At the end of 1978 there was a “Winter of Discontent” in the United Kingdom driven by striking unions attempting to protect their member’s incomes in the face of high inflation; made worse by exceptionally cold and stormy winter weather. In 1976, Labour had implemented austerity policies as its right-wing neoliberal leadership (Callaghan and Healey) engineered a crisis to be “forced” to accept an IMF bailout with the usual austerity, privatization and deregulation strings attached. A short-term devaluation of the British Pound (GBP) together with exchange controls could have carried the UK through a speculative attack on the GBP, with the knowledge that North Sea oil and gas production and government revenues were already accelerating. As with the US Democratic President Carter in the same period, it was the conservative elements within the “progressive” parties that implemented neoliberalism, creating the economic and social conditions that facilitated the elections of both Thatcher and Reagan. Then later striving to be just as neoliberal as the Conservatives/Republicans under the leadership of Clinton and Blair. After more than four decades of neoliberalism across Europe and the US, which has enriched the already wealthy at the expense of the rest, it is the neoliberals who face a winter of discontent; created by their own dogmatic policies. An inflationary crisis stoked by COVID-driven supply chain issues and a dearth of new fossil fuel investments in the past decade has been turned into a raging inferno by European energy policies, sanctions upon Russia, and the greed of US natural gas producers.
Producing A Social Crisis
For many years, the European Union and its individual nations (substantially prodded by the US) have been working to undermine the profitability of Russian natural gas exports, and the control of Gazprom upon its pipeline network that supplies Europe, while working to reduce Europe’s dependence upon Russian gas supplies. In 2014 the EU forced Russia to cancel the South Stream pipeline (63 bcm/yr capacity) that would have brought Russian gas to Europe through Bulgaria. Russia’s response was the Turk Stream pipeline (31.5 bcm/yr) to Turkey, adding to the Blue Stream pipeline (16 bcm/yr) that also supplies that country. Nordstream II (55 bcm/yr), from Russia to Germany, was completed in the face of US sanctions but then the Ukrainian conflict was utilized by the German leadership to not allow the operation of the completed pipeline. The competing EU and US supported Nabucco pipeline (from Turkey to Austria with the main supplier being Iraq) was not completed, while the Southern Corridor from Azerbaijan to Europe (10 bcm/yr to be expanded to 20 bcm/yr) was completed. European nations also built out over 20 LNG terminals, but in no way could they replace the scale of pipeline-based Russian gas supplies and a significant supplier of that LNG was Russia (from its Yamal LNG operation). The increasing demand for natural gas in the EU, together with reductions in European production and the German retirement of its nuclear electricity generating fleet, nullified any ability of the EU to reduce its dependence on Russian gas supplies. In 2021, Russia supplied 40% of the gas consumed by European nations. At a time when gas prices were low many European nations had refused to engage in long-term supply contracts with Russia, trading lower immediate costs for a lack of protection against higher prices in the future. In addition, EU gas storage levels were significantly reduced – reducing immediate gas demand at the risk of exposure to higher gas prices in the future. By showing great hostility to its main external supplier of natural gas, by not engaging in long-term gas supply contracts, and by not filling its gas storage facilities, the EU set itself up for a perfect storm if global gas supplies became tight.
As economies recovered from the COVID lockdowns in 2021, and a severe winter hit Europe, that perfect storm hit, and EU gas prices rose into the stratosphere. Russia was not in the mood to provide additional gas supplies, especially when that severe winter was driving up domestic gas demand and Germany continued to drag its feet on the opening of Nordstream II. Prices mediated somewhat in early 2022, but then the Ukrainian conflict burst into life. The reaction of the West was to steal Russia’s foreign exchange reserves (in US$, Euro etc.) and impose severe economic sanctions upon it. It seemed that EU elites considered that they could metaphorically punch Russia in the face and Russia would not react in any way, while rapidly collapsing to the floor. With the EU proving its capability for theft, Russia decided to price its gas exports in Rubles rather than the Euros that would sit frozen in EU banks. European nations thought that they could call Russia’s “bluff” and refused to pay in rubles, but as it became evident that Russia was not bluffing some nations quietly started paying in rubles. Poland and Bulgaria did not though, resulting in a significant reduction of gas supplies to the overall EU gas market; EU natural gas prices jumped. In addition, Ukraine shut down one third of the capacity of the pipeline network that carries Russian gas through Ukraine to Europe; EU gas prices continued to escalate. Western sanctions then impacted the maintenance and return of a compressor on the Nordstream I pipeline and Russia citing the legal uncertainty of the status of the compressor under sanctions reduced that pipelines throughput to 20% of the designed 55 bcm/yr volume; EU gas prices escalated again. Most recently, Russia stated that Nordstream I would be shut down from August 31st to September 2nd for required maintenance; EU gas prices jumped again. To add insult to injury, a widespread summer heatwave and drought has forced reductions in the output of many nuclear power stations and restricted river-based supplies to some coal-fired power stations, and a lack of wind has restricted wind turbine production. At the current time on an embedded energy basis, EU gas prices are the equivalent of over US$1,200 for a barrel of oil; a ruinous level for both domestic consumers (for space heating and electricity) and corporate users. At no point have the EU elites taken the simple steps that could greatly reduce these prices – open up Nordstream II and get Poland and Bulgaria to pay in rubles. Instead, EU consumers and industry will be sacrificed.
Western sanctions have also affected food and fertilizer exports, as well as temporarily reducing Russian oil exports as it worked to sell its oil to non-sanctioning nations such as India and China. This reduction exacerbated an already rising trend in oil prices as oil demand recovered post COVID lockdowns amid restricted supply. The North American domestic natural gas market has historically been disconnected from global pricing through legal constraints upon gas exports, but after shale gas production rose rapidly these restrictions were removed and multiple LNG export terminals were built as well as pipelines to supply Mexican demand. With the reductions in Russian gas exports to Europe, US LNG export terminals have been working at a full capacity that utilizes up to 15% of US gas production. At the same time, exports to Mexico have significantly increased in the past few years, also accounting for about 10% of US production. This extra demand, combined with a relative plateauing of US gas production, has already produced significantly higher gas prices in the US with the possibility of a convergence with global LNG pricing that is multiples of current US domestic pricing. With a hot summer in the US leading to lower than average winter gas storage capacity utilization, the US may be a cold winter away from rapidly escalating natural gas prices. If that was combined with a second cold winter in Europe, gas prices on both continents may reach unimaginable levels.
Then we have European plans to ban the import of seaborne Russian oil as of December 5th of this year, and the import of Russian petroleum products as of February 5th next year. Oil is supplied to a global market, so to some extent Europe can simply switch to other suppliers but not all oil is the same. Russian oil tends to have high sulfur and other impurities that require specialized processing, meaning that some European refiners will need to make expensive changes to process non-Russian oil and the ability of Russia to sell the oil previously supplied to Europe may be somewhat constrained. At least in the short to medium term this will result in a reduction in Russian oil exports, with a limited ability of Europe to fully replace those exports. A reduction in supply, all other things being equal, can only result in a rise in global oil prices – exacerbating energy-price driven inflation. In 2021, Europe imported over 3 million barrels per day (mbpd) of Russian oil (750 thousand bpd through the exempted pipeline routes) and about 1.3 mbpd of petroleum products such as diesel. Even if Russia can manage to sell at least 75% of the 2.25 mbpd of its oil no longer sold to Europe, the result will still be a tightening of global oil supplies. With respect to the oil products such as diesel, it is quite possible that Russian oil will simply be “washed” through third-country refineries where it will become “Indian diesel” and “Chinese diesel”; just at significantly higher prices given middlemen profits and longer supply routes.
The US has been hamstrung in getting more global oil production to market due to its previous sanctions on Venezuela and Iran (with a mixture of ideology, arrogance and the Israel lobby hindering a rapprochement with Iran), the destruction of Libya, and a Saudi Arabia moving toward a more independent stance. The US has also been rapidly running down its strategic petroleum reserve in a desperate move to keep a cap on domestic petroleum (confusingly referred to as “gas” in the US) prices in the run up to the US mid-term elections. At some point, which may be quite soon, the US will have to stop running down its strategic reserve and even look to replenish it. This would produce a fall in supply at best, and an additional increase in demand at worst; both of which will serve to drive oil prices higher everything else being equal.
With much of global LNG supply tied up in long-term contracts, and oil supplies tight and under the control of a non-amenable OPEC+ (OPEC plus Russia), the fossil fuel begging tours of US and European leaders have resulted in embarrassment rather than increased supplies. Most recently, OPEC+ has stated that it will consider production cuts to offset the impact of any US-Iran deal that removes US sanctions; there will be little or no help to the West from the fossil fuel supply side.
A European Winter of Discontent
The UK is already riven by a wave of strikes by workers who have been offered derisory pay raises after a decade of stagnant pay and a real pay cut of 7% over the yearly period ending in June 2022. With forecasts that UK inflation could peak as high as 18% in early 2023, with some even seeing retail prices rising by over 20% year over year, offered pay raises of low single digits would result in an extra 10-15% real pay cut or more. It has been estimated that by January of next year, two thirds of UK households will be spending 10% or more of their net income on their electricity and gas bills. A rapidly burgeoning “won’t pay” movement, paralleling the poll tax won’t pay movement that unseated Margaret Thatcher in the 1990s may have many millions of members as the winter progresses. The stand-off of such movements with the “Margaret Thatcher on steroids” probable winner of the competition for Conservative prime minister, Liz Truss, will be at the core of a UK winter of discontent. With the combination of rising inflation, falling economic output, falling real wages, increasing strike activity and the “refuse to pay” movement, a 1978-style winter of discontent is certainly on the cards.
The same realities will be spread across Europe, where national leaders (excluding Orban in Hungary and Vucic in Serbia) seem irrevocably wedded to the ongoing support for Ukraine and the self-harming Russian sanctions and energy policies. In France, Macron has previously shown his readiness to utilize extensive police violence and lawlessness to crush the Yellow Vest movement, and the 2022 price cap on electricity rates and freeze on residential gas prices may help keep a lid on such protests. In a recent speech he talked about “doing with less” (for his non-rich constituents and certainly not for himself) for years to come in a long struggle to support Ukraine. With the inability to replace much of what Russia (and Belarus and Ukraine) previously exported to Europe, and the probable inability of maintaining price caps over such a multi-year period, a long struggle can only be a recipe for a multi-year fall in the real earnings of the majority of citizens. In Poland the Ukrainian-family descendent President Andrzej Duda has engaged in explicit anti Russian discourses and actions, as with the leaders of the Baltic States, Moldova, Romania, Slovakia and the Czech Republic. With Polish inflation already above 15% in July of this year (as with Romania, Bulgaria and the Czech Republic, with Slovakia above 12%, the Baltic States above 20%, Moldova above 30%), the offsetting effect of government subsidies is limited; especially with rising interest rates increasing mortgage payments. How long such leaders will be able to actively reduce the living standards of their citizens to support Ukraine is questionable, especially with an increasing number of stories of such citizenry increasingly becoming hostile to Ukrainian immigrants.
The core nation will be a Germany whose successful manufacturing sector has historically been as much dependent on cheap Russian energy as its intrinsic capabilities. Will the combination of a collapsing manufacturing sector (exacerbated by the ongoing collapse of German car sales in China and the US, and Telsa’s increasing market share in Europe) and significant reductions in the living standards of the majority, force either a government climb down or a change of government? If this occurred, and Germany opened the Nordstream II pipeline to increase natural gas supplies the impact upon EU and NATO cohesion may be severe. The Italian snap general election on September 25th may produce a right-wing government more along the lines of Orban’s in Hungary, with a greater readiness to compromise with Russia for the benefit of its population’s living standards. Hungary’s decision to sign a 15-year gas supply deal with Gazprom, starting on October 1st this year and mostly supplied via a link to Turkstream through Serbia and Bulgaria, may help to insulate it somewhat from the winter of discontent. It was also able to exempt its Russian pipeline oil supplies from the European plans to stop using Russian oil. The extremely anti-Russian Bulgarian government fell on June 22nd, and recently the interim energy minister has stated that talks with Gazprom to renew gas supplies are inevitable. Snap elections are set for October 2nd.
Images of a Russia recovering from the immediate impacts of the sanctions, with a population enjoying the warmth and light of cheap Russian fossil fuels, may prove to be very uncomfortable for European leaders and their populations. Already, Russia has stated that it has reallocated half of the Nordstream II gas supply to domestic use to “to develop gas supply to Russia's northwest”, cutting its possible throughput by 50% until at least the end of the current decade. With the pipeline remaining unused, at what point is all possible supply reallocated, removing Nordstream II as a backup plan for Germany? As the Ukrainian war continues, and Russia takes more territory, the Ukrainian government may cut off more of the Russian gas pipelines running through its territory. There have been some Western “experts” that have stated that Russia will not conduct offensive operations during the winter, an utterly ridiculous assertion to anyone who has knowledge of the massive Soviet winter offensives of World War 2.
European Regime Change or Social Crisis: Winter Is Coming
The stresses within the European nations are already very evident and Summer is still upon us. As the leaves start to change colour and the chill of the winds becomes noticeable, the European social, economic and political pressure cooker will start to scream. Will Europe and individual nations be strong enough to contain that pressure, or will it burst out in a series of climbdowns, retreats and colour revolutions? In the US, the Republicans will most probably trounce the Democrats in the mid-term elections, reclaiming control of both house of Congress and escalating the intra-elite war between globalist and nationalist capitalist elites. Winter is Coming…
Excellent read, and I learned a few things. Thank you.
Among the headlines of posts in my mailbox today (27 August '22) was one about a German MP calling for the go-ahead for Nordstream 2... It suggests a scenario...
The German people will have an energy shortage northern winter - and the demands to OK Nordstream 2will increase... Eventually it will be OK'd - and propaganda to "never let the energy crisis happen again" will begin...That propaganda will garner support for taking Russia down "so the crisis cant happen again"...The US and Nato have all Winter to prepare...The war in Ukraine Must be prolonged, and that war of attrition will have degraded Russia militarily...
The sanctions against Russia seem intended to cause the energy troubles in Europe that the US could then exploit to gain support for further aggressions against Russia...?