After a few days of meetings with energy financiers and insiders here in Paris, one thing has become clear…
And I needed to warn you even as we’re getting ready for our flight back home to the U.S.
It involves the changes underway in the European energy sector… and how they may impact us on the other side of the pond.
European “Energy Nationalism” Has Meant More, not Less, Energy Imports
You see, Europe has always had a problem in balancing domestic market conditions with the adequate availability of energy sources. In the U.S. and Canada these days, that balance can occur largely within the home market, because of abundant locally available crude oil, natural gas, and (in the case of the U.S.) coal.
In contrast, European energy expectations gravitate around cross-border allowances and concerns. This was one of the driving forces behind the impetus in the 1960s and 1970s resulting in the move toward a European Union.
Today, the energy prospects for the UK and Norway in the North Sea are declining. Meanwhile, the drive for nationally produced shale and tight gas is running up against political opposition in France and Germany, while basin disappointment and technical problems plague such development in places like Poland.
Against a backdrop of rising nationalism, the continent has found itself staring at increasing dependence on imports – pipelines from Russia, liquefied natural gas (LNG) from North Africa, and even more coal from the U.S.
Policy goals and economic realities are moving in opposite directions…
The UK is Already Paying More for Energy in the Name of Independence
It’s in this collision of nationalistic goals and the real condition of market demand that an unwelcome realization is dawning. The necessary balance between the two may be quite elusive to reach.
The UK has already felt this pressure.
A high court decision has required that Parliament dictate the schedule for Brexit (the departure from the EU obliged by last year’s unexpected vote), guaranteeing considerable political jockeying in Westminster, and neither help nor understanding from the EU headquarters in Brussels.
Some of the result, however, is already manifest. The British pound sterling has declined to multi-decade low exchange rates vis-à-vis other major trading currencies. That has resulted in the apparently paradoxical export of UK-produced natural gas to hubs in the Netherlands and Belgium as volume migrates to better profit margins in a weakening forex environment.
The disadvantage to average British citizens is compounded when it’s realized that, especially this time of year, the gas is then imported back into the UK at higher prices with the local utilities raising their arms in an apparent inability to respond.
That’s long hand for the normal response by the distributor: commiserate with the end user but pass on the increased cost of doing business to them. The effect on households, industry, commerce, and employment is inevitable.
This has been the short-term downside of a rise in British nationalism. The pound has stabilized but at a dramatically reduced exchange value. Absent development of domestic energy sources (maybe a new “coal age,” or a long fight over fracking), the imbalance will not improve anytime soon.
Globalization has had some bad press because of political movements on both sides of the Atlantic. But it does provide access made more difficult by protectionism. We learned that in the lead up to the Great Depression, a lesson now conveniently forgotten in the ongoing battle of political slogans and sound bites.
The latest addition is the rise of nationalism here in France…
Germany’s Reliance on Domestic Renewables has seen Imports from France Soar
Marine Le Pen and the National Front, for decades marginalized in French politics, are now a rising force in advance of elections. They favor leaving the EU (a “Frexit,” if you will), a rejection of the euro common currency, and a return to protectionism for national industries. “Made in France” is Le Pen’s campaign slogan rolled out this weekend.
No one, of course, is addressing how much that will cost the average French resident. Perhaps they should talk to the folks living on the other side of the Channel…
And don’t look now, but even the bastion of EU strength – Germany – is coming under attack. Angela Merkel, in her quest for an unprecedented fourth consecutive term as German Chancellor, finds herself (and her party) behind her principal opponent in the most recent polls.
The cost of energy to Germans is a main problem here too, as a move to deemphasize nuclear power and instead rely on renewables has had embarrassing results…
Germany is increasingly relying (and paying for) imported nuclear-produced electricity from France, and coal from America.
Quite apart from the immediate local conditions in the streets, it turns out that the popular unrest of the last several years in Greece, Spain, and Portugal was a harbinger of things to come across Europe…
The Proposed Border Tax Will Reduce Energy Imports – and Raise Prices
In each case, the availability and price of energy is central to the ongoing debates. Contrary to what the politicos would have you believe, greater reliance on what is inside one’s borders still needs to be fueled by energy crossing those borders.
This lesson is now being felt back home. As I noted here in Oil & Energy Investor well before it was recognized by others, the equivalent move in the U.S. is something called a “border adjusted tax” (BAT). Congress is now looking at this seriously.
Now, the American situation is different than the European one. Here, we have considerable excess energy reserves and the ability to run an economy on domestic energy. The BAT would tax energy coming into the U.S., allowing domestic producers to benefit from reduced foreign competition.
But this would also offset the primary reason for continuing imports in a resource-rich environment – reducing costs. That does serve to restrain prices on the end user side.
In other words, the BAT might reduce imports, but it would also raise costs.
Once again, global trade provides a balanced benefit to the consumer – and once again, unbridled nationalism does not.
There are certainly other problems attending globalization. A blind move in that direction is not the solution either. Yet the strongest argument in favor of closing borders has not been realized in practice.
Employment is not advanced. Restraining competition results in reduced efficiency, higher prices, and slower local economic development.
None of these benefit investors in energy.
Now, the main results of my meetings in Paris have indicated where these nationalist and investment trends are moving. My meetings next week in Frankfurt with the Iranians will expand that discussion.
By the time I return, we will have a different investment terrain to consider.
You’ll find out right here how to profit.
PS The rise of energy nationalism in Europe and the U.S. is making all the news, but today’s most important energy hotspot is on the other side of the planet.
And as this shocking footage reveals, China now thinks they can push America and its allies out of Asia, and secure its energy riches for itself. Thanks to a small $6 defense contractor with top-secret technology, the Pentagon has a plan to stop China dead in its tracks. Click here for the full briefing.
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