The Peter Zeihan Podcast Series - The Europeans Are Having Some Gas Problems || Peter Zeihan

Episode Date: June 27, 2024

Europe has been taking a beating lately, from economic issues to demographic problems, but there's a new one on the horizon. When the Ukraine War wraps up, what will the European energy situation look like? Full Newsletter: https://mailchi.mp/zeihan/the-europeans-are-having-some-gas-problems

Hey everybody, Peter Zine here, coming to you from Italy against a backdrop of olive trees, Jasmine, and Bougainville. So, you know, doesn't get much more Italian than that. I'm on the Ligurian coast, and it is easy at this moment to forget about great power politics, but even here in Italy, they're finding a way to punch through. The issue is energy, unsurprisingly. Before the Ukraine war began, Russia was the world's largest exporter of natural gas, mostly in pipe form, mostly to Europe. And while there has been a lot of talk on all sides, especially the Russian side, but also among pundits in the West, that the Russians are just going to redirect natural gas export somewhere else.

Most notably, China is the one that keeps coming up. But natural gas is not like oil. So oil's a liquid. You can put it onto a tanker and then send that tanker anywhere in the world. But natural gas to get put on a tanker has to be frozen down to 300-odd degrees negative. And the infrastructure to do that is involved, and the Russians lack the capacity. to do it themselves. I'd also argue that the Chinese lack the capacity to do it themselves. So your only other option is to go by pipe. And almost all of the natural gas that Russia has

exported historically has gone to Europe. There are some pipelines that go to China, but they tap fields that are on the eastern side of Russia, far on the other side of the urals. And the two networks are completely separate. And there's a couple thousand in some places, five thousand miles, of open virgin terrain between them. So linking them together is not something that's simple and even if you link them together that's not enough because the existing pipelines are already at maximum capacity so you would have to run new infrastructure from the existing fields in northwest Siberia all the way across central Siberia into southeastern Siberia and then crossing to China and make it all the way to the coast so you're talking about a series of pipelines that would

be the largest in human history that are over three times the length of the whether we're currently the longest ones in existence this is conservatively a hundred billion dollar project, and it would take even if the Chinese were in charge all of it over a decade to build. It's just a physics issue. Now, that's assuming, of course, that you've got the money for it. The Russians, as they always do when they talk about new projects, just assume that the other side is going to pay for the whole thing, which is usually how it doesn't work. And the Chinese are like, no, not only do you need to pay for it, we're not going to pay any more

for the natural gas that is coming through this most expensive infrastructure project in history than what we're paying for other natural gas. So the Russians think that they should be able to charge $300 to $1,000 per thousand cubic meters, whereas the Chinese is like, you know, maybe 80, maybe 150 at a big day. So that's not this deal of the century as it's been referred to. It hasn't been agreed to. No one's putting money down.

No one started construction, and we're two and a half years in the Ukraine war. It is not going to happen unless our understanding of transport physics, construction, and energy change significantly. and that doesn't seem to be on the table at the moment. So let's put that to the side. The Europeans. The Europeans are looking for more and more ways to cut off income to the Russians. They've been whittling down their exposure to direct oil transfers from the Russians.

Almost to zero at this point, that doesn't mean to suggest that they're completely immune to anything that happens. What they've done is they've stopped bringing in the crude directly. The crude bypasses Europe now. It makes a much longer sale to places like India where it's refined into fuel, and then that fuel is sent back to Europe. So they've achieved a degree of market insulation, but they're certainly not out of the woods. Natural gas is a little bit more straightforward. Because those pipelines are basically turned off now, and the last of them will be going off by the end of this year, the Europeans have largely supplemented their natural gas from other sources. And since natural gas cannot be easily rerouted by pipe, this Russian stuff really has.

has just gone off the market. So Gasprom, that's the Russian state authority that's in charge of all natural gas production and export, almost all of it in Russia, has actually reported its first ever loss this year, and it's only going to get worse moving on because they have relied upon those natural gas exports to Europe to generate the currency to maintain their own fields and their own production and their own transport. Natural gas within Russia is very, very heavily subsidized. So their only remaining hard currency is now coming from a couple smaller projects that export LNG projects that someone else built and that the Chinese cannot help them maintain, and then a singular pipeline that does start in the eastern Siberian fields,

or there's maybe two pipelines now, that goes to China, but the two of those combined are less than a quarter as large as what used to go to Europe. That means the Europeans have had to find other sources. For most countries in Europe, the solution has been that liquefied natural gas that I mentioned earlier, with a lot of it coming from the United States and a lesser amount from the Persian Gulf, most notably gutter. But for the Italians, it's a different solution. The Italians, because they're in southern Europe and because the boot of Italy hits so far south, they have been able to bring in natural gas by pipe from North Africa.

The volume of natural gas is now in question. Countries like Algerian, especially Libya, have loads of the stuff. The problem is stability. The Algerians are so anti-French because of this whole colonial war thing that they went through that the logical customer for them, France, is one that they try to avoid dealing with whenever possible. And you add in some energy nationalism, and Algerian output has been steadily dropping for almost 20 years now. They're probably not a reliable long-term producer unless there's a significant change in politics in Algiers. And even if that happens, Algeria has a large and growing population, a large and growing economy.

They need more and more of their natural gas from themselves just to keep the lights on. That leaves Libya, which has been in a state of on again, off again civil war ever since the death of, even preceding the death of Gaddafi 15 years ago. But that has now emerged as the single most stable supply for the Italians. And in a post-Russia world where there just isn't enough supply to go around, Libya is going to become more and more important for the Italians keeping everything running, which means we're in this weird little situation where the Italians have to do one of two things. Number one, they're going to have to send more and more money and more and more people into Libya to stabilize the situation

in order to keep that energy flowing. And the last time the Italians had troops on the ground in Libya, things got decidedly weird, and it was the opening stages of World War II. The Italians would really rather not do that, but they might not have a choice. Option number two is to find another source of energy to keep the lights on. The Italians don't have a lot of coal and their environmental goals at the moment wouldn't allow that to happen.

Hydro is pretty much tapped out for everything they can do at this point. You can only take efficiency so far. The only remaining possibility is nuclear power. And the Italians are one of a handful of European countries that is basically dusting off their old infrastructure and looking very, very hard at what would it take in order to bring some nuclear plants back into the system? It'll be one of those countries that got rid of pretty much everything, and now they have to start over with where they were back in the 1960s and 70s. It's not a cheap solution.

It's not a quick solution. But if your alternative is invading Libya, it's something they have to consider very, very, very closely.