Energy crisis and recession

September 9, 2022

The ArcelorMittal, the world’s second largest steel firm, is scheduled to close one of its two blast furnaces in Bremen, Germany at the end of September. The reasons cited were soaring energy prices, degrading competitiveness, weak market demand, high cost of carbon dioxide, and a planned German government corporate gas rationing in October, a first in the history of the European Union.

EU aluminum smelters are also starting to shut down. One of six industrial firms in Germany is forced to reduce production, says German chamber association DIHK in a survey of 3,500 firms. (2 September 2022, oilprice.com)

Steel is the catalyst for industrialization, and its decline has profound effects on inflation and on the national economy. Its domino effect in terms of production and employment is unimaginable.

Massive unemployment can trigger anarchy as in Sri Lanka and Pakistan. Without steel, industrialized nations like Germany invite recession both in the short and long terms. It is hard to revive plants that have been mothballed for so long. In many cases, it is perhaps irreversible.

In our ever-shrinking planet today, recession is contagious. It is an “export commodity.” If Germany, the largest EU economy, goes into recession, the entire EU follows. An EU recession will easily infect the entire Western hemisphere, starting with the Middle East, then the US, Russia, and China. In the end, because we are hopelessly interconnected, under the domino principle, we achieve rapid global recession. A recession in the US or China, the two largest economies in the world, will be the coup de grâce.

The estimated $5.5 trillion total stimulus to business and aid to people’s health following the pandemic triggered a global cash surplus. More money means less value, the essence of inflation. The US has poured $1 trillion into the bank accounts of its citizens. As of this writing, US inflation stands at 27 percent of gross domestic product; the UK, 18 percent; Australia and Canada, 20 percent; Japan, a staggering 53 percent; EU, 11 percent; and India, 3.5 percent. Japan encouraged citizens to purchase alcohol to help stave off inflation. (Source: WION-Gravitas)

The EU is partly to blame for its woes. The Russian invasion of Ukraine triggered the EU to “shoot from the hip,” imposing deadly US-led sanctions, such as banning the purchase of Russian crude, which soared to $120 per barrel, not realizing it would backfire when they did not plan for energy alternatives until it was too late. When Russia shut down the Nord Stream 1 pipeline, it was the beginning of the end.

Quickly, the energy crisis infected everyone — the US, UK, the Baltic states — evolving into a global crisis. This is not to justify the vicious Russian invasion. It is just the way the cookie crumbles during war. The sanction was a suicide move, as Russia shifts sales to China, Asia, and Middle East markets, even though the price had to be much lower. The sanctions actually increased Russian oil exports even as the price fell by as much as 30 percent per barrel.

The EU nations went into panic mode, not realizing alternative energy sources will take time. Coal and nuclear power plants are being revived, which were banned earlier as a climate change response. That will take time. Alternative gas from smaller nations is too little, too late, and needs infrastructure for delivery. A gas pipeline is like your kitchen faucet. Just turn it on, and the gas flows. Other forms of delivery require more time and less volume, building deep-water ports for ships, employing ship-to-ship transfers, etc.
This coming severe winter, the EU will experience deadly gas rationing never before seen by the public. You have to cook first before the gas is used for heating homes. You may even need to wear your ski jacket when you eat dinner. Gas rationing for corporations will trigger more shutdowns, more unemployment, and deeper recession. Energy is the essence of life and economic development.

The best foreign policy is to simply think peace, not war, for less retaliations, which backfire, stop the present “weapons renaissance” as nations have a buying spree of state-of-the-art attack drones and hypersonic missiles. Weapons makers are raking it in, especially the US. The war fever is not worth it, as it may trigger a nuclear holocaust.

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