Thread: a collection of concrete cases of substitution & demand reduction in the energy crisis.
Economic theory predicts that, as prices rise, households & firms reduce demand and substitute. We're starting to see more and more such cases
I'll collect these here as we go along.
Background: EU countries must cut gas demand by substantial amounts, e.g. Germany by around 29%, to withstand a Russian gas cut-off. Other energy is getting scarcer as well.
Where might such demand reduction come from? And how costly will it be?
In our import stop paper we emphasize that it makes a big difference how much substitution occurs.
Importantly, this is not just about substitution of gas itself. Downstream substitution of gas-intensive products, e.g. via imports, also does the trick.
@makro_philip is furious: if Würth had started doing this in March, the ovens may have been just about ready by late winter. Now they will likely be ready too late.
There should have been less lobbying and more substituting
3. This study looks at German fertilizer production and shows "that increased ammonia imports have allowed domestic fertilizer production to remain remarkably stable."
5. This article cites an Arcelor-Mittal manager essentially saying: we could, of course, import inputs for steel production from abroad. But we'd rather not bc it's expensive. Also, saving additional gas would result in lower production.
6. Households and firms have already reduced their gas demand: according to this study for Germany, household demand is down 6% and industrial demand down 11% relative to early 2021.
One thing to note about households: prices are passed through to a much smaller extent due to long-term contracts, "only" between a 50% and 140% increase.
8. Munich's energy supplier @SWM_Muenchen
- is postponing the conversion of a heating plant from coal to gas
- will convert two heating plants from gas back to oil
As a reminder: zero substitution --> production falls 1-for-1 with gas.
So if you think substitutability of gas along entire supply chain =0 (Leontief "cascade effects") you must also think 🇳🇱 production should be down 25% since Jan 2022.
11. Car manufacturer Audi says it can substitute 20% of its gas consumption in the near term, e.g. by turning down the heating in offices. Only 10% of gas is irreplaceable (paint shop, ovens) and "the minimum amount of gas needed".
12. Car manufacturer Mercedes says it can reduce its Germany-wide gas consumption by a whopping 50% "if regional pooling is made possible." For example, the paint shop in its Sindelfingen factory can be operated without any gas whatsoever.
14. Veltins brewery says that brewing can continue in the brewhouse without interruption even if gas supply stops: "We can switch from gas to fuel oil firing in the boiler house within a few hours."
15. @BASF (same amount of gas as🇨🇭)
- can substitute 15% of gas used for heat & steam (=50% of total) with oil
- can easily substitute ammonia by importing
- can operate as long as gas >50%
- just revised profit expectations for 2022 UPWARDS
For comparison here's @BASF CEO Brudermüller back in March: a cut-off from Russian gas would mean the "destruction of the entire German economy" and the "worst crisis since the end of the Second World War"
It’s also always good to remember how @BASF got to be so reliant on Russian gas. For German speakers, this @ZDF video summarizes it nicely. See in particular the timeline around minute 1:00.
16. Paper manufacturer Schoellershammer will substitute 50% of gas until early January by converting its gas-fired boiler to oil. Even without this measure, it can save 15% of gas while operating its machines at somewhat reduced capacity.
17. Sugar manufacturer Pfeifer & Langen expects to cut Germany-wide gas consumption by 50%. Important part of plan: reshuffle gas across factories. Eg the factories in Appeldorn & Euskirchen can switch to oil which frees up gas for Jülich
Interesting aspect of cases 16 & 17: due to Germany's announced 2030 phase-out of lignite, both the paper manufacturer in 16 & sugar manufacturer in 17 switched everything from lignite to gas only a year ago
After all, gas was green, cheap, and secure. How times have changed!
18. (follow up on 15.) @BASF now even advertise their substitution prowess in their analyst conference calls:
- “preparations to substitute natural gas are progressing well”
- “Continued operation at Ludwigshafen site is ensured down to 50% of BASF’s maximum natural gas demand”
Remember that poor @ArcelorMittal manager who essentially said “we could of course substitute by importing metal inputs, but it really wouldn’t be good for our bottom line”? Guess what they ended up doing:
More generally people sometimes ask: if a firm is cutting production doesn't that show it can't substitute?
The answer is: no, of course substitution is costly. The question is not WHETHER production falls but by HOW MUCH it falls?
No substitutability means production falls one-for-one with gas.
Some substitutability means production does fall but it falls by potentially much less than gas.
That's what we're seeing now.
Here’s a chart by @OliverRakau that shows this beautifully: German industrial gas use falls of a cliff (~40%) but manufacturing output & even chemical output fall by much less (~1% &10%)
The world is not Leontief!
*as @OliverRakau says the ENTSOG data may overstate the gas drop
20. Automotive supplier ZF says it should be able to reduce gas consumption by 20% by:
- turning down heating
- switching some production processes to electricity
- switching others to oil
- importing some parts from regions with lower energy prices
21. Semiconductor manufacturer @Infineon aims to save two thirds (!) of its gas consumption by the end of 2022. One main measure is switching the energy source for the air conditioning systems cooling the rooms where their microchips are manufactured from gas to oil.
22. Yet another glass industry example, just like case 13:
Special glass manufacturer Schott can switch its melting furnaces from natural gas to propane gas if necessary. To this end, it has already stocked up on large quantities of propane gas.
23. German pharma and chemicals manufacturer Merck says it can switch its production processes from gas to oil and that it is "very well prepared" for any potential gas shortage.
24. Oil giant @ExxonMobil_EU say they have reduced natural gas consumption in their European refineries "by 65%, that's the equivalent gas used for powering about 2 million homes in Europe."
Here's an article from May on the ruble saga starring @eni.
Note: the ruble payments were probably economically irrelevant to a certain extent, see e.g. @PHonohanpiie.com/blogs/realtime…, but it's still worth pointing out this is the same company.
27. Here we go with yet another example from the Chemicals industry: specialty chemicals group Evonik say they can reduce their natural gas consumption by up to 40%.
How? They can substitute it with liquefied petroleum gas (LPG).
Hintergrund: 🇩🇪 muss über die nächsten 9 Monate bis Ende der Heizperiode genug Gas sparen dass am Ende die Speicher nicht leer sind
Jede Terawattstunde die heute im Speicher ist muss später nicht gespart werden. Aber wieviel macht das aus?
Beispiel: Deutschland muss bei den jetzigen Füllständen von 72% ca 25% Gas sparen. Wieviel weniger Gas müsste gespart werden wenn die Füllstände heute 82% wären also 10% mehr?
Antwort mit der 0,3 Faustregel: 10% höherer Speicherstand --> 3% weniger Sparen, also 22% statt 25%
In the economics debate, there are two opposing viewpoints:
On one hand, economists including @PikettyLeMonde@gabriel_zucman@dannyyagan & Saez have argued that wealth gains due to rising valuations are a big shift of resources toward the wealthy.
Is economic modelling useful for guiding policy? Specifically epi-macro modeling during the pandemic?
UK Treasury chief economist Claire Lombardelli with a provocative take: "we could have constructed and estimated economic models all day long, and they would have been wrong"
Excellent thread with intuitive explanations why people claiming energy sanctions won't affect Putin's ability to wage war in Ukraine either haven't thought things through or are arguing in bad faith.
An example by @M_C_Klein: "Russia has lost access to many imports" and therefore "the oil boycott will hurt ordinary Europeans at least as much as it impairs Putin’s war effort. It should be understood mainly as a moral gesture rooted in self-denial"
Where does this "production multiplier" of 5 come from?
From an important paper on supply chain disruptions after Fukushima by Vasco Carvalho, Makoto Nirei, Yukiko Saito & Alireza Tahbaz-Salehi @QJEHarvard which indeed finds substantial amplification.
We asked Alireza Tahbaz-Salehi & Vasco Carvalho what they thought of the @tom_krebs_ calculation. Here is what they said:
"We ourselves would not use that Japan- and earthquake-specific number as a starting point for a quantitative assessment of energy disruptions in Europe."