How will the ECB Handle Europe’s Gas Crisis?

Reading Time: 3 minutes

We’ve all seen the headlines and charts of European electricity prices and gas prices. Each time the Nordstream pipeline is serviced, we brace ourselves for Russia to not bring it back. And we brace ourselves for Germany, Italy and likely all of Europe to fall into a deep recession with no easy way out.

Front Month Netherlands Nat Gas Contract Price

I don’t have much to add to the energy conversation other than to remember optimists usually make the most money in investing. But the situation is so untenable.

Since I have no idea how Germany’s chemical and industrial sector will deal with the loss of gas (I’ve read reports, but I don’t know the long-term solution), I decided to jot down what is happening with the Euro currency and if that’s something to stifle the blow.

Unfortunately I just don’t see it.

Here’s my scratch on what could happen. Happy to hear others thoughts

In a nutshell, the EUR has already weakened considerably against the US$. That may help tourism.

Theoretically it helps exports on paper, but this is an interesting situation. How? In fact, Europe has quickly become the highest cost producer of many chemicals and other products. Note BASF and Yara have cut fertilizer production because of the gas cost. That is likely true for many other products. Instead, Europe will need to import these fertilizers from the US.

So generically, if Europe can import products cheaper than it can make, it will have to. And that’s a lot of things at this point given the disparity in prices. It doesn’t help that commodities are typically priced in US$ either. Europe has become a high cost island.

So what can the ECB do? Raise rates? Drive the currency higher? I guess, but the magnitude likely kills the economy anyway.

Do they raise rates but provide stimulus? Do the governments try to take the whole burden? I could see the merit as this is the equivalent of war time spending. Maybe that helps the currency as investors see Europe is building a sustainable path out.

Do they do nothing? Hmm.

Should the Euro be disbanded? Maybe the countries that have cheaper power may want this. Maybe they wouldn’t.

Will the U.S. benefit? I could see our chemical and industrial sector get a larger boost as the low cost producer. But it will also drive up our energy costs, as we’ve already seen with natural gas hitting $9 again. The U.S. Fed also probably wants a stronger currency as it helps tame our inflation. But it is a bit easier being the reserve currency to strengthen when Europe is in such a troubling situation. It is also hard to imagine the US being unscathed in a major European recession.

Should the US conduct some sort of defense era production act? Drill baby drill, but in our own country? Some sort of Marshall plan? I see the merit, but do US voters?

We shall see!

5 thoughts on “How will the ECB Handle Europe’s Gas Crisis?”

  1. I think there’s only one fundamental solution: restoring gas supplies somehow. And perhaps managing demand by prioritizing usage.

    Monetary policy could be used to lean against an inflationary spiral, but at the end of the day, we need a fundamental (not monetary) solution.

    Also, if euro interest rates go up, we may get a repeat of the european debt crisis of a few years ago. HIgh government debts to (stagnant) GDP haven’t improved, and now there’s the inflation catalyst.

    Germany is the economic engine of Europe, but it relies heavily on exports to China, which is in a slowdown of its own.

    If you think of it, this gas crisis is almost a copy of the 1970s oil crisis in the US.

  2. I like the fact that the politicians are working on pragmatic solutions: cutting gas usage to get those gas storage levels up, so that gas prices don’t have this insane risk premium in them; keeping old power plants open; fast-tracking new LNG supply in the US (still not an overnight solution).

    1. Hard to see how it solves the problem though. Cutting usage is great but again that leads to a recession basically.
      And Germany still has no LNG capacity. Will take time to retrofit current supply lines to plants. If things stay as they are today, we’re talking complete, drastic and painful changes to supply chains.

  3. You’re absolutely right, there is no instant alternative for cheap Russian gas. So Europe is economically doomed, until we give Putin what he wants.

    From an investing angle, perhaps the most useful:
    – “who may benefit if European supply chain XYZ shuts down” (like you said)
    – just being ready for opportunities in Europe. EUR assets will be dirt cheap because of the situation and more so because of the exchange rate. Hold for a few years until Putin has turned the tap back on.

    What did you mean by a drilling Marshall plan? Drilling for gas in the US? You’d think that with these prices, the natural gas drillers would be on it already?

    1. Yep. Agree there.

      What I meant by a Marshall plan would be large scale drilling in the US, building export terminals, etc. with aid from the US Govt for the purpose of helping EUR. Taking of the price risk away from the drillers or maybe the capex.
      I view this as low probability but interesting to think about.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.