Dead of Winter - Doomberg

doomberg.substack.com/p/dead-of-winter

“There cannot be a crisis next week. My schedule is already full.” – Henry Kissinger

In the United Kingdom, a grassroots protest movement has broken out in response to the
ongoing energy crisis. With the bill from its failed national policies coming due, ordinary
citizens are organizing campaigns to ensure they are not the ones left holding the bag. The
mission of Don’t Pay UK is to gather at least one million commitments from Her
Majesty’s loyal subjects to simply stop paying their energy bills as of October 1, 2022. At
the time of this writing, Don’t Pay UK has passed 130,000 signatures. We expect that
number to grow.

In reading a recent profile of the movement by Euronews Green, we were struck by the
framing of the crisis by some of the movement’s organizers. This quote from the piece and
the photo we have reproduced below caught our attention (emphasis added throughout):

“Lewis Ford, an organiser from Hull, agrees the movement is ‘a lot about solidarity’,
especially for those forced to choose between heating their home and feeding their family.

‘We’re already talking about the idea of setting up warm banks, which is an absolutely
preposterous idea,’ the 31-year-old IT consultant tells Euronews Green. ‘We're one of the
richest nations. So, it’s not like there’s no money, it’s the fact that the money is being kept
in one space.’”

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 Unicorn hunter | Euronews Green

Sadly for Mr. Ford and the well-intended but totally naïve young woman holding out hope
that the unicorn concept of “cheaper cleaner greener” energy is actually a thing, they are
both victims of insidious propaganda. As reality will soon demonstrate, if a country can’t
afford to keep its citizens warm during the winter, then that country is poor, not rich. And
if the proposed solution to this crisis is to double down on the same crazy policies that
caused it in the first place, then we should expect the problem to get worse, not better.

As longtime readers of Doomberg will know, we’ve been fascinated by the European
energy situation for the better part of the past year, long before the true potential for a
crisis was considered acceptable mainstream thought. In re-reading a piece we wrote last
October called “Putin’s Fools Rush In,” we correctly predicted who held the real power in
the developing conflict. We also badly overestimated the willingness of Western political
leaders to recognize reality. Here are two quotes revealing the miscalculation:

“The prize Putin will soon collect is the inevitable go-ahead by Germany to begin
operating the Nord Stream 2 pipeline, an act that will decisively and irreversibly conclude
a years-long struggle between the United States and Russia in Putin’s favor.”

“Energy is life. Those projects will get developed. The geopolitical power vacuum we are
creating will get filled. We might not be serious, but our enemies are ruthlessly so. They
raise a toast to our self-inflicted demise.”

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 Xi and Putin raising a glass to something that grows sweeter by the day | Getty

In hindsight, our expectation that Western leaders would awaken to the laws of physics
was terribly mistaken. Instead, they have behaved as though they have leverage
over Putin, not the other way around. Despite already skyrocketing energy prices, Nord
Stream 2 was canceled, adding further strain to the EU’s depleting energy options.
Emboldened by the cards handed to him by his geopolitical opponents, Putin invaded
Ukraine. The West’s response – attempting to sanction Putin’s energy from global
markets – was quite literally the dumbest option available, akin to sawing off your own
hand in the middle of a boxing match.

In the past week, the market for European electricity broke, begging the question of
exactly who is being sanctioned by whom. Forward-year prices for baseload power in
Germany skyrocketed to over €1,000 per MWh before crashing by more than a third a day
later. The same contract was selling for €45 per MWh less than two years ago. The
imminent crisis is now undeniably laid bare for all to see. How will Europe navigate the
upcoming winter? Will logic, sanity, and genuine leadership take hold, or will the same
fools who rushed into this mess double down on their foolishness?

Having learned from our mistakes, we now propose Doomberg’s Law of Antilogic™,
under which the current slate of Western leaders can be counted on to select the worst
possible path forward at every critical junction. Applying this law to the current set of
options and recent news flow makes for some sobering analysis. Let’s dig in.

Programming Note

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All Doomberg readers are invited to join us this Friday, September 2nd at 3pm ET for
The European Energy Crisis: What Comes Next?, a Twitter Spaces discussion
between Luke Gromen, Marko Popic, and yours truly, moderated by the inimitable Grant
Williams. Click the link above to find out how to listen!

Last Friday, Luke Gromen posted an interesting framing of the three likeliest near-term
outcomes for Europe in his weekly Tree Rings report (the publication is behind Gromen’s
paywall, which you can sign up for here – it is well worth the price of admission):

“While consensus seems focused solely on the ‘EU collapse’ option, in our view, there are
three most likely possible outcomes for the ongoing and worsening EU energy ‘market
failure’:

1.     Economic collapse/starvation/freezing in the EU, followed shortly thereafter by

skyrocketing global inflation and collapsing bond and equity markets as EU collapse drives
renewed global supply chain collapse.

2.     The EU and Japan acquiesce to realpolitik and come to terms with Russia, thereby
realigning the post-war global geopolitical order and unifying Eurasia economically.

3.     The EU and any other nation that wants cheaper energy can change the means of
payment to include a “sweetener” – a little bit of physical gold with each barrel of oil,
valued either at current western gold prices or possibly at a premium to western gold prices
(which would serve to revalue EU, Russia, China, India, and the US’ gold holdings up,
using Russia’s oil and gas – i.e., Russia’s oil & gas would be used to re-capitalize the
system.)”

With the Law of Antilogic™ in hand, we can safely rule out the second and third
scenarios. The second outcome – suing for durable peace – is long past its feasibility
expiration date. The propaganda on both sides has been so thick and thoroughly applied
that an about-face by either is highly improbable. More convincingly, cutting a peace deal
with Putin is probably the most prudent course available to Western Europe’s political
leaders, making it a stone-cold lock that it will not happen before winter sets in.
Remember, our goal is to put ourselves inside the head of this guy:

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 You know who | Getty

Similarly, Gromen’s third outcome is disqualifyingly logical. At its core, he envisions Putin
accepting a mix of fiat and gold for his desperately needed energy, but with a twist: Putin
places a higher value on the gold than the quoted price in Western markets (i.e., provides
a deeper discount on his oil). In this scenario, an energy importer could sell a barrel of oil
short, use the proceeds to buy gold and stand for its delivery, deliver the gold to Putin in
return for more barrels of oil than they sold short, cover their original short
position with physical, and essentially receive excess “free” oil. Gromen goes on to
speculate that this might already be occurring with select friends of Putin, which would
have the net effect of draining Western gold reserves and sending them to the East. In
practice, this is essentially a derivative of the second proposed outcome, making it
unlikely that any European country would partake in such arbitrage. If we’ve learned
anything in the past year, it’s that the West has a chronic shortage of practical
sophistication among its political class, so the Law of Antilogic™ dictates this is a non-
starter as well, at least on the time horizons that matter for the upcoming winter.

By default, this leaves us with the first outcome: Europe will confront the winter of 2022-
2023 with far less energy on hand than it needs. The question before us now is how might
its provably illogical leaders turn this crisis into a full-blown catastrophe? We can think of
three strategies: increase demand, attack supply, and engage in protectionism. Let’s take
each in order.

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In supply shortages, the best way to bring the mismatch in supply and demand back into
balance is by relying on efficient market pricing, and the Law of Antilogic™ dictates we
should predict the opposite to happen. All efforts to efficiently allocate limited supply by
using market signals will be obfuscated, homeowners and small businesses will be bailed
out, and no high-profile suffering will be tolerated – at least initially.

Recently, Twitter has been flooded with complaints by shocked residents and small
business owners who are beginning to feel the energy crunch directly. Here’s one example
that went viral this week:

Callum ⭐️ @CallumMckeefery
My mum owns a small café in Leicester. Her electricity bill has just jumped from £10k
($12k) a year to £55k ($64k) a year. She is working out her options but more than likely
she will be forced to close.

August 29th 2022

18,005 Retweets66,169 Likes

The outrage that will flow as the populace confronts increased energy costs will be met
with promises to “make things right.” Price caps, stimulus checks, and other transfer
payments will be implemented, initially cushioning the blow for shocked consumers.
However, these efforts support more demand than the market can serve, irritating the
situation and draining precious supplies more quickly. As if on cue, Reuters was out with
a story earlier this week on the developing consensus supporting price caps:

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 “Belgium has backed price caps for the European Union's gas and electricity markets, as
well as suspending trade in case of ‘irrational market behaviour,’ according to a note seen
by Reuters on Monday.

The 27-nation EU is looking to tackle soaring energy prices and is discussing price caps for
markets spooked by Russia's invasion of Ukraine in February and reduced gas supplies to
Europe. Russia calls its actions in Ukraine ‘a special military operation.’

‘I believe in the free market and I think the free market is very efficient, except when it's
not. And today it's not,’ Belgium Prime Minister Alexander De Croo told Reuters on a visit
to Norway.”

Having exacerbated the problem from the demand side, leaders can be counted on to
crimp production as well. On Tuesday, Bloomberg broke the news that leaders in the UK
are eyeing the so-called “windfall profits” of its energy producers for taxation. The leak
clearly came from within the government ranks, making it part of a purposeful public
relations strategy. Here’s a key passage from the story:

“UK gas producers and electricity generators may make excess profits totaling as much as
£170 billion ($199 billion) over the next two years, according to Treasury estimates that lay
bare the revenue-raising potential of a windfall tax.

Treasury officials will deliver the assessment to the next prime minister when they take
office on Sept. 6, according to a person familiar with the matter, who asked not to be
identified discussing internal calculations.

The prediction is likely to fuel further calls for increasing the existing windfall tax on oil
and gas production in the UK, and extending it to power generators that have so far been
exempt. Tax at the current windfall rate of 25% could generate tens of billions of pounds if
the excess profits for 2023 and 2024 come in at the top of the Treasury forecast.”

Nothing motivates incremental production like the threat of seizing profits directly from
the risk takers needed to fund it. Nationalization can’t be much further over the horizon.

Finally, we expect a fracturing of European unity and the implementation of protectionist

policies as countries look to fend for themselves. With Norway already signaling that it
will be forced to curb electricity exports to Europe because low water levels are crimping
its hydroelectric power stations, the stage is set for an every-country-for-itself free-for-all.
Earlier this summer, an agreement was made by EU countries to cut winter gas usage by
15%. However, as Reuters reported yesterday, “sustained cuts in gas demand on the scale
needed have not happened despite multiple industries being forced by extraordinary gas
prices to curtail their output.”

As hard as it is for us to admit in writing, the Law of Antilogic™ will better predict the
future than a logical analysis of what should be done. Having written such analyses for
the better part of a year – and been scolded by some for doing so – we too must capitulate

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to reality on the ground. Europe is hurtling toward the hard wall of physics at a
frightening speed, and its leaders are stomping on the accelerator.

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