fuel prices – The Thrill of Driving

A few weeks ago the Swedish mobility agency in a public announcement told EV drivers that it would be wise if they walked or biked for shorter distances, rather than use their shiny new EV. That’s of course the car they’ve been more or less coerced into buying and replace their old combustion one with, and it’s at the time of year when in Sweden, neither a walk or a bike run is necessarily what you’re dreaming of. This is only one of many small outcomes of the energy crisis Europe is currently battling, or put differently, the crisis where European tax payers pick up the bill for decades of political energy policy mismanagement. This week’s post will be more about what goes into the tank than the car itself – but as we all know, no fuel no fun… Regular programming will resume next week.

*It’s a lovely season for a walk in Sweden…*

Russia’s barbaric onslaught on Ukraine which will hopefully by some divine justice have Putin and his closest gangsters burn in a warm place for very long, is a complete tragedy. We may complain about energy security and fuel prices, but let’s never forget that the Ukrainians are paying a far heavier price, currently without an end in sight. The Ukraine war has however also provided populist politicians the opportunity to put the blame for their own failures on the war and Putin. EU representatives in Brussels like to talk about how Putin has weaponized energy. The exiting Swedish PM speaks about “Putin prices” when defending any kind of spiraling energy prices, notably at the petrol station, although half the price is tax. And so on. Clearly the war has had devastating effects on Europe’s energy supply, but it’s only had so because of Europe’s careless and self-imposed reliance on Russian energy.

Going into the war, 40% of Germany’s natural gas came from Russia. Gas makes up around 25% of Germany’s total energy mix but far more in the all-important industrial mix, so putting it bluntly, Europe’s largest economy put the energy supply of its industry and thereby the security of the whole country in the hands of Putin the dictator. And by the time the now blown-up NordStream II pipeline was built in the second half of the 2010’s, Putin had already showed what he was made of by invading not only Crimea in 2014, but before that also by engaging in wars with Georgia and in Chechnya – twice. So it was, or at least should have been, in complete knowledge of the facts that then German chancellor Merkel took the decision to hand the keys to the German industrial kingdom to Vladimir Putin, with many other European countries doing more or less the same. You really can’t make it up.

*Russian-speaking ex-chancellor Merkel with her pal Putin.*

To get to the root of the problem we do however need to go back to 2011 when immediately following the tsunami-caused Fukushima disaster, Merkel decided to close down Germany’s nuclear plants. Fukushima is of course on the other side of the world seen from Germany and the accident had no relevance whatsoever to Germany’s nuclear security, given the only coast Germany has is to the North Sea which isn’t very prone to tsunamis, and in addition not where Germany’s nuclear plants are located. But hey, who cares about energy security when there is a chance to earn political points with the growing Green movement? Here in Switzerland our local politicians jumped on the train before it had even stopped at the station and decided to close down our local plants. Of course we continue to import nuclear power from neighboring France and could never have closed down our own plants without those imports, but that’s something we don’t really like to talk about.

Nuclear is also where Europe and the US meet in our respective crises, with US policy in the last decade being just as set on closing down nuclear as Europe. The problem is of course that in parallel both sides of the pond also wanted to close down fossil fuels, in other words leaving us with no weather independent source of base power. In the US this has translated to more black-outs last year than at any point in history, and fuel prices in California are now getting close to USD 7 per gallon, which still sounds like a steal seen from Europe but is a historical high from a US perspective. President Biden has consistently acted against any expanded production of both oil and natural gas, at the same time as depleting the strategic oil reserve and traveling to Saudi Arabia, trying to get the true democrats down there to increase production. In essence, the message to US oil companies is “guys, we really don’t like you and we’ll close down all your business in a few years, but until then, could you please invest a few billion and increase production?”.

Enough of the ranting, but the above needs to be said to put the current situation into context. For some strange reason though it usually isn’t, and I’m pretty convinced things will not get better unless those responsible are willing to stand up for mistakes made in past. Whether in the US or in Europe, we’re not in an energy crisis primarily because of Putin’s war in Ukraine or because the Saudis won’t increase production – we’re here because of naive, uninformed and populistic political policies that we as taxpayers are now paying for at the pump, by not using the EV that it was so important we buy, or by freezing in our homes.

The bad news is of course that this will not end anytime soon, but it’s at least good to see that a bit like a drunk waking up on the side of the road, European countries including Germany are now really scrambling for solutions and doing all they can to remedy the situation. Notably in terms of gas supply things are changing quickly, with a heavily reduced dependance on Russia that will go towards nil in 2023. That’s all great, but it only solves part of the problem. Through policies like the ones described above, most countries at present quite simply don’t have any reserve capacity for any type of energy. Building nuclear isn’t done in a couple of months, neither are necessary LNG terminals or for that matter little-discussed but very essential grid investments for renewables that are desperately lacking across Europe, and for which there risks not being any money left in the new recessionary environment we find ourselves in, coupled with increased defense budgets.

*This is an LNG terminal in Japan. Doesn’t look like something you build in a couple of weeks…*

What happens now is therefore a return to the old power sources we thought were closed down forever. Coal imports to Europe have increased by more than 30% in 2022 compared to previous years. In Poland natural forests are now being chopped for energy and people are burning garbage. In Sweden, the oil-fired power plants are back in action and in Denmark, neighbors steal each others’ wood pellets. Climate policy is out the window and we’d better all wish for a very sunny, windy and mild winter across both Europe and the US, which is not really what winter typically looks like. Otherwise, more or less power cuts could be on many countries’ agendas for the coming months. And even in the US, we can safely assume that oil production will increase when people really start freezing.

If electricity really is rationed, you can be pretty sure that EV charging will not go unaffected. The Swedish mobility agency may have been first, but a similar message will no doubt go out in other countries as well. EV charging will also continue to increase in price. How much depends on where you live and where you charge, but as a scary example there are charging stations in the UK where a 300 km charge now costs around £50, which is more expensive than fuel would be for a mid-sized car. And that’s assuming you find a station that works, which seems to be quite rare over there… If you need your car for your daily life and if you’re dependent on the public grid for charging, buying an EV right now is probably not the best idea.

Defeating Putin in Ukraine is of course more important than prices at the pump and would most probably help reduce the price of oil and gas, and thereby inflation. It’s interesting how politicians of all colors are now changing their tune with regards to nuclear and have a very hard time remembering where they stood on the issue until very recently. I had to rub my eyes hard this week when the climate activist Greta Thunberg joined the crowd, talking about Germany’s mistake in closing down its nuclear plants. Of course Greta as recently as 2019 was publicly against nuclear. The more things change they also stay the same though, because only two days later, ex-chancellor Merkel in only the second big interview since she left office said she doesn’t regret anything.

This may all be entertaining but it’s against a serious background where until there is at least more clarity on how our power supply and energy mix will look going forward, the safest option is no doubt to keep your combustion car, because whatever you pay at the pump, it’s still cheaper than buying an EV (and charging it). As we’ve looked at previously you won’t save the climate anyway by driving electric, and you may indeed want to decide yourself when to drive your car and when to bike or take a walk.

A man buys the daily paper at the same local news stand every morning. He glances quickly at the front page and then throws the paper away. One day the new stand owner asks him what he’s looking for. When the man replies it’s the obituaries, the stand owner tells him they’re not on the front page. The man replies: “the one I’m looking for will be”.

This week’s post will be a little different. For once we will not be dealing with the cars we love, but rather with what goes into the tank to make them run. This is of course linked to the terrible events happening only a few hundred kms from where you’re reading this if you’re in Europe, and the implications of which will in some areas will be much more far-reaching than I believe is currently realized. Next to cars one of my other big interests is geopolitics, a subject that has been almost forgotten over the last 30 years but which made a sudden re-appearance on the Eastern front a month ago. In the context of what’s currently happening, one of the most important side effects is playing out in the oil market and thereby to the fuel we put in our cars. This week therefore, geopolitics and cars come together to paint a picture that unfortunately, isn’t very bright.

*The oil price (here Brent) seems to be on a mission…*

Russia is a major producer of basically everything needed to make the modern world run: oil, natural gas, precious and industrial metals and, together with Ukraine, agricultural commodities. It also produces over half of the world’s ammonia (a derivative of natural gas) and Ukraine and Russia are the world’s second and third largest producers of potash. Both ammonia and potash are used for fertilizer production and have thus become crucial in feeding the world’s growing population. This war will therefore have major implications on the world’s food production, but this is ot the place to deal with those. It’s also no secret that Europe, and especially Germany, have built up a completely irresponsible dependence on Russia for its oil and gas-related energy supplies over the last decades, the downside of which has now become obvious. In parallel the US has developed into the world’s largest oil producer and is today self-sufficient, actually exporting a small part of what is being pumped and fracked. To protect that self-sufficiency, a US export ban on oil could well follow in the coming weeks, perhaps meaning that the effects of what follows below will be less severe for our American friends than for the rest of us.

Europe is currently doing what it can to move away from Russian oil imports, but the room for manoeuvre in the short-term is very limited. There is no over-supply of oil in the world today and basically only Saudi Arabia has any room to increase production by perhaps 1m barrels per day, but only maybe a year from now. The completely bizarre idea of starting importing from the dictatorships of Iran and Venezuela (in other words replacing one dictator by two others) is luckily completely unrealistic as both countries would need massive investments in their run-down production facilities before any exports could occur. This means Europe is stuck, which in a way of course goes completely in the direction of replacing oil with green energy that every European politician talks about. But with oil and gas making up more than half of the EU’s current energy consumption, this is not something that happens in a week, especially when like Germany, you’re set on closing down nuclear at the same time.

*How Russian gas flows to the EU – oil flows in much the same way*

Behind the US and Saudi Arabia, Russia is the world’s third largest oil producer and exports around 5 million barrels per day, roughly corresponding to 5% of the world’s daily consumption (but far more of the European consumption). Russian oil fields are mostly located in Western and Eastern Sibiria with the Western fields supplying Europe with oil and gas through two pipelines, as shown above. The Western fields are not connected to the Eastern which mainly supply China. This means oil cannot flow from West to East, for example to be sold on to China (the oils are also of different quality, complicating this further). At current oil prices, the total exports provide Russia with a daily inflow of more than $1bn. Since the start of the conflict a month ago, the EU has paid around EUR 20bn to Russia for oil and gas, neither of which are part of current sanctions. With the war being estimated to cost roughly $1bn per day, that goes a long way to financing the current atrocities.

There is another problem though, and it’s a big one: the Russians are not capable of operating their oil fileds themselves and haven’t done so since the collapse of the Soviet Union. Instead, all the fields have been operated by the Western oil companies which now, with the exception of French TotalEnergies (and we’ll see how long that lasts), have left. The Chinese are roughly as incapable as the Russians at operating oil fields so most probably, what will happen as a consequence of the sanctions and exit of Western companies is that production especially in Eastern Russia will diminish, and thereby also exports to China. That’s bad news for the Chinese economy but unfortunately, for the price we pay at the pump as well.

*Laying off 50′ workers in Russia isn’t the solution says Total. We’ll see how long that holds.*

President Putin is fully aware of the leverage towards Europe the Russian energy constitutes and no one should doubt that he’s also fully capable of turning off the pump altogether, especially if the war effort continues to go as badly as it currently does. Europe could also decide on an oil embargo which would probably be the moral thing to do, but for the reasons mentioned above, is far easier said than done. An embargo or turning off the pump would obviously hurt the Russian economy and thereby ordinary Russians, but as the true dictator he is, don’t expect Putin to care. Realistically therefore, the global oil supply will diminish by a few million barrels over the coming years, which most probably means prices at the pump will go higher. On Thursday this week, some of the world’s leading oil traders joined the ranks of many experts predicting oil barrels to double from here. In Europe it’s still taxes that make up around half of the price at the pump, and we’re already seeing politicians being pressed to reduce taxes or help struggling consumers through subsidies. How much will be done depends on where you are – and how far out the next election is…

It’s therefore fully understandable that many today consider trading in their beloved but perhaps not so economical car against something more efficient, perhaps even a hybrid or an EV. I’m not saying that’s wrong, but remember two things: firstly, your big-block has become far more difficult to trade in than only a few weeks ago, so do your maths to make sure the potential loss in resale value doesn’t exceed the potential fuel savings. Secondly, the supply of new cars is in complete crisis given the continuing disruptions in notably semiconductor and microchip deliveries from China, and many people will have the same idea as you right now. Economical used cars are therefore on the rise, and It could be long before you see your new car, whatever the dealer promises. Finally, anything with a battery is dependant on precisely the industrial metals that to a large extent also come out of Russia, and as a consequence of this whole mess, both these and electricity prices will increase. As so often, there’s no free lunch.

*They don’t have time to worry about prices at the pump*

The invasion of Ukraine is a terrible tragedy of a kind most of us Europeans thought we would never have to witness again. The fact that we have to pay more at the pump obviously quickly fades in comparison to the enormity of the war for Ukraine and its people. As everyone else I truly hope that this will be over sooner rather than later, but the path to that happening is currently difficult to see. And with regards to oil and other commodities, the lifting of sanctions not only rely on Russia going home, but on Putin stepping down or being removed from power. Although we all wish that would happen soon, or indeed to read the headline the man in the quote at the beginning of this post is looking for, that seems unlikely at this stage. So whilst we may swear at the price we pay at the pump, let’s not forget that at the same time, the Ukrainians have far worse things to swear about.

The Thrill of Driving

Tag: fuel prices

Populism is in, power is out!

Geopolitics all the way to the pump