The Winners And Losers Of Germany’s Energy Crisis

The Winners And Losers Of Germany’s Energy Crisis
Reda Farran, CFA

over 1 year ago4 mins

  • German consumers, businesses, and industries face the prospect of gas rationing and soaring prices if Russia completely halts shipments on the Nord Stream pipeline.

  • In such a scenario, Germany could see a 8.6% hit to economic output in the first quarter of 2023 that would plunge it into one of its worst recessions in recent history.

  • European firms are rushing to lock in long-term LNG contracts, mainly with US providers like Cheniere Energy and Sempra Energy.

German consumers, businesses, and industries face the prospect of gas rationing and soaring prices if Russia completely halts shipments on the Nord Stream pipeline.

In such a scenario, Germany could see a 8.6% hit to economic output in the first quarter of 2023 that would plunge it into one of its worst recessions in recent history.

European firms are rushing to lock in long-term LNG contracts, mainly with US providers like Cheniere Energy and Sempra Energy.

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Germany’s energy crisis took a turn for the worse last month after the government raised the country’s gas risk level to the “alarm” phase. And with a catalyst on the horizon that could trigger the final “emergency” stage, you should brace for the big consequences on the German economy – as well as the new winners that’ll be created in the energy industry.

What could trigger the “emergency” stage?

Germany – which still relies on Russia for more than a third of its gas – enacted the initial “early warning” phase in March, bracing for a potential cut in supply after Russia demanded to be paid in rubles. That cut came last month after Gazprom slashed shipments through the key Nord Stream pipeline by 60% – a move that prompted Germany to raise the gas risk level to the “alarm” phase.

Fast forward to today and Russia is poised to shut the Nord Stream pipeline for maintenance for ten days from the 11th of July . But several German officials fear that Russia could use the planned maintenance works to turn off the taps for good, leaving Europe’s biggest economy without its main source of gas. That would most certainly trigger the third and highest “emergency” level, which would involve state control over distribution. In other words, gas rationing.

Who are the losers in this scenario?

First, German consumers, who face the unprecedented prospect of running out of electricity and gas to power and heat their homes. They also face the prospect of soaring utility bills that would seriously dent their discretionary incomes. That’s because the German government is planning new legislation that would share out the costs of both surging energy prices and bailing out failing energy companies (like Uniper). In fact, the head of the federal gas network agency warned that prices for consumers could triple if Russia completely halts shipments through the Nord Stream pipeline.

Second, Europe’s energy industry. Germany’s economy minister warned that Russia’s moves to slash Europe’s natural gas supplies risked causing a domino effect that could bring down the energy market, drawing a parallel with the role of Lehman Brothers in triggering the financial crisis. A complete halt of gas shipments on the Nord Stream pipeline would be the first, huge domino to fall.

Third, German industry. Gas is critical for many industrial processes including the manufacturing of chemicals, pharmaceuticals, metals, fertilizers, and more. Germany’s BASF – Europe’s biggest chemicals maker – recently said it would have no choice but to cut output if its gas supply is reduced, and it’ll most likely be joined by many other industrial firms that, collectively, are a key contributor to German economic output.

Speaking of which, the fourth loser is the German economy, which would be hit hard by the big declines in industrial activity and consumer spending. The graph below shows the German central bank’s estimate of the potential losses to the economy due to production cutbacks, which suggest the country’s economic output could fall by 8.6% in the first quarter of 2023 – a collapse that would plunge it into one of its worst recessions in recent history.

Estimated impact on German economic output (GDP) in the case of natural gas rationing. Source: Bloomberg
Estimated impact on German economic output (GDP) in the case of natural gas rationing. Source: Bloomberg

Who are the winners in this scenario?

Some coal-fired power plants are being reactivated in Germany and other countries in Europe, after the European Union gave member states the green light to burn more coal to deal with the energy crisis. That could push up the price of coal even more, providing a profit windfall to coal mining companies like Arch Resources and Peabody Energy in the US, Glencore in Europe, and China Shenhua Energy, China Coal Energy, Adaro Energy, Whitehaven Coal, and Coal India in Asia.

But coal is just a temporary fix, and the real long-term winner – in my opinion, at least – is US liquified natural gas (LNG). The conflict has spurred European firms to lock in long-term LNG contracts, mainly with American providers. Electricité de France just issued a tender to purchase LNG starting in 2023, major US LNG provider Cheniere Energy greenlit the expansion of a terminal in Texas, Chevron struck two 20-year sales and purchase agreements with Venture Global LNG, and chemicals giant Ineos and German utility RWE separately announced LNG deals with Sempra Energy.

US LNG is already flowing to Europe in record volumes as prices in the region trump Asian rates, but it’s still not sufficient to meet demand. According to Bloomberg New Energy Finance, global LNG demand will increase by 18.4% by 2026 from 2021’s levels. That growth will be led by Europe, while the supply boost will come from the US. That means firms well-positioned in the booming LNG market – like Royal Dutch Shell, Cheniere Energy, and Sempra Energy – are set to benefit.

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