What Will Europe Do? // IEA: Watch Out for China's Solar Supply Chain Dominance // Blas: "The global economy isn’t slowing enough to spark a collapse in crude prices."

What Will Europe Do?

Between 2021 and June 2022, Europe's imports of Russian gas dropped by half--from 40% to 20%. But that's not enough to get it through winter. According to a new post from Bruegel, a European economic think tank, to make it through the winter, Europe needs to chop 15% off its demand.

"For the EU as a whole, a total demand reduction over the next 10 months of about 15% compared to average demand in 2019-2021 would be required to compensate for a complete stopping of Russian pipeline imports," they write. 

Bruegel points out that it will impact various regions of the EU differently. You can click through their infographic to see how it looks for various parts of the Eurozone. 

Germany, the EU's economic powerhouse, has a particularly dismal forecast. 

Bruegel even goes to the trouble to point out that current demand reductions are simply not enough. 

The EU is going to have a rough go of it when it gets cold. Are European prepared to accept austerity? How much will they sacrifice?

Historian Helen Thompson recently pointed out that the politics of sacrifice have been dormant in the west since the 1970s. She marks Carter's "great malaise" speech as the turning point. Yet, she writes, "Asking Western citizens to make sacrifices for Ukraine’s independence looks more palatable than asking them to reduce energy consumption to manage climate change or resource depletion. And since Russia has violated the liberal assumption that war has no place in the post-1989 world, any suggestion that Ukraine’s independence should be sacrificed to global realpolitik is contested."

Still, Thompson argues, our politicians are rusty when it comes to asking for sacrifice. Normally, we've only been asked to sacrifice when our own countries have been at war. "The question for Western governments is becoming what sacrifice can be asked of their citizens against what sacrifice can be asked of Ukraine." This will be a hard balance to strike and it will most certainly be struck. It's being brokered as we speak and when the weather gets cold we'll know for sure--painfully. 

IEA: Watch Out for China's Solar Supply Chain Dominance

The International Energy Agency has released a first-of-its-kind (for them) report that warns China's dominance of the solar supply chain might slow the global energy transition. 

The report "found that China’s share in the manufacturing stages for solar, from the production of polysilicon to the panels themselves, exceeds 80 percent, and in some stages could reach as high as 95 percent by 2025" according to the Financial Times.

“The world will almost completely rely on China for the supply of key building blocks for solar panel production through 2025,” the IEA's report said. “This level of concentration in any global supply chain would represent a considerable vulnerability.”

Their report also revealed that a combination of high commodity prices and pre-existing supply chain bottlenecks had already lifted the price of solar panels by 20%, "which has resulted in delays in their delivery across the world."

While the IEA mentions that China’s Xinjiang province accounts for 40% of the world's polysilicon manufacturing, it does not mention the allegations of forced labor in the region. 

Blas: "The global economy isn’t slowing enough to spark a collapse in crude prices."

Crude oil prices dropped after the Energy Information Administration reported an inventory increase of 8.2 million barrels for the week ending on July 1. Brent crude has dropped by $20 in the last week, WTI $13. 

 Louise Dickson from Rystad Energy told the New York Times, “If a recession materializes and inflation continues to push prices for almost everything higher, oil demand is almost certain to fall, bringing prices with it.”

It appears that the massive increase in price per barrel are coming to an end. Europe teeters on the brink of a recession, as does America. "Undoubtedly," writes Javier Blas, "the oil outlook for the coming months and into 2023 has deteriorated over the last month or so."

But Blas doesn't think an oil market recession is in the offing. 

Here's why he thinks prices will remain high: The physical market is still tight.

"OPEC+ has boosted production to near its limit, with only Saudi Arabia and the United Arab Emirates able to increase output any further. At the same time, Chinese oil demand is quickly recovering from the April-May lockdowns. The roads of Shanghai are again jammed."

Blas writes that the physical market isn't tighter because of America's SPR released, which is pushing about one million barrels of oil a day into the market thus capping prices. "The sales are larger than the production of some OPEC nations," he writes. "But those releases will either end by October, or their size will be reduced."

And don't forget, Russia can still weaponize oil--Kazakhstan's exports are vulnerable to manipulation. And Libya's output is sinking.

So what was the deal with Tuesday's price drop? "Liquidity in oil market futures is very poor," Blas writes, "leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Both happened this week." So, he cautions, "Don’t misinterpret one day’s price decline as presaging a relaxation of the pressure that’s pushed Brent up by more than 50% in the past year."

Alex Kimani over at Oilprice.com, concurs: "The funny thing is that this is all based on market sentiment and bearish projections but has little to do with the physical oil markets."

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• American gasoline prices have finally dipped. "The average price of a gallon of gasoline in the United States has fallen to $4.779, AAA data shows—a decrease of nearly 9 cents per gallon on the month."

• The UK's Drax is extending the life of coal plants to secure winter energy. Drax "will keep its last two coal units active past a shutdown scheduled for September, the company said in a filing with National Grid Plc. The units will be kept open until March and only used at times of high power demand."

• The US Treasury Department has extended the authorization of export and re-export of liquefied petroleum gas to Venezuela until July 2023. 

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