Those whom the gods wish to destroy

Reuters reported an interesting piece of news this week. Albermarle, one of the biggest producers of lithium globally, warned that it may have to close a lithium processing plant in Germany. Why would it have to close a plant one might wonder, when lithium is in such high demand? Well, it appears that the gods wish to destroy the EU.

The EU added lithium to its list of critical materials a couple of years ago because of its fundamental importance for electric vehicle batteries. The EU, as we all know, is very fond of EVs and the electrification of transport as one of the main paths to the energy transition. At the same time, it may soon classify lithium carbonate, chloride, and lithium hydroxide as dangerous for humans.

It sounds a little surreal at a first glance for those with some knowledge about the significance the EU has attached to EVs. At a second glance, it’s no longer surreal. At a second glance the news might make one wonder about the mental health state of those involved in the decision-making process in the EU.

In all fairness, the proposal to classify lithium compounds as hazardous to human health did not come from the EC or from Frans Timmermans. It came from the European Chemicals Agency, which appears to be not so intimately involved in the electrification plans of its parent structure. And of course just because the classification has been proposed does not mean it would be approved.

However, the very fact that such a proposal, which goes directly counter to EU energy ambitions, originated in an European agency makes for eyebrow-raising material and sparks sanity doubts, especially in the context of EC forecasts that the EU will need 18 times more lithium than it uses now by 2030 and 60 times more by 2050, according to the Reuters report.

The decision on whether or not the three lithium compounds are a health hazard is due to be made at the end of 2022 or the beginning of 2023. By that time, the EU may be rationing gas. The grim forecast comes from the IEA’s Fatih Birol who spoke to the FT about the energy situation in Europe this week.

I’m always eager to hear what the chief of the International Energy Agency — which I expect to soon rebrand the way bp and Equinor did it, perhaps renaming itself to International Electrification Agency — and this was no exception. As usual, Birol did not disappoint.

“If we have a harsh winter and a long winter and if we do not take [demand side measures] . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities,” he told the FT.

Given the climatic characteristics of Europe, chances are we will have at least one of the two — a harsh or a long winter. Or we could have both, as tends to happen sometimes. The perception of harshness when it comes to winter is quite relative, one must admit, but if you turn your heating on in October and keep using it until April that’s a long winter.

We could only hope the winter will be short and mild (as if it has ever been short and mild at the same time) but, according to Birol, we should also hope China’s economic growth slows down. Otherwise demand for gas from China would mess up European consumption plans. Talk about fragile.

Saying governments needed to address the demand side of the energy equation, Birol added that whatever shortages of gas may be on the cards would not be as bad if “the Chinese economy doesn’t perform at the usual pace”. Here’s to hoping the Chinese fail so we can keep the lights on in European factories. This is where we’ve got to.

In more wonderful news for Europeans, there’s been a new crop of bullish oil price predictions. Trafigura’s chief executive said this week the situation on the oil market is critical and prices could go parabolic in the next six months.

Per the FT, “A parabolic move in markets is generally defined as when a price that has been rising suddenly surges to hitherto unseen levels, mimicking the right side of a parabolic curve.” I don’t know about you, but to me, this could make for a pretty decent apocalyptic film.

Should this happen, Jeremy Weir could take on as co-screenwriter Goldman Sachs’ Damien Courvalin. The head of the bank’s energy research team told CNBC last Friday why the current oil crisis was no ordinary crisis and why it could get worse, although he didn’t use these words, of course. Investment bank analysts are not in the alarmist business, after all.

The current shortage in oil is structural, Courvalin explained, it has been in the making for years and even if someone, read Saudi Arabia, brings additional barrels to the market right now it won’t make much difference beyond the very immediate term, i.e. this summer.

The second problem with a potential — because it is still only potential — ramp-up from Saudi Arabia is that the moment it taps its spare capacity it stops being spare. This means there will be a smaller capacity cushion for the future and that, if we are to trust oil analysts, is not a very good thing.

Then there’s the FT’s David Sheppard who managed in a recent column to be both delicate and blunt at the same time. After discussing the oil supply problems, Sheppard said about demand:

“China is reopening. People are flying again. Demand is going in the wrong direction. All these factors point to rising oil prices until a level is reached that reduces consumption, probably by triggering an economic slowdown large enough to curtail demand. In other words, a recession for many economies.”

The news stories above, besides depressing and a bit amusing, also have another thing in common, an underlying theme that was until relatively recently downplayed as a risk of the current geopolitical and energy situation.

The theme is inflation, the same phenomenon that was dismissed as transitory by Fed chair Jerome Powell this time last year before he admitted in November that “It is probably a good time to retire that word.” Note the elegance with which the Fed chair says “We were wrong” without actually saying “We were wrong.” Janet Yellen at least said she had been wrong about the “transitory” thing.

Inflation is no longer transitory anywhere in the world, except perhaps in Turkey, which has lived with inflation for decades, it seems, and somehow copes. As inflation stopped being transitory, so the danger of a recession grew from a distant and highly unlikely possibility into a very clear and present danger.

The situation, per analysts, looks like this: demand for oil is strong despite the equally strong price rally from recent months. Prices will need to go much higher before they start having any meaningful impact on demand.

Unfortunately, these higher price levels, besides destroying demand, will also trigger an economic slowdown also known as a recession. For some extra-lucky countries, there is a danger of stagflation, which is the worst of both worlds: rising prices, low demand for spending, and, as a bonus, high unemployment rates. On the flip side, all this will bring oil prices down. There’s always a silver lining, isn’t there?

The proverb “Those whom the gods wish to destroy they first make mad” appears to be a piece of folk wisdom wrongly attributed to Euripides but that’s irrelevant. What’s relevant is that it is very much true that insanity is destructive and self-destructive.

If we stretch the definition a bit (a lot) to include incompetence on an unprecedented level, the picture of a person sitting on a tree branch and cutting it from underneath himself could make for a nice symbol of the collective political leadership of the West and associated territories.

Image credit: Ken Mull