Q3 In Review

Q3 2021 Recap

A recent story on the Bloomberg news service caught our attention, at first because it struck us as somewhat comical, but as we pondered its implications it became worrisome and even frightful. The headline itself was seemingly innocuous: “A German Power Plant Just Ran Out of Coal.”[1] Having once visited a DC-area Starbucks for our morning caffeine fix only to be told they were out of coffee, our first thought was, “That’s plain silly.”  Even more so, this being October, we imagined a crew of lederhosen-clad utility workers hurriedly shoveling briquettes into a wheelbarrow, hauling it to the power plant, firing up the furnaces and clogging merrily off to the nearest Oktoberfest celebration for a stein full of lager.

Now, lest you think we might have done similar imbibing before penning this letter, please bear with us – this tale of unintended consequences does have relevance to today’s global economy and your investments. It turns out that German coal production has been in decline for years, dropping about 45% from 2012 through 2020.[2] And yet, through the first half of 2021, dirty old coal remains the largest source of electricity in the country.[3] The Germans are sharp engineers, as those who drive German cars will surely attest, and we’d bet they’ve been contemplating converting much of their power production to alternative, “greener” fuel sources that could help reduce the impact of coal shortages. Other fuels like, say, natural gas.[4]

It further turns out that several years ago one of Germany’s European neighbors, the Netherlands, announced they were cutting production at their largest natural gas field, Groningen, because they were concerned about earthquakes. It seems that Groningen rests on land prone to seismic instability, and though the Dutch had been one of the main gas suppliers to Europe for decades,[5] they will cease production at the field in entirety next year. Dutch gas generation has fallen more than 70% since 2013 due largely to production caps at Groningen.[6]

Here’s where the silliness turns ominous: Natural gas production across Europe has been in steady decline over the years, thanks in large part to Groningen, even as natural gas dependency reached all-time highs as recently as 2019.[7]  That coal-fired German utility may not be so eager to convert to natural gas if there isn’t enough gas to go around. This imbalance has become more pronounced by the rapid and expansive post-pandemic economic recovery with consequences for the globe. Strong worldwide demand has caused natural gas prices on the New York Mercantile Exchange to jump 60% in the last three months alone![8] A similar price spike in the United Kingdom has led to the bankruptcy of six utility companies there as operating costs grew out of control.[9]