Germany's Chancellor Scholz has already warned that should the gas supply be turned off, Germany would dive into a potentially very deep recession that would, almost by definition, drag the rest of the Eurozone with it.
This, however, is a regional FedBank talking worldwide recession.
And it's a FedBank experienced in hydrocarbon economics.
A small part of a very interesting post at naked capitalism, March 24:
....Even though the major financial news outlets like the Wall Street Journal and Bloomberg reported on the new Dallas Fed paper, The Russian Oil Supply Shock of 2022, seemed worth highlighting here. It is short and in large type, which worries me as a sign of the central bank’s assumptions about the intellectual level of its audience. Key sections:
In the immediate aftermath of Russia’s invasion of Ukraine in late February, early estimates suggested that perhaps 3 million barrels a day (mb/d) of petroleum production—almost 3 percent of world production—had been effectively removed from the global oil market, constituting one of the largest supply shortfalls since the 1970s…
Recent data from Energy Intelligence, however, indicate that the fall in Russian petroleum exports to date has been somewhat smaller than the initial estimate of 3 mb/d and coincided with oil price weakening after March 8.
What changed is that much of the Russian oil that continues to be exported from Baltic and Black Sea ports at steep discounts is not delivered to refiners, as is customary. Instead, trading houses are purchasing the oil and keeping it in commercial storage in Europe, from where it may be potentially resold, bypassing financial sanctions. Buying oil for storage is not prohibited under current sanctions.
Yves here. Let me stop for a second. Oil storage capacity is limited. Basically, contrary to what intuition would tell you, oil does not store very well. Hopefully readers can provide any update/correction if needed, but storage capacity relative to normal use levels back in the runup to the crisis was 51 to 55 days. That is why when speculators are stockpiling oil on a widespread basis, you read about full oil tankers wandering around like the Flying Dutchman. It’s normally easier to store oil by leaving it in the ground or by stockpiling finished product, particularly energy-dense diesel.
In other words, buying for storage has limits…but in reality, these traders are just taking oil into storage in one door and selling it out the other. I would hazard this intermediation mainly adds costs and complexity rather than amounting to meaningful stockpiling, particularly in light of the oil shortfall. Back to the Dallas Fed:
…the main reason Russian crude oil and refined product exports have been at risk since Russia’s invasion has been the refusal of financial institutions to back such transactions. In addition, oil tanker rates for Russian destinations rose to record levels, reflecting public pressure on oil companies to avoid purchasing Russian oil, fear of official sanctions on Russian energy exports at a later date and attacks on vessels in the Black Sea. This outcome was largely unanticipated, as U.S. and European Union sanctions originally deliberately excluded Russian energy exports.
Another dimension in which the current event differs from historical precedent is that the reduction in Russian oil exports was preceded by a cut in Russian natural gas exports to Europe. Natural gas is used for home heating, for power generation and in industrial production. For example, it plays a central role in the production of fertilizer. The resulting price increases to various degrees have spread across the globe through trade in liquefied natural gas.
The paper then goes through alternate suppliers, and how the Saudis and UAE (at least presently) won’t make up the shortfall or how, like US shale players, they can’t, at least not in a time frame that will have a big enough impact. Again from the article:
Thus, unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil….
…if the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991....
....MUCH MORE at "Russia Counter-Sanctions “Unfriendly Nations” by Requiring Gas Payments in Roubles; Dallas Fed Predicts 2022 Global Recession if Russian Energy Supply Remains Restricted"
Previously:
It was less than three months ago that we were posting "Germany’s Reaction To The Energy Crisis Could Be Catastrophic".
Ditto for the timing of "Germany is not as stable as we think. Just ask its preppers".
But it was only four weeks ago we saw "Bundesbank: "Germany tipped into second recession by virus".
