospect in the sort of near future for there to be a single natural gas press. I mean there's not

a single oil press, but it's close. You know, Brenton to WTA and the other benchmarks, they tend to not be that far off, whereas with natural gas, you know, the gap between Henry Hub and the Dutch numbers sort of wildly different, and it's different all around the world because the transmission infrastructures so fragmented. But if this market keeps getting built out and export and import terminals and so on, well, is there a point in the future

where there's more or less a global natural gas price. No. I think that we are still far away from that. I think that we are getting a lot more integration. And you see now that something happened in the US and that's moving the rest of the markets, or vice versa, something happens in Europe and and moves the global gas market. But we're going to still have a lot of spreads and you're not gonna have Henry hab trading at TTF level. I think that that's that's far far away from today, Alex.

I want to go back to something that you said earlier, which is that the informational value embedded in commodities prices might be less than it was because of the volatility in the market and the uncertainty over the outlook. Can you give us a little bit more color on this aspect of it and what it's actually like trading energy at the moment well, I think it's with any value

at risk model. The more volatile a thing is in general and the more thinly traded, So the less volume going through the exchange or however you measure that liquidity, the more you will be charged to trade that, both by exchange margin and whoever you're trading through in my case, or if you're a bank, you trade director the exchange, but your internal cost of capital for that stuff goes

up pretty quickly. So yeah, if something realizes more volatility than extremely marginal crypto tokens, then you cannot get leverage on it, which means your ability to bet on spread trades between Maybe I think the price is a bit crazy today, but it's the back end. Prices are good value that just becomes very expensive to put on, and when you model out the returns, amount of capital get tied up in those transactions gets to be wholly unappealing.

As a result, people just pull back from the market, and so if you're a physical trader, it generally means that the spot market becomes very wide and disorderly, which is amazing if you're a glen Cora or trafficker or the like, but for people trying to lock in like industry, like industrials or big energy users trying to lock in longer term prices, it becomes more or less unworkable. Both

of you. You can come in on this question. If the price of energy or the price of a given contract, as you say, loses some of its informational vilure or it's less liquid or sort of you know, harder to arbitrage, What are the what are the consequences of that? Is it that it makes planning harder? Is it that, you know, thinking about what you need to do for the winter, like, what are the negative effects of prices losing their informational value? Yeah, I think it's very hard for people to plan. I

think it's also modeling. People will assume a price on a screen has inherent meaning, and whereas you've often got to start to take a view as to how, for example, growth and allergy, export capacity from the US and demand destruction Europe and landing capacity in Germany will lead to some sort of convergence to some arbitrage condition or close to that arbitrage condition. Because right now it's it's it's

pretty wild. So I think that, yeah, you really have to have a good view on value to be able to take risk. The other thing you're seeing, of course, is that if you want to build a solar farm in Europe and get a p p A at what used to be an obscene price, people will just about take your hand off because it's at least firm, it's a it's a it's a firm source of power, and it's going to be a lot cheaper than spot. So

so that those guys are doing okay right now? Yeah, I think that, I mean to our explorence, I think that it's just planning. It's becoming very very complicated for companies, and also the liquidity but growing in the forward market is so thin that anyone that wants to hedge any risks is facing a very difficult time with with additional problem that you are hedging any race, and particularly you are a power producer and then you want to sell forward.

I mean, this is the moment where you will think, well, you know, prices are a record high. You are a power producer, sell forward looking revenue a gray market. But obviously if the market moves against you and it goes even higher than you are going to be facing huge margin calls and those marketing calls could just potentially blow a company completely out of the water and run out

of credit, not because it made a wrong call. Actually it was heading at risk selling selling forward the electricity looking fantastic prices, but then marking calls hit you. You don't have the credit to pay them, and you could go ballly up just because of that. So it is a very difficult market. And I think that for the market right now in terms of offering a product for um, playing off risk, it's just not having the value that

they used to have. So we have seen a number of efforts to obviously mitigate some of the impact of higher energy prices. What do you think is most helpful or most effective at the moment? Have you? And actually when I ask you also, what do you think is the least effective? Just because I want to hear have you a rant about things? I think that the most effective thing that you're going to need to do right now is I mean, we really are going to have

to support the poorest families through the winter. It's just going to be catastrophic. I cannot really think what it's going to be for you know, poor working class families in Europe when they start facing a bill that is four hundred five hundred euros or dollars, and that is more most likely all the discretionary spending monthly, it's just going to pay electricity and gas. And they may have kids, they may have elderly people that they need just to

keep warm at home. I mean, you know, you don't need the lights to go off to face a problem where people cannot really heat themselves, and and and and and access electricity. If it's just too expensive, then you could have the same problem. So assisting that class of people, it's going to be an absolutely priority. And I don't

see nearly enough in Europe down'nt about that. Providing blankets support to everyone, no matter what the wealth is, no matter what the salary is, it's the wrong answer to it. It's just supporting demand in a moment that you need to be restraining demand. So I think that target is support is critical. Providing blankets support as many governments, particularly the UK has been providing, where everyone is basically getting a reveate and and a money for the government is

the wrong way to do. And then we're gonna get We're gonna need in Europe to get a lot more serious about trying to to be clear to people of what's coming. I mean, the Bank of England press conference when they increase interest rates was it was hard to listen to because the governor said, we're gonna have even higher inflation and we're gonna have a one year long recession. But at least you could criticize whether he was to

to a slow racing interest rates. But it's the first time that I see a policymaker, a central bank, governor, a finance minister just telling the public what is coming and warning in very clear terms what's coming. I think that it is time that prime ministers and under finance ministers start to be clear to the population about what's coming and start to prepare in the population for it

and then offers some solutions. But at the moment in Europe that he's not even an acknowledgement what'scoming and how body is coming. So I'm thinking still about you know, the sort of the tail of the two homes and Tracy's house with the big pile of coal underneath, and then Alex's house where there's you know, solar panels on the roof, and it feels like these are like the fork, the fork in the road, the two different directions. I've gone the non E S T route. Yeah, yeah, exactly.

So it's like, does this is this a moment where we, uh the world sort of backtracks on some of these E s G goals and uh start maybe reopening opening new coal mines which maybe a few years ago seemed unthinkable. Or is this really catalyzed an acceleration of different renewable energy sources? And it seems like maybe it's both one and one or the other. But Alex, I'm curious, like really both of you though, like what do you see as the sort of like first and second order effects

of this in terms of where energy investment goes from here? Well, personally that if you look at what's in the I R A bell, Uh, there's a there's a lot of clues there, and particularly things that Joe Mansion was very keen on. The US is going to export a lot more lergy, there will be more pipeline takeaway capacity to places like West Virginia. That is absolutely not an accident,

at least from Joe's point of view. Um, And but I think similarly, you're starting to see in places in Europe where Italy basically allows you to write down the entire cost of getting the heat pump. That sort of demand destruction and pretty muscular approaches to that are going

to be more common. Europe is quite perverse, and particularly the Netherlands until recently, whereby you get sort of protected by the government on gas prices, but you have full pass through a power prices which are effectively gas prices. So you're discouraging people from switching their heating to electrification through the structure of your have your electricity and gas tariffs. And I think there's there's a lot of clean up to be done there. But in coal, for example, I

think I don't think that's going to happen. The only reason the only grade of coal that is going bananas right now is the one that you can burn in European coal plants which have been reopened, or the other grades like you know, Indonesian lower calorific grades hundred type stuff that's already started selling off pretty heavily because China is just importing less coal and producing more of its own.

So I think the China impact is going one direction, and the europe gas shortage and then substitution dynamics going another. I think realistically, talking to people in the coal industry. They expect to have a really good time for two years and then be back to maybe not very good times. Opening new minds would seem to be a poor financial decision, but no doubt someone will try it. Yeah, I I

kind of agree with Alex. I think that we don't want to see international call mine in just having a boom, but we're going to see more coal mining in China and in India. And you know, the expectation is for this year global call demand to heat too much the two thousand and thirteen peak, and in two thousand and twenty three, on an annual basis, we will said probably a new all time high. I think that the biggest consequence of the current crisis is going to be a

sharper focus on energy security. Um that was I want to say abandoned, but the energy security took a backseat to climate change over the last five years or so. I think that you are going to have now energy security at the same level as climate change in terms of concerns by policymakers, and that most likely it's gonna mean slow down in some of the climate change initiatives you're going to have. You're going to keep a lot

more of coal fire generation um on a standby. At least you're not gonna shut down the plants and and dismantled them for good. You will keep them on on on standby. Uh. I think that's gonna be a reconsideration of nuclear in many in many countries. I mean, we are beginning to see when the Germans, despite everything, they're beginning to warm up to the idea that maybe keeping the plants a bit longer was not such a bad idea.

But I do think that we're gonna see also many individuals were possible to try to install solar panels on their houses. So I think that we're going to see on the next few years of boom on solar installation on on on individual houses. That it's gonna depend a bit on prices. I mean, the price of solar panels is starting to to to to go up. Uh. Speaking from from on experience about this house, because that would be my first investment on the house to put the

solar panels. I do have solar panels for the hot water, so I think that the shower is guarantee over the winter. It may not be very warm, but it's gonna be at least there, but I would not be surprised if in many European countries we see many houses we don't have a solar panel today that they will have a sonar panel by because I think that people have learned a lesson and say, well, if I can generate myself a bit of electricity, that is going to be very important.

The other thing that I for the first time beginning to see a lot of attention on is modeling electricity demand for the next few years. Electricity demanding in many OI city countries have been relatively flat despite economic growth over the last few years. But we are going to put quite a lot of more electricity consumption into the grids, coming from electric vehicles, coming from heat pumps. And that means that previous assumptions that electricity demand was not going

to increase need to be revised. And I see a lot of people now beginning to spend quhi lot of time of modeling electricity consumption in Europe and in the US for the next five or ten years. And then messages scom is that the demand is going to go up and I'm going to having some cases quite meaningful. Alex talk to us a little bit more about what

China is doing here. I mean both in terms of energy transition um such as it is in China, but also in terms of securing additional gas supplies, because one of the interesting things we've seen the summer is that while it seems like the rest of the world is really scrambling to get as much lergy as possible before the winter, China has mostly stayed out of that market and doesn't really seem to be ramping up imports or not trying to secure additional supply. What's going on there?

And if they come back into the market, you know at the last minute, it is that going to drive up prices? Yeah, it may well do if they do that. Though, if you look at the data for China's pipeline imports from Kazakhstan, Turkmenistan and Russia, they are more or less running those pipelines flat out at this point in time. So they have massively increased their purchases from Russia Kazakhstan.

The data is getting a little bit well, accuracy is more contested than it was a couple of months ago, but they appeared to be buying a lot more and

that's that's relatively uncontested. There's also longer term and this is a big question for the allergy market is and is that they're talking about doing a very large pipeline power of Siberia too, which would then lead to a question of world how much more ellergy is China really going to import because a lot of the power that China, a lot of the allergy that China is imported historically

is very seasonal. It's often geared towards heating in northern China in the winter, and recent promulgations from the relevant organs have indicated they want to go very hard on heat pumps also for for actual load balancing and their power grid. They now want to do I think it's two hundred and fifty gigawats are pumped hydro so that

they can better utilize their coal resources. So China's making a push much like everywhere else, for essentially friend shoring their energy supply to people in the Greater Eurasian land mass, as well as also just trying to reduce their alliance on gas full stop because they are price sensitive like everyone else, and if they have a lot of high quality coal they can burn instead and ellen j costs forty bucks or more per gig a dual equivalent. Then

they absolutely don't have time for that, have you. I just want to go back to something you're talking about before, and this idea of energy security may be becoming on the same level as a priority of climate, but you know, just in general sort of Europe's specifically, and then more broadly, like what do people think about e s G these days? Do you see some of the resolve weakening on uh, you know, some of these efforts that were very popular

and the twenty tends to reduce emissions. Do you see a sort of like actual backlash coming to this and maybe like people questioning it's like was going you know, was trying to discourage investment. Really useful exercise given where we are with you know, coal demand today. Like what do you see as the sort of near term future of e s G either at a sort of like

corporate level or just a sort of policy level. Well, to me, it was very interesting when earlier this month he now goes, we have the glenk Or first half results and they have the conference call, and obviously glint Or is the word's largest commoti trade. There is a big miner of coal is the largest exporter or thermal call in the c BORN market, and typically you will expect so own investors or sell side analysts just giving the company a bit of a hard time. Why you

are still um investing in call? Why you are not spinning of the business while you're not selling it? Sell it to the Chinese. It was a typical question and in this conference called actually a cell side analyst from a big major American bank asked the CEO of glen Core. He said something like, you know the world is short of energy. What is going to take you to start investing in coal mines to help the world in the short time with supply? And to me that was the

kind of a hard moment. I mean like when you know when a cell side analyst it's kind of saying no, Actually, the question here to us is why these guys are not investing modern call. That's how a back said, I

think e SD is taking right now. I mean black Rock put it quite well um earlier this year when it was just describing his views of about some of their shareholder resolutions on climate chains, and they said that those resolutions they needed to take into account the current geopolitical context but the energy market pressures and the implication

of both into inflation. I think for the time being E s D has gone at least on energy and commodities, has come from really they must have item the hottest selling item to a bit of them a day is I asked recently a big European institutional investor about E s G and and he was saying to me that is very yesterday. Is not really what I'm focusing right now. Is it gonna go away? No? I don't think it's

gonna go away. This is a cyclical business. High prices give way to low prices, and I think that at that point E s G is going to be back. But for the time being, I think that you're going to have a lot of investors to spaying lip service to E s D and climate means. And at the same time as a glink or are you going to put modern money into the core of business or not?

Can I just say something the on the E s G thing, Yes, sir, I think there is a real problem with the interactions between both investors in the companies in that people do not make big, good, equiliberal models of what demand should be for these fuels over time. And so when the war happened, obviously there was some quantum of gas and coal taken out of the market, and then there was sort of a record scratch, and the s G investors could not change their tune or answer, well,

how does this change things? You know, how do we get the fuel supply? Should we think about the geopolitical risk waiting of our fuel supply? There was absolutely no

response to that. But unfortunately, and this has been no credit to people on the in the energy sector, is they have not developed a coherent response aside from Harada, let's drill some holes now, and so I suspect we're going to probably get over investment and then the energy sector probably look silly again in due course, especially the

most marginal fuels, namely thermal coal. And so I I think there needs to be a lot more of an effort two model the world well so that we can pick up things, you know, like we did in our paper that China was probably just going to step away from coking coal maybe forever, and that's that stuff is important, but it's it's hard graft modeling, and it is not done enough today anyway, Alex and have you we want to give you guys the opportunity to ask each other

a question. So, um, maybe we start with Alex, is there anything that you want to ask? Have you? Yeah? I mean when you talk to all the trading houses, I mean, what is the general sentiment of the guys who are in physical training that you talk to. I mean there's a I talked to a lot of the folks in Singapore, but it's clearly uh, it just seems like complete disorder and European power right now. I think that everyone is trying to balance the res of supply

and under accession that is coming in Europe. I see a still most trade that's quaite, bullies, thermal call and allergy supplies and and gas in Europe. Um with oil, they have a bit of a less clear outcome because there are so many there are so many moving pieces, and each of those moving pieces is a million to two million barrels a day appears. I mean, it's going to be a deal with Iran nuclear there is are the sunctions in you the European suctions on Russia are

really gonna hit hard or not. You know, it's it's China gonna rebound from from COVID or it's gonna remain doing with the zero zero COVID policy, So they're a bit confused. But one thing that a lot of people seem to think is that we are not yet over on oil with with diesel in particular, and I hear a lot of concerns about the diesel situation come in

later this year in Europe. That is one that perhaps we are not on the season, so it's kind of drop a bit out of the rather from from a lot of people, but there is a lot of concerns on physical trading houses where Europe is going to have enough diesel disc this winter. They just real quickly what is the issue there, why diesel specifically, and why the

seasonal element of it. Well, obviously we need more diesel because diesel is is also heating oil for for winter and we still used, particularly in German, equal lot of heating oil for for the winter. And also because we are beginning to to to get a sense that if there is a problem of gas supply or companies see these guys high gas prices remaining, a lot of the incentive is to try to run on on diesel or heating oil through the winter because economically makes makes sense.

And you know, we we have seen even huge the national like B S a F the big German chemical company talking about using fuel oil or or or diesel as an alternative to us and sorry, and a lot of a lot Previously a lot of the diesel was coming from from Russia. So from February, in theory, Europe is not going to be important any diesel from Russia. And that's when you know, we have been talking about sanctions.

But all the announcements on sansions work for tomorrow, but that tomorrow is getting closer and closer by the day. By December, Europe cannot buy Russian crewd anymore. We're still buying it, and by February we cannot buy refined products. And when you take that amount of supply from the market, then it gets complicated. So Alex, my my question to you. You are based in Singapore, you have a very very

good view about Asia. How you see the response, But I'm very very curious because we sometimes forget about Japan, you know, particularly from the point of view Europe. But you know, it is still the four largest oil consumer, is a huge importance of l n G has a huge nuclear industry. I mean to me, it's one of the most important energy countries. Even if the demand there is no lower rowing, but it's still a huge consumer.

How do you what do you think the Japanese government in particular, and and that kind of intersection between the Japanese government of the Ministry of um of Metty and and the Japanese trading companies Showa Shasha and what are they thinking, how they're responding to these crisis that has

put the war of energy upside down. When I speak to people there and some people and Metty, they are engaging and as broad and I would say as deeper rethink of some of these issues, both for both for the energy shock reasons but also for security reasons due to recent developments as much as anything since the nineties seventies. I'd say there is all sorts of there're things of

are considered quite um futuristic. For example, like using ammonia made from renewables in Australia, you can blend about of it into the fuel of a coal fire power plant without substantial retrofits. That's all been pulled forward I would say five years, so they are considering that sort of stuff. They're also considering and that they are, and they have been doing a lot more renewables as well, both in terms of looking at agri volta x so view to

heat stress from from the recent really brittle weather. They've had people looking at basically putting solar in the middle of fields to reduce heat stress on plants because you

don't actually lose much of anything in yield. So there's a lot of stuff which is a little bit maybe not science fiction, but further down the the I guess critical path that has now been pulled forward as well as of course I'm trying to get nuclear plants restarted, but I think there's a sort of recognition that we are unlikely to unless Saudi Arabia were to evaporate or Australia you know, levitated off into the outer galaxy or something like that, you're unlikely to generate as big as

shock for them in terms of energy. Ever. Again, real quickly, and we're just about to wrap it up, but Alex, since you mentioned heat stress, this seems to be a thing that bubbles up everywhere. And you know, we have part of this story with the French nuclear is that they had to pair back because the rivers were still hot that they couldn't dump the additional hot water. We know that there are concerns with river levels in Germany. It's also in the American Southwest, very big concerns about

water levels. Like to what degree is climate itself contributing to strains on the production of energy around the world. Can I give you a specific example. So so, so there's a there are a couple of ucail plants in Switzerland, one of the one of which was just in the middle of so a little lot of fish island and a river and does not have a cooling towel. So the design was the river is always cold in Switzerland, we can just use the river to call the plant.

No problems, right. Unfortunately, now you get to a point where they can't run the plant as hard because the water level, the temperature in the river gets too high. And it's not that the river is about to boil off or anything like that, but you will kill the fish who don't really handle temperatures above centigrade. So that there's all these kinds of subtle constraints in these systems that you just kind of glide over as an assumption.

But as the climate changes and systems change, these become real issues in terms of how you can run a fleet of power assets, right, and then it becomes almost self reflexive because as the energy crisis worsens climate change, some of those like second order effects make it harder to transport commodities or produce commodities, and then you have

to go back to dirty your energy like coal. I'm thinking specifically about the water levels of the Rhine issue, the fact that it's more difficult to get commodities up the river given that the water levels are so low. All right, Alex and haav A, that was a fascinating discussion. I feel like we covered quite a lot of ground on what is a complicated topic. So thank you so much both of you for coming on all thoughts. Thank you,

thank you very much, and that was great. Thank you so much for coming up, So Joe, that really was an informative and thought provoking conversation. I thought, so one thing I hadn't realized, but both have A and Alex kind of brought it into sharp relief, was just the idea of maybe the price of commodities aren't telling you as much as they used to. In the current environment.

It seems like traders are having um some difficulty with volatility, you know, have a mentioned margin, and the fact that it's difficult to trade if you think that your position is going to blow up, you know, in the next week or two. And then the other thing that really struck me is the follow on uncertainty from all of that on actual companies and manufacturers and producers. Because I

think Heavier was the one who made this point. It does seem like a huge impediment to investment and just normal business if you think you aren't going to be able to hedge your energy needs totally, so many interesting things. That's like a really big one. And of course, you know some of our conversations earlier this year with the Salton posts that were kind of about that and how these energy trading shops were the new banks, and if there's a decrease in liquidity, yeah, then you know that

creates all kinds of new issues. You know. The other thing I was thinking about is this idea of Europe being far and away the top bidder for l en G. You know, one of the stories that gets told throughout history is e MS and particularly like frontier markets really

get hit hard in a fed hiking cycle. Interest rates go up with liquidity drains, and we are seeing some of that, but there's also now this other cycle layered on top of it, where many of those same countries, in addition to seeing highersrust rates, are also seeing the energy that they might have bought get bit away. And so is Javeer puts it, you know, it's like basically shifting blackouts this winter from Europe to poorer countries. Yeah, and this to me is a very very big takeaway

from the conversation. There are a number of them, but the globalization of the l en G market that we've seen in recent years, and there's been so much focus on what's happening in Europe because of Europe's proximity to Ukraine, um and because it's the most directly hit by Russia's invasion, but the knock on effects are arguably bigger in a country like say Pakistan, which I mean my mother used to live in Pakistan too, um, so I know that there are many, many blackouts in Pakistan and it's sort

of a constant issue there, But it seems like they might actually suffer a lot more than Europe. Even though the focus is on Europe at the moment, yeah, absolutely, Yeah, so many interesting things that that conversation. It's such a treat to like talk to people who are just like so in the leads and can get so technical and detailed and also can explain things so clearly, you know that, lad.

I think that last point that Alex made probably deserves its own episode, Heat Stress on the energy system itself, because you know, he mentioned that situation, and it's like, you put up a nuclear plant in Switzerland, y oh, We're always going to have access to plenty of cold water. It's literally Switzerland, and then suddenly that gets called into question, and then I think, you know, there's uh, you know,

the water levels elsewhere are an issue. We saw it in Texas on the flip side when we had those freezes and some of those natural gas power plants that hadn't been properly winterized went down at the exact moment that everybody was cranking up their heat. Like all kinds of interesting interplay between climate change or extreme weather events and the production and transmission of energy itself. That feels like a whole episode at some point in the future.

It's another all thoughts episode that has led to another all thoughts episode in the future. Those are the best ones. Those are the best, and those are those are two great guests for um for talking about them for sure. Okay, shall we leave it there. Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi isn't Thal. You can follow me on Twitter at the Stalwart. Follow our guests on Twitter.

Alex Turnbull He's at lex b H. Turnbull and Javier Blocks He's at Xavier Blocks. Follow our producer Carmen Rodriguez at Carmen Armine and check out all of our podcasts Bloomberg onto the handle at podcasts. Thanks for listening.