Winter is coming for Europe, and the Europeans are in a tight spot.
On the one hand, they want to hammer Russia with sanctions and put Vlad Putin in his place over his aggressiveness in Ukraine.
Giving a few nuclear bombs to the Poles would solve the problem without resorting to economic suicide, but a feckless Obama doesn’t have the stones for it. He would rather Iran get the bombs.
But alas, it is not that easy. Putin the Bare-chested has leverage. Europe needs Russian natural gas to heat its homes for the winter.
The unmistakable fact is that the EU gets a third of its natural gas from Russia, and the memories of Vlad the Denier shutting off the taps in 2006 and 2009 are still fresh in its memory.
No leader wants to issue gas rationing, nor can they afford to close factories when they are on the verge of a triple-dip recession.
The Gas Deal
Here are the facts on the ground: Europe has record inventories of gas, as it built up for the coming siege. Politicians have had all summer to lay in stores in case Ukraine disrupts supply.
Furthermore, just a few weeks ago, Russia agreed to resume deliveries through the Ukraine pipeline. It had closed off the taps back in June as the pro-Russian forces battled the CIA-backed government in Ukraine.
That said, no natural gas has started flowing, as Ukraine needs to pre-pay for gas and cover a $1.65 billion debt it owes to Gazprom (OTC: OGZPY) — Russia’s super-major gas company.
Time is Running Out
Like in the U.S., winter has started early in Europe, with snow across Poland and the East. Poland and Hungary have been reverse-flowing oil into Ukraine in order to give that country enough to heat homes.
But this can’t last forever, and Gazprom claims it is against its current contracts.
A long standoff will hurt a number of countries including Germany, which foolishly stopped its nuclear and coal programs to become heavily indebted to Russian/Ukrainian natural gas.
For the record, natural gas in Europe is trading at $9.77 today — more than double the U.S. price of $4.37.
Russia, acting logically, decided it can get an even higher price in China and has elected to sign a long-term export deal worth $400 billion.
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More Energy
At the end of the day, Russia still needs Europe as a customer to supply revenue. Over half of Russian revenue comes from energy exports. And Europe still needs Russian gas flowed through Ukraine to feed its energy needs.
With North Sea oil production dropping and fracking either illegal over environmental concerns or unworkable due to geography, Europe must get its energy from somewhere.
That somewhere will be North Africa and the Middle East. The news yesterday was that six French fighter jets have been added to the fight against ISIS. The EU is also backing plans to arm the Kurds in Iraq.
The Kurds have some of the largest reserves of oil in Iraq. One field has 13.7 billion barrels. Not only is this oil being pumped, but production is also expanding at a fast clip.
With the help of U.S. and European bombing runs, coupled with the surge of Peshmerga volunteers, ISIS has hit its high-water mark in terms of territorial expansion.
Oil is flowing out of Kurdistan through pipelines into Turkey and on into Europe. The Kurds are now exporting 300,000 barrels of oil a day, and this will hit 500,000 by the first half of next year. This oil costs around $20 to produce.
Dubai on the Tigris
I don’t know if Kurdistan will be the next Dubai. But I do know it will survive and flourish over the coming years. Fear is now at its height. The time to buy is now.
There is one oil company that has massive upside potential and the rights to an enormous oil block. It will be supplying Europe for decades, and there is no risk to you.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
