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Running out of Energy

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The Landscape

A Cold Shower

As a kid, I grew up in a miner’s household. That typically meant feast or famine, depending on the economy. When the economy was humming along, my dad had as much work as he could handle at the nearby iron ore mine, and life was relatively good. 

But, sooner or later, the economy would turn, layoffs would be announced, and suddenly our fortunes would change overnight. Such was the life of a miner. Growing up in that type of environment, I naturally learned to be frugal when possible. For example, us kids would share a bath as opposed to each taking a long hot shower by ourselves. To this day, I am sensitive about the overuse of hot water in a shower, because it is expensive and not nearly as necessary as a hot meal. 

I bring this up because my frugal habits seem to have passed on to the next generation, but not because of me. You see, I kind of got over the ultra-frugal thing. I don’t get laid off every time the economy stutters, and life tends to get easier for each generation anyway. One of those improvements was a readily available hot shower. 

So, even though I tried to pass on the art of frugality to my children, it didn’t have the same sobering weight as it would when real economic choices are forced to be made between basic necessities. My children didn’t experience the same kind of economic change in their lives as I had routinely experienced growing up. Instead, they got used to a certain lifestyle, and it simply became part of their identity. So, you can imagine my surprise when I visited my son in Finland this summer. 

After 24 hours of travel, I am usually eager for a hot shower and a night of sleep, and when I arrived in Finland this time, it was no exception. “Dad, electricity prices have gone so high that we turned the hot water heater way down for the summer. The shower won’t be hot, and the little heat there is, won’t last long. We take fast showers here.”

Woah. It has been a complete generation since I’ve had to take a sailor’s type of shower! This got me curious about how bad things must be getting in Europe for my young son to be looking at ways to conserve energy as much as he is. And this is in the summertime! Our opinion has been that the next round of energy crisis wouldn’t begin until the fall heating season, but looking at the charts shows that already things are heating up to a level that is getting attention from the general public.

NATGAS is flying and it's not even the fall heating season yet!

The evidence that crisis conditions are returning across the pond lie in the new all-time high wholesale electricity prices in both Germany and France. On top of that, Europe’s NG price has risen back to the vicinity of its Q1 all-time high. Take a good look at the chart above and notice that the previous spikes were short lived, but this time there is an obvious uptrend unfolding over several weeks. We don't know how high the price will go in this round, but there is no sign of an imminent top just yet, and the cold season has yet to begin.

The current NG price in Europe is not sustainable. At its current price, demand is sharply curtailed. I see that evidence when my son is attempting to save on energy usage. At the current NG price in Europe of about 175 euros/MWhr, it is currently priced at the equivalent of US$52/MMBtu, or almost 9X the current price in the US. It is also equivalent to an oil price of approximately $312/barrel for oil.

The current price shows extreme tightness in supply, which is going to affect the economy. For example, this fall, demand for Natgas will grow, but absent additional supply, something will have to give. Given the choice between residential heating and industrial use, heating homes will likely take priority. That means we need to be prepared for industries to have to temporarily shut down this coming winter, further exacerbating supply problems. Further, when politicians are given a choice of dirty energy or no energy, they will choose dirty energy.

We see this currently by the massive rise in the price of thermal coal (there are different kinds of coal, this kind is used for electricity generation). On a weekly chart, coal appears poised for a break out of a massive base that has developed over the past year. At its current price, Europeans are suffering, and there is no sign yet that a top is near.

Given a choice of dirty energy or no energy, politicians will choose dirty energy every time.

We are all for clean energy. But, building out renewable energy systems on a large scale actually requires an increased production of fossil fuels to fuel the building process and to subsidize energy usage. Renewable energies such as solar and wind are not yet suitable for base load electricity supply due to their intermittent natures and inherent inefficiencies.

Fortunately, there is a way to provide energy in a way that is reliable, efficient, and extremely clean.... drum roll please..... NUCLEAR! Nuclear energy meets the requirements, but it is so politically charged, that it currently isn't given the level of attention that it might deserve. With modern technology, nuclear energy can be both safe and green.

We hope that the market will find solutions to our rapidly escalating energy problem. Absent some real solutions, our energy needs might be met via demand destruction through an economic contraction rather than through an increase in production. We suspect the energy crisis will become front and center in the news as soon as the weather turns cold.

~Lorin

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