Sep 16, 2022 Macro

Almost without gas, but industry is coping

Russia has all but stopped gas exports to Europe. What would have been considered a major catastrophe some months ago has turned out to be manageable so far.

At first glance Putin's plan to use energy as a weapon seems to be working. Europe's media is fixated on the increase in the price of natural gas[1] and fear of a cold winter. At second glance, however, Putin’s victory looks Pyrrhic. Natural gas prices have dropped below their peak despite the announcement of the almost complete supply freeze – and in some cases they are down to half their peak price.[2] Even the supply freeze and explosion in prices has not appeared to provoke the much-feared economic collapse. Why?

Firstly, Germany has dealt with the gas shortage by increasing gas storage much faster than expected. Secondly, consumption has fallen quite remarkably. The savings made by private households won’t be clear till the autumn and winter,[3] but it is already apparent that industry has been able to substitute other energy sources for natural gas. And – this is the crucial point – with significantly lower production losses than feared.

As our Chart of the Week shows, in July and August industry used around 20% less gas[4] than the average for 2018 to 2021. Yet in July [5] Germany's real industrial production fell by only 2% compared to the 2018-2021 period. And we believe these figures could get still better when a so called auction model for gas is introduced. Then companies that are currently still benefiting from (long term) favorable supply conditions will have an incentive to curb their consumption and auction off their surplus gas at a profit.

Difference of gas consumption and industrial production 2022 vs. 2018-2021

20220916_CotW_Gas usage_CHART_EN.png

Sources: Haver Analytics, Bundesnetzagentur, DWS Investment GmbH as of 9/12/22

Of course, this does not mean that German industry and households are not in for a tough winter – and perhaps two or three hard winters. The drastic increase in prices is enough to cause that. And in our baseline scenario we expect a slight recession in Germany and Europe at the turn of the year. Small businesses especially are likely to complain more about the difficulties they face. But just a few months ago it was feared that a near halt in supplies from Nordstream I would provoke a catastrophe. The halt has come; the catastrophe hasn’t. And the government has lent a helping hand with a relief package for commercial consumers that amounts to about 3% of GDP.

Putin says that Russia has staying power in the war because his people are capable of suffering and can deal with economic shortages. "However, we are now seeing how adaptable Western industries are when faced with extraordinary pressure," says Martin Moryson, Chief European Economist at DWS.

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1. Future contracts for delivery in 12 months have almost five folded since the beginning of the year.

2. Source: Bloomberg Finance L.P.; as of 9/13/22

3. Not only because that is when private households will increase their gas usage significantly, but because higher wholesale natural gas prices only feed through retail prices slowly.

4. This report shows what the International Energy Agency thought what was possible back in March 2022 in terms of gas savings:

5. Data for August has not yet been published.

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