I hear the train a comin', it's rolling 'round the bend.
And I ain't seen the sunshine since I don't know when
Johnny Cash, Folsum Prison Blues
It’s not a Black Swan when you can see it coming.
Have some sympathy for Germany; it’s in a hell of a bind. It is highly dependent on Russia for its energy needs (a bind Merkel led them into).
Berlin, We Have A Problem
Recent History
In 2021, Moscow provided nearly 40% of the EU’s gas needs.
On February 24, Russia invades Ukraine.
On 8 March, the European Commission outlines proposals to reduce the EU’s dependence on Russian gas by two thirds before the end of 2022 as part of a plan to become independent from all Russian fossil fuels “well before 2030”. The US imports of Russian gas and oil. Britain says it will phase out its Russian energy imports by the end of 2022.
On 27 April, Russian giant Gazprom cuts off gas supplies to Bulgaria and Poland.
On 21 May, Russia cuts gas to neighbouring Finland.
In mid-June, Gazprom drastically cuts daily gas supplies to Germany via the Nord Stream pipeline. Citing a technical problem, Gazprom reduces deliveries by 40 percent, then another 33 percent, in the run-up to a June 23-24 EU summit which is expected to grant Ukraine membership candidate status.
On 23 June, Germany moves closer to rationing gas, raising its supplies alert level to the second of three stages.1 The Federal Ministry for Economic Affairs and Climate Action (BMWK) declared the alert level of the gas emergency plan in Germany (FAQ des BMWK zum Notfallplan Gas). The alert level follows on from the early warning level declared on 30 March 2022.2
Gas flows from the Nord Stream 1 pipeline are currently at about 40% of their maximum capacity. If Russian gas supplies via the Nord Stream 1 pipeline remain at this low level, it will hardly be possible to achieve a storage level of 90% by November without additional measures. The reduction is also affecting the transfer of gas to other European countries such as France, Austria and the Czech Republic.
[T]he key Nord Stream pipeline is due to shut for maintenance on July 11, adding pressure to already fraught markets. German officials have raised the prospect that Moscow may never reopen the pipe after the maintenance, leaving the country without its main source of gas.3
Current Developments
German leaders are stepping up warnings of impending turmoil and natural-gas shortages in Europe’s biggest economy, which relies on Russia for about one-third of its energy. Putin has gradually reduced supplies after European countries imposed sanctions in response to Russia’s invasion of Ukraine.
German utilities are at risk of cascading failures that might require activating a legal clause that would allow them to pass on price increases outside of contract commitments, Habeck said.4
Already.
German gas giant Uniper SE is in talks with the government over a potential bailout package of as much as 9 billion euros, ($9.4 billion)5
The energy situation is causing Germany to revisit its climate change commitments
Germany is pushing for Group of Seven nations to walk back a commitment that would halt the financing of overseas fossil fuel projects by the end of the year … That would be a major reversal on tackling climate change as Russia’s war in Ukraine upends access to energy supplies.6
Scenarios
The Bundesnetzagentur (BNetzA) is Germany’s energy regulator. They have run a set of scenarios. Here are the results for those who can read German. Two other scenarios have different results. I’ll rely on @LionHirth’s summary.
Bloomberg did their own scenario.7
I’d probably use the BNetzA results for my baseline case; one assumes they have the best information.
Bundesbank Adverse Risk Scenario
The Bundesbank included a section titled Possible development of the German economy in an adverse risk scenario in the Outlook for the German economy for 2022 to 2024 section of its Monthly Report - May 2022.
An adverse risk scenario was developed as a way of accounting for the prevailing uncertainty surrounding key assumptions. Unlike in the baseline scenario, the assumption here is an escalation of the conflict.
Another assumption is a complete and permanent stoppage of Russian energy exports to the European Union (EU). This leads to energy rationing and cutbacks in production in EU countries.
A loss of Russian energy supplies from the third quarter of 2022 leads to gas supply bottlenecks over the scenario horizon.
Since priority is given by law to the supply of gas to essential social services and household customers as well as to small and medium- sized enterprises in business, trade and services, industry will be disproportionately hard hit by the effects of gas rationing.
According to the model calculations, the production losses caused by the stoppage of gas supplies would lead to losses in value added of 3¼% in the period from the third quarter of 2022 to the second quarter of 2023.12 In this regard, the effect of gas rationing would mainly be felt in the first quarter of next year, which is why much of the loss in gross domestic product (GDP) materialises in 2023. The GDP losses computed for the period from the third quarter of 2023 to the second quarter of 2024, at 1¼%, are significantly smaller than in the preceding four quarters owing to the smaller size of the gas gap. Strong amplification effects via supply chains increase the original shock effect to two- and- a- half times the size. This can be explained by the fact that some of the sectors that are particularly strongly affected supply important intermediate inputs for other production areas.
Overall, the shortfall of the real GDP level relative to the baseline scenario widens from around 1½% in the current year to roughly 6¾% in 2023. GDP then declines by just over 3% relative to the year 2022 instead of growing by just under 2½% as assumed in the baseline scenario. That said, GDP growth in 2024 is considerably stronger in the adverse than in the baseline scenario. Even so, the level of real GDP is then still 4½% below that of the baseline scenario.
Far from Folsom Prison,
That's where I want to stay,
And I'd let that lonesome whistle,
Blow my Blues away.
Johnny Cash, Folsum Prison Blues
A.I. Model Risk Mitigation
DALL·E 2 Pre-Training Mitigations
[W]e put various guardrails in place to prevent generated images from violating our content policy. This post focuses on pre-training mitigations, a subset of these guardrails which directly modify the data that DALL·E 2 learns from. In particular, DALL·E 2 is trained on hundreds of millions of captioned images from the internet, and we remove and reweight some of these images to change what the model learns.