EU Sets Gas Reduction Targets, Braces for Impact // Is Oil Output Near Its Ceiling?

EU Sets Gas Reduction Targets, Braces for Impact

The EU is going to propose a 15% cut in natural gas use by member states next month. The move stems from Europe's anxiety that Russia will shut off the tape.

"The goal would be embedded in a regulation accompanying a demand-reduction plan the European Commission is scheduled to unveil Wednesday to cope with a potential full cutoff by Moscow," reports Bloomberg. "The measure also would include a mandatory trigger if the situation worsens and voluntary curbs are insufficient, according to three EU diplomats with knowledge of the matter."

The EU also hopes to curb the consumption of energy through its "Save gas for a safe winter plan" by asking people to reduce heating and cooling coupled with some market-based measures. The EU estimates that a harsh winter could risk 1.5% of the region's GDP.

European anxieties about Russian gas flows are well-founded. On Wednesday, Putin said that even if gas flowed through Nordstream 2 to Germany tomorrow it would do little to improve European shortages.

"I had to warn him that we would take half of the volumes intended for Nord Stream 2 for internal consumption and processing then. I talked about that issue at Gazprom's request, and Gazprom has already done that," Putin said yesterday regarding Scholz and Nordstream 2.

"Therefore, even if we launch Nord Stream 2 tomorrow, it won't be 55 million cubic meters a year, but exactly half of that. In addition, bearing in mind that only the second half is left of this year, it means only one-fourth. That's the situation with the supplies," he added. Putin also warned of capacity cuts from Nordstream 1 due to equipment repairs.

The German outlook is especially bleak. Yesterday, we covered the German chemical industry's warnings that it could no longer conserve its gas consumption--the country's third-largest industry may have to abandon production. Unlike German automotive and machinery, the country's two largest sectors, the impact of a cessation in chemical production would be swift and painful continent-wide.

Now the country's energy crisis seems to be worsening. Along with France and the UK, Germany's power prices are climbing this week due to weak wind performance. Plus, the heatwave that's driving up energy prices is also drying up the Rhine River. "The current water level measured at Kaub, a chokepoint for heavy freight ships about midway along the river, is hovering around 70 cm (about 27.5 inches)," reports Gizmodo. "If it drops to 40 cm or below (about 15.7 inches), barges will no longer be able to carry enough weight to justify their journeys."

"Member States should update their national emergency plans by the end of September to show how they intend to meet the reduction target, and should report to the Commission on progress every two months. Member States requesting solidarity gas supplies will be required to demonstrate the measures they have taken to reduce demand domestically," the EU said on Wednesday.

"All consumers, public administrations, households, owners of public buildings, power suppliers and industry can and should take measures to save gas. The Commission will also accelerate work on supply diversification, including joint purchasing of gas to strengthen the EU's possibility of sourcing alternative gas deliveries," it added.

Is Oil Output Near Its Ceiling?

After Biden's trip to Saudi Arabia, Mohammed bin Salman gave a speech. In it, he revealed a seemingly longheld secret about the Saudi's production capacity. It turns out, it's 13 million barrels per day.

“The kingdom will do its part in this regard, as it announced an increase in its production capacity to 13 million barrels per day, after which the kingdom will not have any additional capacity to increase production,” MBS said.

So maybe that first part was less of a secret. There were already plans in the works for Aramco to expand capacity from 12 to 13 million bpd by 2027.

"But the second part was completely new," writes Javier Blas, "setting a hard ceiling at a much lower level than the Saudis have themselves discussed in the past. Back in 2004 and 2005, during Riyadh’s last big expansion, the kingdom made plans to expand its pumping capacity to 15 million if needed. And there was no suggestion that even that elevated level was an upper limit."

Blas speculates that perhaps climate change and the investment culture it has created have influenced MBS's decision. Why should the Saudis dump more capital into a sector the developed world by and large wants to abolish?

For now, the world needs crude. And it needs cheap crude. It currently depends on the US, Russia, and Saudi Arabia. "Together, they account for nearly 45% of global total oil supply," Blas tells us. But if the Saudis aren't going to budge, Russia's getting slaughtered in the long run by sanctions, and American investors are more ESG than Drill Baby Drill, then we're in for a world of hurt. Expensive fossil fuels mean an expensive world.

Even if we unshackle the atom from its absurd regulatory chains, we're talking about an energy transition and scale on the order of decades, not years. Even longer if we keep wasting time with wind and solar.

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Crom's Blessing

"A construction worker on the frame of the One LaSalle Street building, Chicago, Illinois, 1929. "