The Natural Gas and Oil Crisis

719

Operation Disclosure | By David Lifschultz, Contributing Writer

Submitted on October 26, 2021

THE NATURAL GAS AND OIL CRISIS

Compliments of the Lifschultz Organization founded in 1899

A great deal of this crisis has to do with the environmental effort to wean the world away from oil and natural gas to renewable energy such as solar and wind power. The only problem is that this movement has essentially greatly slowed down the drilling for oil and natural gas, see footnote one article describing the collapse in oil and natural gas drilling. This has caused the prices for oil and natural gas to skyrocket.

The article below demonstrates how Washington is accentuating this crisis in Europe and damaging its economy in its so far economic war against Russia.  Long contracts at low rates as Hungary were discouraged by the US action and so Europe on average is paying far higher spot prices than they could be for natural gas long term contracts. Also, the US sanctions on Nord Stream Two delayed that project which would have prevented the high prices for natural gas in Europe, and even now Europe is dragging its feet under US pressure in approving the Nord Stream Two lower prices by not allowing Nord Stream Two to start. But the most interesting point in the article is the size of fierce derivative trading at the Chicago Mercantile Exchange noted in this quote which is raising the price of oil and natural gas:

“To get an idea of the volume of speculative transactions on the stock exchanges, it suffices to think that the United States alone, Chicago Mercantile Exchange, headquartered in Chicago and New York, carries out 3 billion contracts per year for an amount of one million billion dollars (more than ten times the value of the world GDP, that is to say of the real value produced in a year in the world). In 2020, when the global economy was largely paralyzed, the number of futures and similar contracts reached a record high of 46 billion, 35% more than in 2019, causing raw material prices to rise.”  The world GDP is 93 trillion dollars and this one exchange trades each year ten times that much which reflects the movements of the derivative markets manipulated by cash settlement rigs discussed in footnote two.

In this art of war piece, the point is that the US is at economic war with China and Russia and as yet it is not a shooting war. Yet NATO just declared that nuclear weapons are a critical component of their defense implying the war in Europe will be a nuclear war.

“Nuclear weapons are a core component of NATO’s overall capabilities for deterrence and defense, alongside conventional and missile defense forces.”

Why did they say this? The reason is that NATO’s forces would crumble like the British and French forces at the Maginot Line in 1940 as their conventional forces are worthless. In five minutes Russian hypersonic missiles would destroy the only meaningful military instrument that NATO has which is air power by pulverizing all their air fields. NATO’s defensive missiles as Aegis are relatively worthless.  So this is a nuclear war warning on Russia. But in a nuclear war Russian wins hands down as their defensive missile shields as the S-500, S-600 and rolling out S-700 would intercept the NATO nuclear missiles. Also, Russia has nuclear bomb shelters for 40 million city residents.  The US does not have any bomb shelters for their masses. If the reader has seen the Moscow subway system deep in the ground, they provide a natural protection in themselves. The nuclear weapons threat is pure bluff. Thus, in two weeks the Russian forces would be at the English Channel.

But that is not all. The US has no defensive missiles worth anything in the US so over 250 million Americans would die in a nuclear war.  Only an idiot would think the US would risk 250 million Americans over the Europeans whose only purpose in this world to the US is to balance the power against Russia. The US only allowed Germany to rise again because of the Russian threat or otherwise they would have followed the Morganthau Plan to return the Germans to an agricultural people. The US has no love for Germany or anyone else. They are and were just cannon fodder as the Russians, French and English in World War Two. The US mainland was safe and their casualties were relatively small in relation to those of Russia and Germany in World War Two. They let their allies do most of the fighting and supplied through their enormous power of production the weapons.

Morgenthau Plan

” THE ART OF WAR “

Prices explode in gas battle

by Manlio Dinucci

The rise in gas costs in Europe stems above all from speculation in a context of uncertainty, attributable to the geopolitical efforts of the United States against Russian gas. Not only could prices return to where they were two years ago if Brussels signed a long-term deal with Moscow, they would have to come down.

VOLTAIRE NETWORK ROME (ITALY) | 12 OCTOBER 2021

The explosion in gas prices is hitting Europe at the critical moment of economic recovery, after the disastrous effects of the 2020 lockdowns. The explanation according to which this is due to the growth in demand and the fall in supply hides a much more complex framework, in which financial, political and strategic factors play a primary role.

The United States accuses Russia of using gas as a geopolitical weapon, cutting supplies to force European governments into long-term contracts with Gazprom, as Germany has done with the North Stream pipeline . Washington is pressuring the European Union to break away from Russia’s “energy dependence”, which makes it “hostage” to Moscow.

Basically as a result of this pressure, long-term contracts with Gazprom for the import of Russian gas have fallen in the EU, while purchases on the spot (or cash ) markets , where we buy gas shares that are paid in cash during the day, increased. The difference is substantial: whereas with the long-term contract we buy gas at a low price, which is kept constant over the years, in the spot markets we buy gas at volatile prices, generally much higher, determined by financial speculation in the stock exchanges. Huge amounts of mineral and agricultural raw materials are purchased with futures contracts, which provide for their delivery on an established date and at the price agreed upon at the time of signing. The strategy of the powerful financial groups which speculate on these contracts is to inflate the prices of raw materials (water included) in order to resell the futures at a higher price. To get an idea of the volume of speculative transactions on the stock exchanges, it suffices to think that the United States alone, Chicago Mercantile Exchange, headquartered in Chicago and New York, carries out 3 billion contracts per year for an amount of one million billion dollars (more than ten times the value of the world GDP, that is to say of the real value produced in a year in the world). In 2020, when the global economy was largely paralyzed, the number of futures and similar contracts reached a record high of 46 billion, 35% more than in 2019, causing raw material prices to rise.

At the same time, the US is putting pressure on the EU to replace Russian gas with US. In 2018, with the joint declaration between President Donald Trump and European Commission President Jean-Claude Juncker, the European Union pledged to “import more liquefied natural gas (Lng) from the United States in order to diversify its energy supply ”. The gas which arrives in the EU is extracted in the USA from oil shales by a technique of hydraulic fracturing which causes very serious environmental damage; we will liquefy it by cooling it to -161 ° C and then transport it with gas ships to around 30 terminals in Europe, where it is then re-gasified. US gas, although benefiting from public aid, remains much more expensive than Russian and, to enter the market,

Added to all this is the “gas pipeline war”, the one that Italy paid dearly when in 2014 the Obama administration, together with the European Commission, blocked the South Stream , the gas pipeline in advanced construction phase. which, on the basis of the agreement between Eni (Italian National Hydrocarbons Company) and Gazprom, would have brought Russian gas directly to Italy, through the Black Sea, at low prices. Russia got around the hurdle with the TurkStreamwhich, through the Black Sea, brings Russian gas into Turkey’s European shred, continuing into the Balkans to supply Serbia and Croatia. On September 29 in Budapest, Gazprom and the company Mvm Energy signed two long-term contracts for the supply of Russian gas to Hungary at low prices for 15 years. A defeat for Washington, weighed down by the fact that Hungary and Croatia are part of NATO. Washington will certainly respond not only economically, but also politically and strategically.

The bill is paid by us, with the increase in gas bills and the cost of living in general.

Manlio Dinucci [Réseau Voltaire]

Footnote one:

Green bubbles threaten to pop stock markets

Magical US thinking of a Green agenda financed by endless amounts of printing-press money will only end in tears

By DAVID P. GOLDMAN OCTOBER 2, 2021

Prices for all energy commodities jumped during the past month, some by record margins, as a global energy shortage set off a scramble for gas, coal and oil. Brent crude has doubled in the past year, Newcastle coal has quadrupled, and Netherlands natural has risen seven-fold.

There are many small reasons for the global energy squeeze, and one big one: Investment in hydrocarbons has collapsed under pressure from the Green agenda adopted by international consensus.

Energy investment in the United States has dwindled as large institutional investors boycott fossil fuel investments. China’s critical electricity shortage is the result of draconian regulation of coal mining, exacerbated by Beijing’s punitive ban on Australian coal imports.

The idea is fanciful that the world can re-direct US$100 trillion in capital investment during the next 30 years to reduce carbon emissions to zero by 2050, as the International Energy Agency has proposed.

To put in context what this number implies, I note that the combined free cash flow of the 4,100 companies worldwide with a market capitalization of at least $1 billion was $332 billion in the first quarter of 2021, or $1.33 trillion annualized.

To put this in context: $100 is about 70 times that sum to be spent over 30 years. In other words, the entire free cash flow of the world’s private corporations would barely make up a third of the Global Reset investment budget.

The political pressure of the Green agenda has virtually wiped out investment in the US oil and gas industry. Capital expenditures for US exploration and development companies during 2021 (and projected for 2022) are only a fifth of the 2015 peak of $150 billion.

Meanwhile, oil and gas companies are sitting on mountains of cash. The free cash flow of the oil and gas industry will rise to $50 billion next year, the highest on record. In 2015 the oil and gas industry showed negative free cash flow because it borrowed to expand production.

Now oil and gas companies are paying down debt and returning cash to shareholders rather than take hydrocarbons out of the ground.

There has been an increase in energy demand due to an unseasonably hot summer and the reopening of airline flights and other forms of transportation, but the spectacular increase in energy prices is the result of constraint on demand.

Virtually the whole of the world’s political elite has signed on to the carbon neutrality agenda, including the government of China, which appears to believe that support for carbon neutrality (which China has pledged by 2060) will mitigate hostility to China in the West.

But the energy market suggests that the hard reality of supply constraints will overwhelm the Green agenda before it gets started.

The energy price shock adds to the inflationary pressures that continue to build in Western economies. Supply constraints in the United States have spilled over to the services sector, as the Philadelphia Federal Reserve’s survey of nonmanufacturing companies indicates.

Prices paid by services companies are rising at the fastest rate since the survey began in 2011, with more than 50% of respondents reporting higher input costs.

The cost of shelter, which comprises about two-fifths of the US Consumer Price Index, continues to rise at a record pace in the United States. This hasn’t turned up in the official data, because it takes time for old rental leases to expire and new leases to be written.

But several additional percentage points of inflation are now programmed into US inflation for the next two years.

That makes inflation a perfect storm. The stock market’s September setback, which left the S&P about 5% below its peak, reflected inflation risk and the associated risk that the Federal Reserve will raise interest rates in the future in response to inflation.

But the stock market’s reaction to date has been far more benign than the inflation data might indicate, and more benign than expectations about future interest rates might suggest.

As long as investors have to pay the Federal government to take their money, they will continue to take risk in the equity market. The so-called real yield (the yield of inflation-indexed bonds) at the five-year maturity is now -1.68% a year, which means that investors “expect” to lose 9% of their principal over five years. Of course, inflation-indexed bonds pay investors for inflation, so the effective loss will be less.

During the past 15 years, the yield on inflation-indexed US government bonds has tracked the expected federal funds rate (the Fed’s overnight lending rate to banks) very closely. That relationship broke down during the great monetary expansion of the past two years.

Given the market’s expectation for the federal funds rate 24 months from now, the 5-year TIPS yield should be more than a percentage point higher than it is today. There’s a simple (but disturbing) explanation for the discrepancy: The Fed has been buying most of the TIPS available on the market.

If we take into account the Fed’s purchases of $200 billion in TIPS since the Covid crisis began, this and the expected federal funds rate explain the current level of TIPS yields almost perfectly.

That’s not comforting for equity prices. The “real” interest rate on US government bonds explains virtually all the change in stock prices during the past three years.

As the Fed forced down the “real” interest rate, by reducing its overnight rate to zero and by purchasing hundreds of billions of dollars in TIPS, investors were forced into stocks.

The chart above shows the relationship between the 5-year TIPS yield and the S&P 500 (the linear relationship shifted after the Covid crisis). The link between TIPS yields and tech stocks is even closer.

At some point, the Fed’s game is going to come to an end. The magical thinking of a green agenda financed by endless amounts of printing-press money will be followed by a nasty hangover. Rates will rise and the asset bubble will pop.

Exactly when that will happen is beyond anyone’s capacity to forecast, but the unpleasant September in US equity markets was a foretaste of what we can expect.

David Lifschultz
THE LIFSCHULTZ ORGANIZATION
DAVID@LIFSCHULTZORGANIZATION.COM

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