• Reduced output and runaway inflation are the new normal in Europe.
• Russia has already reduced gas flows and will cut off Europe before it’s ready.
• As a result, Europe will return to coal-fired plants.  Oh, the irony.

Happy Tuesday!

As I walked around the streets of the Big Apple, I thought, “Oh, rats!”

Credit: Sean Ring

Yup, that was right on the street for all to see.

But the kids chased it, shouting, “Ratatouille!” like it was a cartoon movie.

Credit: Disney.com

Except, it’s not a cartoon movie.

It’s an indictment of the whole system.

Do you know what it reminded me of?

When I wrote that Russia would cut off Europe’s gas before it was ready for it.

And guess what I read today in the Journal?

That Russia is cutting Europe’s natural gas output via Nordstream by 20%.

There is nothing unforeseen here.

We knew this was coming because Europe hadn’t been squeezed enough to feel the real pain.

Soaring temperatures and “global warming” masked Europe’s need for Russia’s resources.

But we knew from the beginning this was going to happen.

How did we know?

Because the evidence was clear.

It was so clear; we spoke of it before.

To be precise, it was the June 24th Rude, where I wrote most of the below.

I removed a section that wasn’t pertinent to the conversation.

But the rest of this Rude will be about how Russia is cutting Europe’s energy supplies, just like we said it would.

I’ve updated the charts to the most recent I could find.

Europe Slowly Cuts Russian Energy Supplies, Only For Russia to Speed Up the Process

Guess what Europeans are getting in their Christmas stockings this year?

Coal!

No, really, they’re getting coal.

Imagine being so stupidly green, you’ve got to use coal to heat your home.

Welcome to Europe!

Talk about the ice water of reality splashing you in the face.

Anyone with a brain - and outside of Brussels - knew the Russians weren’t just going to let the EU “wind down” its dependence on Russian energy.

Once the inevitable was plain, Moscow took the liberty of speeding up the process.

And now, Europe is left with a silly choice: freeze and shut down its industry or turn on the coal-fired plants.

From CNBC:

German Economy Minister Robert Habeck has described the government’s decision to limit the use of natural gas and burn more coal as a “bitter” one but said the country must do everything it can to store as much gas as possible ahead of winter.

“The gas storage tanks must be full in winter. That has top priority,” Habeck said in a statement, according to a translation.

The Netherlands on Monday said it would activate an “early warning” phase of an energy crisis plan and remove a production cap at coal-fired plants to preserve gas, according to Reuters.

Italy and Austria have also reported plans to consider burning more coal to offset a sharp drop in Russian gas supplies.

Well, at least South Africa is making out:

Credit: Quartz Africa

It’s a complete loss of sovereignty.  These politicians are now making decisions based on the bad choices they made before.

As for Russia, she isn’t suffering all that much.

Tsvetana Paraskova over at oilprice.com just published a peach of a piece titled, “Russia Overtakes Saudi Arabia As China’s Top Oil Supplier.”

Here are the salient facts:

Chinese imports of Russian crude surged by 55 percent in May as the world’s biggest importer of oil took advantage of major discounts.

Russia has now overtaken Saudi Arabia as China’s top oil supplier.

Russia is also estimated to have overtaken Saudi Arabia to become India's second-largest supplier of crude oil in May. The average daily rate of Russian oil exports to India stood at 819,000 barrels last month, compared with 277,000 BPD in April.

It’s not all roses. Paraskova notes that it’s unlikely that the Asian market can absorb all 4 million barrels going to Europe.

But it’s far better than most in the West will admit.

Russia Says No

Look at the latest prices:

Wholesale European gas prices jumped 12% Monday to 179 euros, or about $183, a megawatt-hour. They have more than doubled so far this year and are expected by analysts to keep rising as winter approaches, adding to inflation that is straining economies, governments, and financial markets in the region.

Who can afford this sort of punishment?

Not the European consumer, who I think will quickly revolt.

Europe certainly can’t survive a winter without gas, but things are bad right now.

Europe’s Economy is Already Down the Tubes

I tell graduate students that if you want one score that will tell you a great deal about a place, look at the exchange rate.  Here’s the EURUSD:

Since the beginning of 2021, the EUR has tanked versus the dollar.

So it was terrible going into the Russia-Ukraine war and has gotten much worse.

My paisano Mark Rossano, the Sherlock of the Supply Chain, expects the EURUSD to fall below parity relatively quickly.

It did, but it’s briefly rebounded.  I’m looking for more downside.

I’m still trying not to move too many euros to Italy yet.

Germany’s July Purchasing Manager Index, a great leading economic indicator, also came in below expectations:

French business confidence is also taking a huge hit:

And just wait until household spending follows suit.

Wrap Up

Policy matters.

And the unelected bureaucrats in Brussels are running the place into the ground.

The EU’s Russia policy is wrong from first principles and needs an urgent rethink.

That will probably happen over a frozen winter when people die from the cold.

Once that happens, the Atlanticists will have a much tougher time arguing with the admittedly few Europeans arguing for an independent European policy.

All in all, this is a cautionary tale about an entire continent losing control of its destiny because of bad decisions, a lack of independence, and a misguided view of how the world works.

Especially concerning energy and industry.

Well, some people just have to learn the hard way.

But not you.

I’ll see you tomorrow.

All the best,

Sean