The risk of a total shutdown of Russian gas supplies is now well understood. Not a single molecule of Gazprom has been transported to Europe via the Yamal pipeline via Poland for six weeks. Streams via Nord Stream 1 via the Baltic have been operating at 40% capacity since mid-June. They went down to zero this week for ten days of scheduled maintenance.
European leaders strongly suspect the Kremlin will concoct a pretext to keep Nord Stream 1 closed when inspections end on July 21 – the next red day for the global economy. French Finance Minister Bruno Le Maire warned on Sunday that a “total shutdown” was more likely than not.
German environmental vice-chancellor Robert Habeck is preparing to activate phase 3 of his country’s “emergency” plan, with gas rationing for heavy industries. “Anything can happen,” he said.
Goldman Sachs estimates the euro zone would contract by up to 2.7% if the gas stopped, with GDP potentially falling 3.2% in Germany and 4.1% in Italy. The first talks of an EU “energy bailout” for Germany and Italy have begun. Others will have to share their scarce gas reserves – in other words, do what Germany failed to do with PPE kit at the start of the pandemic. It will be fractured.
What is less explored is what would happen if Mr. Putin triggered a full-fledged oil shock on top of the gas squeeze order to push the cost of living crisis to breaking point.
It is widely believed that he would not play the oil card because import revenues are too valuable – worth $700 million a day, namely $400 million for gas – and because crude is too fungible a commodity in world markets for targeted use against Europe. But that ignores the internal structure of the Russian economy and may underestimate Mr. Putin’s desire to create maximum havoc as an instrument of foreign policy.
JP Morgan’s Natasha Kaneva and Ted Hall think the Kremlin might be seriously tempted to give it a try. They argue that Russia could temporarily halve its total production and starve the world to five million barrels a day – 5% of global supply – without causing lasting damage to its drilling infrastructure or suffering an economic blow. intolerable. They estimate that a shock and fear of this magnitude would push prices to $380 a barrel, levels that would bring the global economy to a standstill.
The most likely calibration is a cut of three million barrels per day. That would take Brent to $190, still enough to break the all-time high of $148 in mid-2008. “The tightness of the global oil market is on Russia’s side and strong public finances could absorb revenue losses without too much difficulty,” they said.