Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wisen't thal Joe, things
Speaker 1: look rough in Europe. Yeah, we we've talked about this.
Speaker 1: We haven't done a Europe specific episode in a while,
Speaker 1: but something we've been talking about lately is the macro forces,
Speaker 1: shortage of energy, high inflation, but also sort of mediocre
Speaker 1: underlying growth. Tough position right now. Yeah, you know, my
Speaker 1: mother is actually visiting the States at the moment. She
Speaker 1: lives in Austria, so I'm getting a firsthand picture of
Speaker 1: a lot of the stuff that's going on there in
Speaker 1: terms of attempts to save energy in the middle of
Speaker 1: a heat wave, I might add, and she even had
Speaker 1: to She had to trade in her car for she says,
Speaker 1: for something more efficient and reasonable in the current climate.
Speaker 1: So she gave up this very like gas guzzling convertible
Speaker 1: in order to get some efficient like sedan. Well that's uh,
Speaker 1: that's the goal, right everyone, Everything becomes a little bit
Speaker 1: more efficient. Conservation is the pain? Would she come on
Speaker 1: the podcast? I don't think so. Okay, but you know,
Speaker 1: there's a lot going on in Europe with energy at
Speaker 1: the moment, and it's pretty clear now. You know, we
Speaker 1: touched on this a little bit earlier in the year,
Speaker 1: the potential for an energy crisis in Europe, and it
Speaker 1: now looks like Europe is firmly in one. So, for instance,
Speaker 1: if you look up the benchmark gas features in Europe
Speaker 1: Dutch t t F contracts, I think they're still hovering
Speaker 1: around like two hundred euros, which is pretty close to
Speaker 1: a record high. We know that before Russia invaded Ukraine
Speaker 1: it was responsible for something like of Europe's energy imports.
Speaker 1: That has obviously dropped quite a bit as Russia sort
Speaker 1: of cuts off gas supplies. But the big question is
Speaker 1: what can Europe do to offset this and exactly how
Speaker 1: bad could things get this winter? Yes, this is the
Speaker 1: key question. How bad will there be a big shortage?
Speaker 1: You know in the summer you can sort of, you know,
Speaker 1: not run the air conditioning is hard, or maybe you
Speaker 1: know a lot of places don't even have air conditioning, etcetera.
Speaker 1: Open windows is what my mother keeps telling me. It's
Speaker 1: worth noting, by the way, that Dutch natural gas features
Speaker 1: contract that you quoted is to around two euros is
Speaker 1: you know, is eleven So I just think it's really,
Speaker 1: you know, for some context, just an absolutely insane jump
Speaker 1: and the gas shortage or the gas crisis part of it,
Speaker 1: but also a lot of attention paid lately to the
Speaker 1: state of the French nuclear industry, disrepair, lots of shutdowns,
Speaker 1: reactors not operating, So there is a confluence of factors
Speaker 1: really putting the squeeze on Europe right now. Yeah, and again,
Speaker 1: like it is just crazy to think how far we've come,
Speaker 1: both in terms of prices, which you pointed out, but
Speaker 1: just in terms of the actions to try to contain
Speaker 1: this crisis. Because I remember when Pierre and Durand came
Speaker 1: on the show, um, you know, in the spring, and
Speaker 1: he was talking about, oh, Europe might have to ration
Speaker 1: and energy and that seems so extreme at the time,
Speaker 1: and you know, fast forward a few months and that
Speaker 1: is exactly what is happening. There's a scramble not only
Speaker 1: to save energy, but also a scramble to store as
Speaker 1: much gas as possible. So I am very very pleased
Speaker 1: to say that we are going to be speaking with
Speaker 1: two people on this topic today. We're going to have
Speaker 1: a real discussion around the issue, get some varying viewpoints.
Speaker 1: We're gonna be speaking with Heavy a Blast. He is,
Speaker 1: of course a columnist over at Bloomberg Opinion and an
Speaker 1: expert on all things energy. And we are also going
Speaker 1: to be speaking with Alex Turnbull, who we've had on
Speaker 1: the podcast before. He's a fun manager based in Singapore
Speaker 1: and also a researcher in global energy. So thank you
Speaker 1: both for coming on the show, Thank you for having me.
Speaker 1: Thank you very much. So have it. Why don't we
Speaker 1: start with you. Let's let's just do the basic question.
Speaker 1: How bad do you think things are going to get
Speaker 1: in Europe this winter? Well, it's gonna get bad. And
Speaker 1: allow me to give you a personal example and also
Speaker 1: show you how bad I am at investments. I use recently.
Speaker 1: I use recently close the purchase of a house in London,
Speaker 1: in West London. I resisted for many years. I was
Speaker 1: very happy with my flat, but I wanted a garden,
Speaker 1: as every middle class British person likes. And you know
Speaker 1: I did that probably at the very peak of the market.
Speaker 1: So that's how bad I am. So I was used recently.
Speaker 1: I'm just doing my moving and I was thinking how
Speaker 1: bad it will be if I could not carry my
Speaker 1: gas and electricity contract. That I have and it's you know,
Speaker 1: fixed for for for a number of months still ahead,
Speaker 1: and I have to start from the scratch, just get
Speaker 1: a new electricity and gas contract on the new your
Speaker 1: property and currently paying about a hundred and thirty five
Speaker 1: pounds per month for electricity and gas in my current flat.
Speaker 1: If I have to get a new contract because prices
Speaker 1: have gone so much up and because every utility in
Speaker 1: the UK is already factory in the big price increase
Speaker 1: that we're going to get from October, my bill will
Speaker 1: go monthly from a hundred and thirty five pounds to
Speaker 1: four hundred and seventy five pounds per month. That is
Speaker 1: how bad it's going to get now using mine, working
Speaker 1: class families getting electricity and gas bill, unless the government
Speaker 1: makes an intervention of anything north of four hundred, four
Speaker 1: hundred and fifty pounds, which is more than five hundred
Speaker 1: dollars per month used for electricity and gas put aside
Speaker 1: castoline prices, that's how bad it's going to get in
Speaker 1: terms of the impact of the cost of living crisis.
Speaker 1: And that is across Europe. What is happening in the
Speaker 1: UK is very similar in Germany, where utilities are already
Speaker 1: warning consumers that the utility monthly charge is going to
Speaker 1: double at the very least starting on the first of October.
Speaker 1: So Alex, I want to bring you in, you know,
Speaker 1: as have you mentioned, his energy bill is going to soar,
Speaker 1: and of course we're going to see that across Europe
Speaker 1: if people haven't already had that rerating kick in already.
Speaker 1: But it's one thing for prices to surge. It's another
Speaker 1: thing for say, people do not have power, maybe people
Speaker 1: do not have heat, or probably more likely industry in
Speaker 1: some countries has to shut down because it's uneconomical. What
Speaker 1: do you see as the sort of you know, is
Speaker 1: there risk of something beyond it's just more expensive and
Speaker 1: something more sort of fundamental hit and shortages that's coming winter.
Speaker 1: I think in the short term it's very hard to
Speaker 1: do a lot of substitution, which is, while we saw
Speaker 1: not a lot of change in industrial gas demand in
Speaker 1: Europe around last winter, there was a sense in which
Speaker 1: everyone was kind of frozen in place, but you're already
Speaker 1: starting to see quite substantial substitution for industrial demand. The
Speaker 1: problem is is that as a consumer, it's Harvier points out,
Speaker 1: there's not a lot you can really do in the
Speaker 1: short term. But you know, here's where my story of
Speaker 1: buying the house comes in. I bought a house briefly
Speaker 1: before COVID in in Australia, and I was planning on
Speaker 1: putting solar panels on it, but then I kind of
Speaker 1: got locked out of the country for two years because
Speaker 1: of Australia's COVID controls, and my tenant, who was not
Speaker 1: happy with the change in power prices, basically said like,
Speaker 1: if you want to put solar on it, and I said, yeah,
Speaker 1: I actually I love to do that. And so that's
Speaker 1: already knew about seventy their power demand UM and their
Speaker 1: power bills. So in places like Australia where you are
Speaker 1: similarly impacted by issues of gas and coal, price has
Speaker 1: been the marginal pricing source of demand, and it's certainly
Speaker 1: South Wales. UM. You can type of media action and
Speaker 1: I think you're going to say a lot more of
Speaker 1: that over time, but but that does take time, and
Speaker 1: that demand destruction not in a bad way, and a
Speaker 1: sense that people workout ways to consume less while preserving
Speaker 1: their lifestyles. That is a multi year process and so
Speaker 1: in the short run, people can't really cut their consumption
Speaker 1: much but at a time that does tend to happen,
Speaker 1: you know. I think the real lesson is to be
Speaker 1: like Tracy and when you buy a house, discovery that
Speaker 1: you actually have a mountain of coal in your basement,
Speaker 1: which is something Tracy revealed to us in a recent episode.
Speaker 1: That's like the ultimate hedge is to buy a house
Speaker 1: that comes with coal. Don't worry, guys, I too bought
Speaker 1: at the top of the market, so yes, I have
Speaker 1: some commodity exposure to offset that purchase. But yeah, Alex,
Speaker 1: I mean I mentioned the benchmark gas contract in Europe earlier,
Speaker 1: hovering around like two hundred euros, and Joe pointed out
Speaker 1: that that's up from nineteen, you know, just a little
Speaker 1: while ago, but it has come down a little bit,
Speaker 1: like there does seem to be some moderation recently. What's
Speaker 1: driving that? Is that a sign that maybe we're turning
Speaker 1: around the corner as some of these energy savings kick in,
Speaker 1: or as Europe starts to reach its gas storage target.
Speaker 1: I'm allowed to make any definitive comments here. On the
Speaker 1: one hand, I'll point out that if you talk to
Speaker 1: your friendly prime broker about wanting to trade something which
Speaker 1: realizes about volatility. On a good day, you may find
Speaker 1: that actual risk taking capacity in these markets is heavily
Speaker 1: constrained and the information in prices is not quite what
Speaker 1: it once was. UM. So that there's that. UM. The
Speaker 1: other thing I would point out is that that can
Speaker 1: be both to the upside or to the downside. So
Speaker 1: we saw a similar dynamics in coking coal for much
Speaker 1: of this year when people were concerned about USh and
Speaker 1: supply getting taken out of the market. But then China
Speaker 1: open the border the Mongolia and mongol, so you took
Speaker 1: seven million tons out from Russia, but then actually China
Speaker 1: just board it all more or less, and then you
Speaker 1: also had Mongolia into the market for thirty six million
Speaker 1: tons run right currently. So as a result, coke and
Speaker 1: cole went from say two fifty dollars to six briefly
Speaker 1: and is now back to two hundred dollars. So, UM,
Speaker 1: I don't think we're going to get a kind of
Speaker 1: supply d s X macin in gas or high caloritic
Speaker 1: value coal to fix Europe's problem that quickly. Have you
Speaker 1: can you sort of give us the broader picture of
Speaker 1: how you wait the different factors driving up European prices
Speaker 1: right now because obviously everyone is, you know, quite aware
Speaker 1: of the stress and the tensions between Europe and Russia
Speaker 1: over the war and the declining exports. But then of
Speaker 1: course you know there's also and this has gotten more
Speaker 1: attention than the last couple of weeks, the French nuclear
Speaker 1: industry has is operating a diminished capacity. France is currently
Speaker 1: an electricity importer as opposed to an exporter. Like you know,
Speaker 1: there's there's multiple factors and how would you attribute them? So, Joe,
Speaker 1: You're right, there multiple factors that they are driving here
Speaker 1: the market on gas. The most important one certainly is
Speaker 1: Russia restricting supplies to Europe. You take Germany as an example,
Speaker 1: Supplies are down eighty percent from where they were normally,
Speaker 1: and that is a completely political decision by Bloodymid putting
Speaker 1: to put pressure on Europe and drop the support on
Speaker 1: on Ukraine. Then in electricity, the situation in France is
Speaker 1: certainly the main driver. About fifty percent of the nuclear
Speaker 1: reactors in France are not working at the moment, Most
Speaker 1: of them are on maintenance revised, just checking for cracks
Speaker 1: on some welding, and that it has really forced France
Speaker 1: to import and usually last quantities of electricity from every
Speaker 1: neighboring country, which is putting pressure on gas because that
Speaker 1: means that we are consuming more gas for for power generation.
Speaker 1: Looking forward, well, a lot of the situation in Europe
Speaker 1: is gonna depend, I think on three factors. Number one
Speaker 1: is what Bloodymid Putting does in the next few weeks
Speaker 1: and months, whether he shuts down completely supplies or not.
Speaker 1: Number two is the weather. How call is going to
Speaker 1: be the winter in Europe or how warm. If we
Speaker 1: get a mile winter like last year, Europe may be
Speaker 1: able to whether the problem without much of an additional
Speaker 1: problem it's really called in Europe, then there is trouble
Speaker 1: in Europe. It it's called in Japan. There is also
Speaker 1: trouble in Europe because it means that Europe is going
Speaker 1: to have to compete with Japan for llergy supplies. And
Speaker 1: the other big question, and Alex was talking about this earlier,
Speaker 1: is how much consumers from myself to the big companies
Speaker 1: are going to be able to save this winter. We
Speaker 1: are beginning to see signs that demand in the industry
Speaker 1: is coming down. That's in part due to high gas prices.
Speaker 1: We are beginning to see some substitutions, some companies trying
Speaker 1: to run on fuel oil or diesel some of their operations.
Speaker 1: And I think that consumers are going to save quite
Speaker 1: a lot of gas, in part because, to be frank,
Speaker 1: I don't want to be hit by a four hundred
Speaker 1: seventy pounds and months bill for my electricity and gas.
Speaker 1: So yeah, I'm gonna put my thermo state a bit lower.
Speaker 1: And how those factors are going to interact over the
Speaker 1: next three months it's going to be the key. But
Speaker 1: the big problem for policymakers and for traders is that
Speaker 1: you cannot really model properly two of those factors. I mean,
Speaker 1: you could make assumptions on savings, how much demand substitution
Speaker 1: is gonna be, you could, you could really try to
Speaker 1: attempt to answer that question, but you cannot really answer
Speaker 1: the question of what bloody mill Puttin is going to
Speaker 1: do and how call is going to be the weather
Speaker 1: four months from now. And that is why it's so
Speaker 1: difficult and so volatile the market right now. And Alex
Speaker 1: said add to that that there is very little liquidity,
Speaker 1: so the information on the price is rather imperfect at
Speaker 1: the moment. That's really interesting. So I take the point
Speaker 1: that it's difficult to predict what Putin is going to do,
Speaker 1: and it's probably difficult to predict exactly what the weather
Speaker 1: is going to be this winter, But could you make
Speaker 1: an assumption about how or could you try to model
Speaker 1: how well prepared Europe is for the possibility, for instance,
Speaker 1: that Russia just cuts off all the gas, because I
Speaker 1: think at the moment, like the flows through nord Stream
Speaker 1: something like one to of normal capacity. What if they
Speaker 1: just go away? How prepared would Europe be for that scenario?
Speaker 1: If the flows of North Stream were to stop, let's
Speaker 1: say tomorrow. You know, we we are not nearly there.
Speaker 1: We will we will, we will not have enough gas
Speaker 1: in the storage to make it through the whole winter
Speaker 1: without having to save significant amount of gas. That means
Speaker 1: demand destruction in the industry if we can't build inventories
Speaker 1: to the eighty percent target or nine percent target that
Speaker 1: Germany has put itself to, the Hargert higher target by
Speaker 1: October November and then putting shuts down completely gas supplies.
Speaker 1: We will make it through the winter barely, but we
Speaker 1: will make it through the winter. But that's gonna still
Speaker 1: require very high prices because you need to you need
Speaker 1: to make sure that some industries are not consuming gas. Uh,
Speaker 1: you have a combination of putting cats supplies, say September October,
Speaker 1: and we have a cold winter. While that really requires
Speaker 1: some significant savings on energy, and that will require the
Speaker 1: German government effectively taking control of the energy sector and
Speaker 1: saying you can consume, you cannot consume because we need to.
Speaker 1: We need to make sure that every home has enough
Speaker 1: gas for hitting. The priority will be the homes and
Speaker 1: everything else will be secondary to that. But all of
Speaker 1: those scenarios also create a problem. Even if we make
Speaker 1: it through the winter without massive troubles us with having
Speaker 1: to I mean, an economic recession is given, but you know,
Speaker 1: without additional pain beyond that, we are in a very
Speaker 1: precarious situation for the following summer and the following winter.
Speaker 1: So this becomes a bit of a multi year problem.
Speaker 1: So even if you make it through the winter in
Speaker 1: twenty three, then you emerge in March of twenty three
Speaker 1: in a very low situation of inventories and probably with
Speaker 1: not enough time to rebuild inventories for two in any
Speaker 1: meaningful way. So then you have another year of problem,
Speaker 1: another year of high prices. Look, it's not how to
Speaker 1: put it, I mean, it's not really good. It looks
Speaker 1: very challenging. Best cases scenario we make it through the
Speaker 1: winter without significant trouble, having to reduce demand in the
Speaker 1: industry and paying very high prices similar to now that
Speaker 1: I think it's best cases scenario. Worst cases scenario is
Speaker 1: we have to race on gas significantly and paying even
Speaker 1: higher prices than today. Alex, what is your assessment of
Speaker 1: the inventory situation right now? And then you know if
Speaker 1: this is like you know, we're not just talking winter,
Speaker 1: and like, is there more capacity to import gas besides
Speaker 1: nord Stream, like through terminals or is that just completely
Speaker 1: maxed out basically, I I guess on on inventor is
Speaker 1: currently depending on how you can figure your model, we're
Speaker 1: in the seventies now. In terms of storage, there's still
Speaker 1: to my it's pretty aggressive storage builds ahead of us.
Speaker 1: So we will be, by my estimates, you know, in
Speaker 1: the mid eighties by the time at peaks, which is
Speaker 1: generally a very good place to be in terms of
Speaker 1: storage levels. Um and if you look at your break
Speaker 1: down the nodal consumption of the way they present the
Speaker 1: data in Europe and industrial demands already down a lot
Speaker 1: of places, and some of that were easier saving some
Speaker 1: of that SF moving more of ammonia production to the States,
Speaker 1: but that's in. Industry is already very much doing its bit.
Speaker 1: If you assume households do very modest levels of demand constraint,
Speaker 1: I don't think the winter is going to be that stressful. However,
Speaker 1: every marginal gigga jewel that comes into Europe giggle, what
Speaker 1: our or however you want to measure gas, the gas
Speaker 1: has to come out of the lergy market, and that
Speaker 1: is very tight. And the reason that's tied is because
Speaker 1: it had to grow to accommodate Europe very quickly. When
Speaker 1: it's normally had quite moderate, sort of mid to high
Speaker 1: single digit growth at best. It's had to grow almost
Speaker 1: this year and that's not easy to do. And the
Speaker 1: reason that's tied is that you cannot get a lot
Speaker 1: of incremental gas into the market without more energy landing
Speaker 1: capacity in Europe which is coming in, but also more
Speaker 1: export capacity from the US. So over time, I agree,
Speaker 1: it's a multi year process, but that's spread between US
Speaker 1: gas prices. Henry hub and what that translates to into
Speaker 1: um TTF will converge towards Henry Hub plus a spread
Speaker 1: over times US gas becomes essentially linked to global lergy prices.
Speaker 1: Historically it was linked, but but it sort of broke
Speaker 1: because the we suddenly hit a constraint in terms of
Speaker 1: export capacity and demand in Europe. Just real quickly, to
Speaker 1: what degree alex is this? You know, aggressive demand for
Speaker 1: energy in Europe? How is it spilling over to other
Speaker 1: llenergy importers? And I'm thinking, you know the natural gas
Speaker 1: depend in Asian countries, like what is this sort of
Speaker 1: like global knock on effect. It was quite funny as
Speaker 1: an Australian because it very quickly blew up Asian ellergy
Speaker 1: prices where cargoes had to be rerouted or China due
Speaker 1: to lockdowns consume less gas, so resold cargoes and spot
Speaker 1: markets innovated them to Europe. But then in Australia people
Speaker 1: thought they were sort of immune, and then by April May,
Speaker 1: Australian power prices started moving very aggressively up because the
Speaker 1: European grid will first burn gas if it can, we'll
Speaker 1: consume it. If it can't get that, it has to
Speaker 1: burn coal. And the coal it burns is six thousand
Speaker 1: killer cow coal, which is exactly what it's produced in
Speaker 1: the Hunter Valley of Australia, where most of Australia's Eastern
Speaker 1: grid's power plants are. So it's it's everyone has got
Speaker 1: swept up in this to one shape or form or another.
Speaker 1: I want to bring Heavier in on the same topic. Really,
Speaker 1: I mean, it has been a pretty rapid adjustment the
Speaker 1: way the LERG market has done this. And you know
Speaker 1: it used to be a fairly fragmented market and now
Speaker 1: it's increasingly globalized because of all these pressures and some
Speaker 1: other factors. How do you see that shaking out, Heavier
Speaker 1: and how does it sort of change the dynamics of
Speaker 1: the energy industry as a whole. Well, clearly, the ability
Speaker 1: of Europe to tap the llend market has really saved
Speaker 1: the day for Europe. This has happened only ten fifteen
Speaker 1: years ago, where the global lending market was not nearly
Speaker 1: as developers is today, and the ability of cargo's was
Speaker 1: much lower, particularly on the spot market with the ability
Speaker 1: to reroute carrigos, Europe will have had a big problem
Speaker 1: and the dependency on Russia was much much higher. So
Speaker 1: the lending market is offering a relievable to Europe in
Speaker 1: so many ways. Um. I mean, one of the things
Speaker 1: that we have seen that to me is very interesting
Speaker 1: is Europe. But the Many is outbidding everyone else in
Speaker 1: the market taking the llergy. That's one of the reasons
Speaker 1: we have these very high prices in the market. I mean,
Speaker 1: on fundamentals, as Alex was pointing out, we should not
Speaker 1: probably have two hundred euros permica the hour of gas
Speaker 1: because the inventories are builting in the right direction and
Speaker 1: we should have enough gas um if putting was to
Speaker 1: keep the flows. But obviously we need to continue outbidding
Speaker 1: the whole market for llergy supplies, and for that we
Speaker 1: need to sustain very high prices in Europe for that
Speaker 1: to happen. What's happening there is that a number of
Speaker 1: countries that were starting to rely on the global llengy
Speaker 1: market for supplies middle middle income and poor countries and
Speaker 1: thinking the likes of Pakistan or Banglades or even India
Speaker 1: are now being um. They're seeing now that European nations
Speaker 1: and European utilities campaign much higher prices, so they're not
Speaker 1: getting the cargos that they were expecting. Some of the
Speaker 1: cargos that this will be going into Asia at the
Speaker 1: moment I rerouted into you Rope, and we have seen
Speaker 1: power supply problems in the likes of Banglades or Pakistan,
Speaker 1: which is affecting the textile industry. So in a way
Speaker 1: it may be a case where Europe avoids the black
Speaker 1: house that many of us we have been talking and fearing,
Speaker 1: but only because the black house move somewhere else, somewhere
Speaker 1: else that they cannot really pay the price that Europe
Speaker 1: is paying for the llergy and then the black house
Speaker 1: are happening in Pakistan or Banglades, but the black house
Speaker 1: are actually happening. It's used differently, and that global ellergy
Speaker 1: market is allowing that arbitrast to happen that without it, well,
Speaker 1: it will not be happening in the black house will
Speaker 1: be happening in Europe because we will not be able
Speaker 1: to get in off GUS real quickly. Is there any
Speaker 1: prospect in the sort of near future for there to
Speaker 1: be a single natural gas press. I mean there's not
Speaker 1: a single oil press, but it's close. You know, Brenton
Speaker 1: to WTA and the other benchmarks, they tend to not
Speaker 1: be that far off, whereas with natural gas, you know,
Speaker 1: the gap between Henry Hub and the Dutch numbers sort
Speaker 1: of wildly different, and it's different all around the world
Speaker 1: because the transmission infrastructures so fragmented. But if this market
Speaker 1: keeps getting built out and export and import terminals and
Speaker 1: so on, well, is there a point in the future
Speaker 1: where there's more or less a global natural gas price. No.
Speaker 1: I think that we are still far away from that.
Speaker 1: I think that we are getting a lot more integration.
Speaker 1: And you see now that something happened in the US
Speaker 1: and that's moving the rest of the markets, or vice versa,
Speaker 1: something happens in Europe and and moves the global gas market.
Speaker 1: But we're going to still have a lot of spreads
Speaker 1: and you're not gonna have Henry hab trading at TTF level.
Speaker 1: I think that that's that's far far away from today, Alex.
Speaker 1: I want to go back to something that you said earlier,
Speaker 1: which is that the informational value embedded in commodities prices
Speaker 1: might be less than it was because of the volatility
Speaker 1: in the market and the uncertainty over the outlook. Can
Speaker 1: you give us a little bit more color on this
Speaker 1: aspect of it and what it's actually like trading energy
Speaker 1: at the moment well, I think it's with any value
Speaker 1: at risk model. The more volatile a thing is in
Speaker 1: general and the more thinly traded, So the less volume
Speaker 1: going through the exchange or however you measure that liquidity,
Speaker 1: the more you will be charged to trade that, both
Speaker 1: by exchange margin and whoever you're trading through in my case,
Speaker 1: or if you're a bank, you trade director the exchange,
Speaker 1: but your internal cost of capital for that stuff goes
Speaker 1: up pretty quickly. So yeah, if something realizes more volatility
Speaker 1: than extremely marginal crypto tokens, then you cannot get leverage
Speaker 1: on it, which means your ability to bet on spread
Speaker 1: trades between Maybe I think the price is a bit
Speaker 1: crazy today, but it's the back end. Prices are good
Speaker 1: value that just becomes very expensive to put on, and
Speaker 1: when you model out the returns, amount of capital get
Speaker 1: tied up in those transactions gets to be wholly unappealing.
Speaker 1: As a result, people just pull back from the market,
Speaker 1: and so if you're a physical trader, it generally means
Speaker 1: that the spot market becomes very wide and disorderly, which
Speaker 1: is amazing if you're a glen Cora or trafficker or
Speaker 1: the like, but for people trying to lock in like industry,
Speaker 1: like industrials or big energy users trying to lock in
Speaker 1: longer term prices, it becomes more or less unworkable. Both
Speaker 1: of you. You can come in on this question. If
Speaker 1: the price of energy or the price of a given contract,
Speaker 1: as you say, loses some of its informational vilure or
Speaker 1: it's less liquid or sort of you know, harder to arbitrage,
Speaker 1: What are the what are the consequences of that? Is
Speaker 1: it that it makes planning harder? Is it that, you know,
Speaker 1: thinking about what you need to do for the winter, like,
Speaker 1: what are the negative effects of prices losing their informational value? Yeah,
Speaker 1: I think it's very hard for people to plan. I
Speaker 1: think it's also modeling. People will assume a price on
Speaker 1: a screen has inherent meaning, and whereas you've often got
Speaker 1: to start to take a view as to how, for example,
Speaker 1: growth and allergy, export capacity from the US and demand
Speaker 1: destruction Europe and landing capacity in Germany will lead to
Speaker 1: some sort of convergence to some arbitrage condition or close
Speaker 1: to that arbitrage condition. Because right now it's it's it's
Speaker 1: pretty wild. So I think that, yeah, you really have
Speaker 1: to have a good view on value to be able
Speaker 1: to take risk. The other thing you're seeing, of course,
Speaker 1: is that if you want to build a solar farm
Speaker 1: in Europe and get a p p A at what
Speaker 1: used to be an obscene price, people will just about
Speaker 1: take your hand off because it's at least firm, it's
Speaker 1: a it's a it's a firm source of power, and
Speaker 1: it's going to be a lot cheaper than spot. So
Speaker 1: so that those guys are doing okay right now? Yeah,
Speaker 1: I think that, I mean to our explorence, I think
Speaker 1: that it's just planning. It's becoming very very complicated for companies,
Speaker 1: and also the liquidity but growing in the forward market
Speaker 1: is so thin that anyone that wants to hedge any
Speaker 1: risks is facing a very difficult time with with additional
Speaker 1: problem that you are hedging any race, and particularly you
Speaker 1: are a power producer and then you want to sell forward.
Speaker 1: I mean, this is the moment where you will think, well,
Speaker 1: you know, prices are a record high. You are a
Speaker 1: power producer, sell forward looking revenue a gray market. But
Speaker 1: obviously if the market moves against you and it goes
Speaker 1: even higher than you are going to be facing huge
Speaker 1: margin calls and those marketing calls could just potentially blow
Speaker 1: a company completely out of the water and run out
Speaker 1: of credit, not because it made a wrong call. Actually
Speaker 1: it was heading at risk selling selling forward the electricity
Speaker 1: looking fantastic prices, but then marking calls hit you. You
Speaker 1: don't have the credit to pay them, and you could
Speaker 1: go ballly up just because of that. So it is
Speaker 1: a very difficult market. And I think that for the
Speaker 1: market right now in terms of offering a product for um,
Speaker 1: playing off risk, it's just not having the value that
Speaker 1: they used to have. So we have seen a number
Speaker 1: of efforts to obviously mitigate some of the impact of
Speaker 1: higher energy prices. What do you think is most helpful
Speaker 1: or most effective at the moment? Have you? And actually
Speaker 1: when I ask you also, what do you think is
Speaker 1: the least effective? Just because I want to hear have
Speaker 1: you a rant about things? I think that the most
Speaker 1: effective thing that you're going to need to do right
Speaker 1: now is I mean, we really are going to have
Speaker 1: to support the poorest families through the winter. It's just
Speaker 1: going to be catastrophic. I cannot really think what it's
Speaker 1: going to be for you know, poor working class families
Speaker 1: in Europe when they start facing a bill that is
Speaker 1: four hundred five hundred euros or dollars, and that is
Speaker 1: more most likely all the discretionary spending monthly, it's just
Speaker 1: going to pay electricity and gas. And they may have kids,
Speaker 1: they may have elderly people that they need just to
Speaker 1: keep warm at home. I mean, you know, you don't
Speaker 1: need the lights to go off to face a problem
Speaker 1: where people cannot really heat themselves, and and and and
Speaker 1: and access electricity. If it's just too expensive, then you
Speaker 1: could have the same problem. So assisting that class of people,
Speaker 1: it's going to be an absolutely priority. And I don't
Speaker 1: see nearly enough in Europe down'nt about that. Providing blankets
Speaker 1: support to everyone, no matter what the wealth is, no
Speaker 1: matter what the salary is, it's the wrong answer to it.
Speaker 1: It's just supporting demand in a moment that you need
Speaker 1: to be restraining demand. So I think that target is
Speaker 1: support is critical. Providing blankets support as many governments, particularly
Speaker 1: the UK has been providing, where everyone is basically getting
Speaker 1: a reveate and and a money for the government is
Speaker 1: the wrong way to do. And then we're gonna get
Speaker 1: We're gonna need in Europe to get a lot more
Speaker 1: serious about trying to to be clear to people of
Speaker 1: what's coming. I mean, the Bank of England press conference
Speaker 1: when they increase interest rates was it was hard to
Speaker 1: listen to because the governor said, we're gonna have even
Speaker 1: higher inflation and we're gonna have a one year long recession.
Speaker 1: But at least you could criticize whether he was to
Speaker 1: to a slow racing interest rates. But it's the first
Speaker 1: time that I see a policymaker, a central bank, governor,
Speaker 1: a finance minister just telling the public what is coming
Speaker 1: and warning in very clear terms what's coming. I think
Speaker 1: that it is time that prime ministers and under finance
Speaker 1: ministers start to be clear to the population about what's
Speaker 1: coming and start to prepare in the population for it
Speaker 1: and then offers some solutions. But at the moment in
Speaker 1: Europe that he's not even an acknowledgement what'scoming and how
Speaker 1: body is coming. So I'm thinking still about you know,
Speaker 1: the sort of the tail of the two homes and
Speaker 1: Tracy's house with the big pile of coal underneath, and
Speaker 1: then Alex's house where there's you know, solar panels on
Speaker 1: the roof, and it feels like these are like the fork,
Speaker 1: the fork in the road, the two different directions. I've
Speaker 1: gone the non E S T route. Yeah, yeah, exactly.
Speaker 1: So it's like, does this is this a moment where we,
Speaker 1: uh the world sort of backtracks on some of these
Speaker 1: E s G goals and uh start maybe reopening opening
Speaker 1: new coal mines which maybe a few years ago seemed unthinkable.
Speaker 1: Or is this really catalyzed an acceleration of different renewable
Speaker 1: energy sources? And it seems like maybe it's both one
Speaker 1: and one or the other. But Alex, I'm curious, like
Speaker 1: really both of you though, like what do you see
Speaker 1: as the sort of like first and second order effects
Speaker 1: of this in terms of where energy investment goes from here? Well,
Speaker 1: personally that if you look at what's in the I
Speaker 1: R A bell, Uh, there's a there's a lot of
Speaker 1: clues there, and particularly things that Joe Mansion was very
Speaker 1: keen on. The US is going to export a lot
Speaker 1: more lergy, there will be more pipeline takeaway capacity to
Speaker 1: places like West Virginia. That is absolutely not an accident,
Speaker 1: at least from Joe's point of view. Um, And but
Speaker 1: I think similarly, you're starting to see in places in
Speaker 1: Europe where Italy basically allows you to write down the
Speaker 1: entire cost of getting the heat pump. That sort of
Speaker 1: demand destruction and pretty muscular approaches to that are going
Speaker 1: to be more common. Europe is quite perverse, and particularly
Speaker 1: the Netherlands until recently, whereby you get sort of protected
Speaker 1: by the government on gas prices, but you have full
Speaker 1: pass through a power prices which are effectively gas prices.
Speaker 1: So you're discouraging people from switching their heating to electrification
Speaker 1: through the structure of your have your electricity and gas tariffs.
Speaker 1: And I think there's there's a lot of clean up
Speaker 1: to be done there. But in coal, for example, I
Speaker 1: think I don't think that's going to happen. The only
Speaker 1: reason the only grade of coal that is going bananas
Speaker 1: right now is the one that you can burn in
Speaker 1: European coal plants which have been reopened, or the other
Speaker 1: grades like you know, Indonesian lower calorific grades hundred type
Speaker 1: stuff that's already started selling off pretty heavily because China
Speaker 1: is just importing less coal and producing more of its own.
Speaker 1: So I think the China impact is going one direction,
Speaker 1: and the europe gas shortage and then substitution dynamics going another.
Speaker 1: I think realistically, talking to people in the coal industry.
Speaker 1: They expect to have a really good time for two
Speaker 1: years and then be back to maybe not very good times.
Speaker 1: Opening new minds would seem to be a poor financial decision,
Speaker 1: but no doubt someone will try it. Yeah, I I
Speaker 1: kind of agree with Alex. I think that we don't
Speaker 1: want to see international call mine in just having a boom,
Speaker 1: but we're going to see more coal mining in China
Speaker 1: and in India. And you know, the expectation is for
Speaker 1: this year global call demand to heat too much the
Speaker 1: two thousand and thirteen peak, and in two thousand and
Speaker 1: twenty three, on an annual basis, we will said probably
Speaker 1: a new all time high. I think that the biggest
Speaker 1: consequence of the current crisis is going to be a
Speaker 1: sharper focus on energy security. Um that was I want
Speaker 1: to say abandoned, but the energy security took a backseat
Speaker 1: to climate change over the last five years or so.
Speaker 1: I think that you are going to have now energy
Speaker 1: security at the same level as climate change in terms
Speaker 1: of concerns by policymakers, and that most likely it's gonna
Speaker 1: mean slow down in some of the climate change initiatives
Speaker 1: you're going to have. You're going to keep a lot
Speaker 1: more of coal fire generation um on a standby. At
Speaker 1: least you're not gonna shut down the plants and and
Speaker 1: dismantled them for good. You will keep them on on
Speaker 1: on standby. Uh. I think that's gonna be a reconsideration
Speaker 1: of nuclear in many in many countries. I mean, we
Speaker 1: are beginning to see when the Germans, despite everything, they're
Speaker 1: beginning to warm up to the idea that maybe keeping
Speaker 1: the plants a bit longer was not such a bad idea.
Speaker 1: But I do think that we're gonna see also many
Speaker 1: individuals were possible to try to install solar panels on
Speaker 1: their houses. So I think that we're going to see
Speaker 1: on the next few years of boom on solar installation
Speaker 1: on on on individual houses. That it's gonna depend a
Speaker 1: bit on prices. I mean, the price of solar panels
Speaker 1: is starting to to to to go up. Uh. Speaking
Speaker 1: from from on experience about this house, because that would
Speaker 1: be my first investment on the house to put the
Speaker 1: solar panels. I do have solar panels for the hot water,
Speaker 1: so I think that the shower is guarantee over the winter.
Speaker 1: It may not be very warm, but it's gonna be
Speaker 1: at least there, but I would not be surprised if
Speaker 1: in many European countries we see many houses we don't
Speaker 1: have a solar panel today that they will have a
Speaker 1: sonar panel by because I think that people have learned
Speaker 1: a lesson and say, well, if I can generate myself
Speaker 1: a bit of electricity, that is going to be very important.
Speaker 1: The other thing that I for the first time beginning
Speaker 1: to see a lot of attention on is modeling electricity
Speaker 1: demand for the next few years. Electricity demanding in many
Speaker 1: OI city countries have been relatively flat despite economic growth
Speaker 1: over the last few years. But we are going to
Speaker 1: put quite a lot of more electricity consumption into the grids,
Speaker 1: coming from electric vehicles, coming from heat pumps. And that
Speaker 1: means that previous assumptions that electricity demand was not going
Speaker 1: to increase need to be revised. And I see a
Speaker 1: lot of people now beginning to spend quhi lot of
Speaker 1: time of modeling electricity consumption in Europe and in the
Speaker 1: US for the next five or ten years. And then
Speaker 1: messages scom is that the demand is going to go
Speaker 1: up and I'm going to having some cases quite meaningful.
Speaker 1: Alex talk to us a little bit more about what
Speaker 1: China is doing here. I mean both in terms of
Speaker 1: energy transition um such as it is in China, but
Speaker 1: also in terms of securing additional gas supplies, because one
Speaker 1: of the interesting things we've seen the summer is that
Speaker 1: while it seems like the rest of the world is
Speaker 1: really scrambling to get as much lergy as possible before
Speaker 1: the winter, China has mostly stayed out of that market
Speaker 1: and doesn't really seem to be ramping up imports or
Speaker 1: not trying to secure additional supply. What's going on there?
Speaker 1: And if they come back into the market, you know
Speaker 1: at the last minute, it is that going to drive
Speaker 1: up prices? Yeah, it may well do if they do that. Though,
Speaker 1: if you look at the data for China's pipeline imports
Speaker 1: from Kazakhstan, Turkmenistan and Russia, they are more or less
Speaker 1: running those pipelines flat out at this point in time.
Speaker 1: So they have massively increased their purchases from Russia Kazakhstan.
Speaker 1: The data is getting a little bit well, accuracy is
Speaker 1: more contested than it was a couple of months ago,
Speaker 1: but they appeared to be buying a lot more and
Speaker 1: that's that's relatively uncontested. There's also longer term and this
Speaker 1: is a big question for the allergy market is and
Speaker 1: is that they're talking about doing a very large pipeline
Speaker 1: power of Siberia too, which would then lead to a
Speaker 1: question of world how much more ellergy is China really
Speaker 1: going to import because a lot of the power that China,
Speaker 1: a lot of the allergy that China is imported historically
Speaker 1: is very seasonal. It's often geared towards heating in northern
Speaker 1: China in the winter, and recent promulgations from the relevant
Speaker 1: organs have indicated they want to go very hard on
Speaker 1: heat pumps also for for actual load balancing and their
Speaker 1: power grid. They now want to do I think it's
Speaker 1: two hundred and fifty gigawats are pumped hydro so that
Speaker 1: they can better utilize their coal resources. So China's making
Speaker 1: a push much like everywhere else, for essentially friend shoring
Speaker 1: their energy supply to people in the Greater Eurasian land mass,
Speaker 1: as well as also just trying to reduce their alliance
Speaker 1: on gas full stop because they are price sensitive like
Speaker 1: everyone else, and if they have a lot of high
Speaker 1: quality coal they can burn instead and ellen j costs
Speaker 1: forty bucks or more per gig a dual equivalent. Then
Speaker 1: they absolutely don't have time for that, have you. I
Speaker 1: just want to go back to something you're talking about before,
Speaker 1: and this idea of energy security may be becoming on
Speaker 1: the same level as a priority of climate, but you know,
Speaker 1: just in general sort of Europe's specifically, and then more broadly,
Speaker 1: like what do people think about e s G these days?
Speaker 1: Do you see some of the resolve weakening on uh,
Speaker 1: you know, some of these efforts that were very popular
Speaker 1: and the twenty tends to reduce emissions. Do you see
Speaker 1: a sort of like actual backlash coming to this and
Speaker 1: maybe like people questioning it's like was going you know,
Speaker 1: was trying to discourage investment. Really useful exercise given where
Speaker 1: we are with you know, coal demand today. Like what
Speaker 1: do you see as the sort of near term future
Speaker 1: of e s G either at a sort of like
Speaker 1: corporate level or just a sort of policy level. Well,
Speaker 1: to me, it was very interesting when earlier this month
Speaker 1: he now goes, we have the glenk Or first half
Speaker 1: results and they have the conference call, and obviously glint
Speaker 1: Or is the word's largest commoti trade. There is a
Speaker 1: big miner of coal is the largest exporter or thermal
Speaker 1: call in the c BORN market, and typically you will
Speaker 1: expect so own investors or sell side analysts just giving
Speaker 1: the company a bit of a hard time. Why you
Speaker 1: are still um investing in call? Why you are not
Speaker 1: spinning of the business while you're not selling it? Sell
Speaker 1: it to the Chinese. It was a typical question and
Speaker 1: in this conference called actually a cell side analyst from
Speaker 1: a big major American bank asked the CEO of glen Core.
Speaker 1: He said something like, you know the world is short
Speaker 1: of energy. What is going to take you to start
Speaker 1: investing in coal mines to help the world in the
Speaker 1: short time with supply? And to me that was the
Speaker 1: kind of a hard moment. I mean like when you
Speaker 1: know when a cell side analyst it's kind of saying no, Actually,
Speaker 1: the question here to us is why these guys are
Speaker 1: not investing modern call. That's how a back said, I
Speaker 1: think e SD is taking right now. I mean black
Speaker 1: Rock put it quite well um earlier this year when
Speaker 1: it was just describing his views of about some of
Speaker 1: their shareholder resolutions on climate chains, and they said that
Speaker 1: those resolutions they needed to take into account the current
Speaker 1: geopolitical context but the energy market pressures and the implication
Speaker 1: of both into inflation. I think for the time being
Speaker 1: E s D has gone at least on energy and commodities,
Speaker 1: has come from really they must have item the hottest
Speaker 1: selling item to a bit of them a day is
Speaker 1: I asked recently a big European institutional investor about E
Speaker 1: s G and and he was saying to me that
Speaker 1: is very yesterday. Is not really what I'm focusing right now.
Speaker 1: Is it gonna go away? No? I don't think it's
Speaker 1: gonna go away. This is a cyclical business. High prices
Speaker 1: give way to low prices, and I think that at
Speaker 1: that point E s G is going to be back.
Speaker 1: But for the time being, I think that you're going
Speaker 1: to have a lot of investors to spaying lip service
Speaker 1: to E s D and climate means. And at the
Speaker 1: same time as a glink or are you going to
Speaker 1: put modern money into the core of business or not?
Speaker 1: Can I just say something the on the E s
Speaker 1: G thing, Yes, sir, I think there is a real
Speaker 1: problem with the interactions between both investors in the companies
Speaker 1: in that people do not make big, good, equiliberal models
Speaker 1: of what demand should be for these fuels over time.
Speaker 1: And so when the war happened, obviously there was some
Speaker 1: quantum of gas and coal taken out of the market,
Speaker 1: and then there was sort of a record scratch, and
Speaker 1: the s G investors could not change their tune or answer, well,
Speaker 1: how does this change things? You know, how do we
Speaker 1: get the fuel supply? Should we think about the geopolitical
Speaker 1: risk waiting of our fuel supply? There was absolutely no
Speaker 1: response to that. But unfortunately, and this has been no
Speaker 1: credit to people on the in the energy sector, is
Speaker 1: they have not developed a coherent response aside from Harada,
Speaker 1: let's drill some holes now, and so I suspect we're
Speaker 1: going to probably get over investment and then the energy
Speaker 1: sector probably look silly again in due course, especially the
Speaker 1: most marginal fuels, namely thermal coal. And so I I
Speaker 1: think there needs to be a lot more of an
Speaker 1: effort two model the world well so that we can
Speaker 1: pick up things, you know, like we did in our
Speaker 1: paper that China was probably just going to step away
Speaker 1: from coking coal maybe forever, and that's that stuff is important,
Speaker 1: but it's it's hard graft modeling, and it is not
Speaker 1: done enough today anyway, Alex and have you we want
Speaker 1: to give you guys the opportunity to ask each other
Speaker 1: a question. So, um, maybe we start with Alex, is
Speaker 1: there anything that you want to ask? Have you? Yeah?
Speaker 1: I mean when you talk to all the trading houses,
Speaker 1: I mean, what is the general sentiment of the guys
Speaker 1: who are in physical training that you talk to. I
Speaker 1: mean there's a I talked to a lot of the
Speaker 1: folks in Singapore, but it's clearly uh, it just seems
Speaker 1: like complete disorder and European power right now. I think
Speaker 1: that everyone is trying to balance the res of supply
Speaker 1: and under accession that is coming in Europe. I see
Speaker 1: a still most trade that's quaite, bullies, thermal call and
Speaker 1: allergy supplies and and gas in Europe. Um with oil,
Speaker 1: they have a bit of a less clear outcome because
Speaker 1: there are so many there are so many moving pieces,
Speaker 1: and each of those moving pieces is a million to
Speaker 1: two million barrels a day appears. I mean, it's going
Speaker 1: to be a deal with Iran nuclear there is are
Speaker 1: the sunctions in you the European suctions on Russia are
Speaker 1: really gonna hit hard or not. You know, it's it's
Speaker 1: China gonna rebound from from COVID or it's gonna remain
Speaker 1: doing with the zero zero COVID policy, So they're a
Speaker 1: bit confused. But one thing that a lot of people
Speaker 1: seem to think is that we are not yet over
Speaker 1: on oil with with diesel in particular, and I hear
Speaker 1: a lot of concerns about the diesel situation come in
Speaker 1: later this year in Europe. That is one that perhaps
Speaker 1: we are not on the season, so it's kind of
Speaker 1: drop a bit out of the rather from from a
Speaker 1: lot of people, but there is a lot of concerns
Speaker 1: on physical trading houses where Europe is going to have
Speaker 1: enough diesel disc this winter. They just real quickly what
Speaker 1: is the issue there, why diesel specifically, and why the
Speaker 1: seasonal element of it. Well, obviously we need more diesel
Speaker 1: because diesel is is also heating oil for for winter
Speaker 1: and we still used, particularly in German, equal lot of
Speaker 1: heating oil for for the winter. And also because we
Speaker 1: are beginning to to to get a sense that if
Speaker 1: there is a problem of gas supply or companies see
Speaker 1: these guys high gas prices remaining, a lot of the
Speaker 1: incentive is to try to run on on diesel or
Speaker 1: heating oil through the winter because economically makes makes sense.
Speaker 1: And you know, we we have seen even huge the
Speaker 1: national like B S a F the big German chemical
Speaker 1: company talking about using fuel oil or or or diesel
Speaker 1: as an alternative to us and sorry, and a lot
Speaker 1: of a lot Previously a lot of the diesel was
Speaker 1: coming from from Russia. So from February, in theory, Europe
Speaker 1: is not going to be important any diesel from Russia.
Speaker 1: And that's when you know, we have been talking about sanctions.
Speaker 1: But all the announcements on sansions work for tomorrow, but
Speaker 1: that tomorrow is getting closer and closer by the day.
Speaker 1: By December, Europe cannot buy Russian crewd anymore. We're still
Speaker 1: buying it, and by February we cannot buy refined products.
Speaker 1: And when you take that amount of supply from the market,
Speaker 1: then it gets complicated. So Alex, my my question to you.
Speaker 1: You are based in Singapore, you have a very very
Speaker 1: good view about Asia. How you see the response, But
Speaker 1: I'm very very curious because we sometimes forget about Japan,
Speaker 1: you know, particularly from the point of view Europe. But
Speaker 1: you know, it is still the four largest oil consumer,
Speaker 1: is a huge importance of l n G has a
Speaker 1: huge nuclear industry. I mean to me, it's one of
Speaker 1: the most important energy countries. Even if the demand there
Speaker 1: is no lower rowing, but it's still a huge consumer.
Speaker 1: How do you what do you think the Japanese government
Speaker 1: in particular, and and that kind of intersection between the
Speaker 1: Japanese government of the Ministry of um of Metty and
Speaker 1: and the Japanese trading companies Showa Shasha and what are
Speaker 1: they thinking, how they're responding to these crisis that has
Speaker 1: put the war of energy upside down. When I speak
Speaker 1: to people there and some people and Metty, they are
Speaker 1: engaging and as broad and I would say as deeper
Speaker 1: rethink of some of these issues, both for both for
Speaker 1: the energy shock reasons but also for security reasons due
Speaker 1: to recent developments as much as anything since the nineties seventies.
Speaker 1: I'd say there is all sorts of there're things of
Speaker 1: are considered quite um futuristic. For example, like using ammonia
Speaker 1: made from renewables in Australia, you can blend about of
Speaker 1: it into the fuel of a coal fire power plant
Speaker 1: without substantial retrofits. That's all been pulled forward I would
Speaker 1: say five years, so they are considering that sort of stuff.
Speaker 1: They're also considering and that they are, and they have
Speaker 1: been doing a lot more renewables as well, both in
Speaker 1: terms of looking at agri volta x so view to
Speaker 1: heat stress from from the recent really brittle weather. They've
Speaker 1: had people looking at basically putting solar in the middle
Speaker 1: of fields to reduce heat stress on plants because you
Speaker 1: don't actually lose much of anything in yield. So there's
Speaker 1: a lot of stuff which is a little bit maybe
Speaker 1: not science fiction, but further down the the I guess
Speaker 1: critical path that has now been pulled forward as well
Speaker 1: as of course I'm trying to get nuclear plants restarted,
Speaker 1: but I think there's a sort of recognition that we
Speaker 1: are unlikely to unless Saudi Arabia were to evaporate or
Speaker 1: Australia you know, levitated off into the outer galaxy or
Speaker 1: something like that, you're unlikely to generate as big as
Speaker 1: shock for them in terms of energy. Ever. Again, real quickly,
Speaker 1: and we're just about to wrap it up, but Alex,
Speaker 1: since you mentioned heat stress, this seems to be a
Speaker 1: thing that bubbles up everywhere. And you know, we have
Speaker 1: part of this story with the French nuclear is that
Speaker 1: they had to pair back because the rivers were still
Speaker 1: hot that they couldn't dump the additional hot water. We
Speaker 1: know that there are concerns with river levels in Germany.
Speaker 1: It's also in the American Southwest, very big concerns about
Speaker 1: water levels. Like to what degree is climate itself contributing
Speaker 1: to strains on the production of energy around the world.
Speaker 1: Can I give you a specific example. So so, so
Speaker 1: there's a there are a couple of ucail plants in Switzerland,
Speaker 1: one of the one of which was just in the
Speaker 1: middle of so a little lot of fish island and
Speaker 1: a river and does not have a cooling towel. So
Speaker 1: the design was the river is always cold in Switzerland,
Speaker 1: we can just use the river to call the plant.
Speaker 1: No problems, right. Unfortunately, now you get to a point
Speaker 1: where they can't run the plant as hard because the
Speaker 1: water level, the temperature in the river gets too high.
Speaker 1: And it's not that the river is about to boil
Speaker 1: off or anything like that, but you will kill the
Speaker 1: fish who don't really handle temperatures above centigrade. So that
Speaker 1: there's all these kinds of subtle constraints in these systems
Speaker 1: that you just kind of glide over as an assumption.
Speaker 1: But as the climate changes and systems change, these become
Speaker 1: real issues in terms of how you can run a
Speaker 1: fleet of power assets, right, and then it becomes almost
Speaker 1: self reflexive because as the energy crisis worsens climate change,
Speaker 1: some of those like second order effects make it harder
Speaker 1: to transport commodities or produce commodities, and then you have
Speaker 1: to go back to dirty your energy like coal. I'm
Speaker 1: thinking specifically about the water levels of the Rhine issue,
Speaker 1: the fact that it's more difficult to get commodities up
Speaker 1: the river given that the water levels are so low.
Speaker 1: All right, Alex and haav A, that was a fascinating discussion.
Speaker 1: I feel like we covered quite a lot of ground
Speaker 1: on what is a complicated topic. So thank you so
Speaker 1: much both of you for coming on all thoughts. Thank you,
Speaker 1: thank you very much, and that was great. Thank you
Speaker 1: so much for coming up, So Joe, that really was
Speaker 1: an informative and thought provoking conversation. I thought, so one
Speaker 1: thing I hadn't realized, but both have A and Alex
Speaker 1: kind of brought it into sharp relief, was just the
Speaker 1: idea of maybe the price of commodities aren't telling you
Speaker 1: as much as they used to. In the current environment.
Speaker 1: It seems like traders are having um some difficulty with volatility,
Speaker 1: you know, have a mentioned margin, and the fact that
Speaker 1: it's difficult to trade if you think that your position
Speaker 1: is going to blow up, you know, in the next
Speaker 1: week or two. And then the other thing that really
Speaker 1: struck me is the follow on uncertainty from all of
Speaker 1: that on actual companies and manufacturers and producers. Because I
Speaker 1: think Heavier was the one who made this point. It
Speaker 1: does seem like a huge impediment to investment and just
Speaker 1: normal business if you think you aren't going to be
Speaker 1: able to hedge your energy needs totally, so many interesting things.
Speaker 1: That's like a really big one. And of course, you
Speaker 1: know some of our conversations earlier this year with the
Speaker 1: Salton posts that were kind of about that and how
Speaker 1: these energy trading shops were the new banks, and if
Speaker 1: there's a decrease in liquidity, yeah, then you know that
Speaker 1: creates all kinds of new issues. You know. The other
Speaker 1: thing I was thinking about is this idea of Europe
Speaker 1: being far and away the top bidder for l en G.
Speaker 1: You know, one of the stories that gets told throughout
Speaker 1: history is e MS and particularly like frontier markets really
Speaker 1: get hit hard in a fed hiking cycle. Interest rates
Speaker 1: go up with liquidity drains, and we are seeing some
Speaker 1: of that, but there's also now this other cycle layered
Speaker 1: on top of it, where many of those same countries,
Speaker 1: in addition to seeing highersrust rates, are also seeing the
Speaker 1: energy that they might have bought get bit away. And
Speaker 1: so is Javeer puts it, you know, it's like basically
Speaker 1: shifting blackouts this winter from Europe to poorer countries. Yeah,
Speaker 1: and this to me is a very very big takeaway
Speaker 1: from the conversation. There are a number of them, but
Speaker 1: the globalization of the l en G market that we've
Speaker 1: seen in recent years, and there's been so much focus
Speaker 1: on what's happening in Europe because of Europe's proximity to Ukraine,
Speaker 1: um and because it's the most directly hit by Russia's invasion,
Speaker 1: but the knock on effects are arguably bigger in a
Speaker 1: country like say Pakistan, which I mean my mother used
Speaker 1: to live in Pakistan too, um, so I know that
Speaker 1: there are many, many blackouts in Pakistan and it's sort
Speaker 1: of a constant issue there, But it seems like they
Speaker 1: might actually suffer a lot more than Europe. Even though
Speaker 1: the focus is on Europe at the moment, yeah, absolutely, Yeah,
Speaker 1: so many interesting things that that conversation. It's such a
Speaker 1: treat to like talk to people who are just like
Speaker 1: so in the leads and can get so technical and
Speaker 1: detailed and also can explain things so clearly, you know that, lad.
Speaker 1: I think that last point that Alex made probably deserves
Speaker 1: its own episode, Heat Stress on the energy system itself,
Speaker 1: because you know, he mentioned that situation, and it's like,
Speaker 1: you put up a nuclear plant in Switzerland, y oh,
Speaker 1: We're always going to have access to plenty of cold water.
Speaker 1: It's literally Switzerland, and then suddenly that gets called into question,
Speaker 1: and then I think, you know, there's uh, you know,
Speaker 1: the water levels elsewhere are an issue. We saw it
Speaker 1: in Texas on the flip side when we had those
Speaker 1: freezes and some of those natural gas power plants that
Speaker 1: hadn't been properly winterized went down at the exact moment
Speaker 1: that everybody was cranking up their heat. Like all kinds
Speaker 1: of interesting interplay between climate change or extreme weather events
Speaker 1: and the production and transmission of energy itself. That feels
Speaker 1: like a whole episode at some point in the future.
Speaker 1: It's another all thoughts episode that has led to another
Speaker 1: all thoughts episode in the future. Those are the best ones.
Speaker 1: Those are the best, and those are those are two
Speaker 1: great guests for um for talking about them for sure. Okay,
Speaker 1: shall we leave it there. Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe wi isn't Thal. You can follow
Speaker 1: me on Twitter at the Stalwart. Follow our guests on Twitter.
Speaker 1: Alex Turnbull He's at lex b H. Turnbull and Javier
Speaker 1: Blocks He's at Xavier Blocks. Follow our producer Carmen Rodriguez
Speaker 1: at Carmen Armine and check out all of our podcasts
Speaker 1: Bloomberg onto the handle at podcasts. Thanks for listening.