Observations of an expat: cold winter cometh

Enjoy the summer sun while you can. It is going to be a c-c-cold winter – literally and metaphorically.

Just about every corner of the globe will be affected. The US perhaps less than many. Europe more than most. But Inflation fuelled by energy shortages will affect almost every one. The rare exceptions will be those living in mud huts heated by gathered wood and financed by a barter economy.

The major cause is the Ukraine war, European reliance on Russian energy and Vladimir Putin’s willingness to use it as a weapon. But there are other factors: Grain and general food shortages caused by the war, slow recovery from a lingering pandemic, supply chain bottlenecks, inflation and rising interest rates to control it and political instability which is both the cause and effect of the above.

On 26 July the EU will hold a European energy summit to thrash out a coordinated response to the crisis. Failure to do so will damage the unity of the world’s biggest trading bloc with knock-on effects everywhere else.

On the agenda are increased development of green energy and boosted production of European oil and dirty coal to fill the gap. Also to be discussed will be coordinated purchases of Liquefied Natural Gas and the building of more gas storage facilities, the strength of the Euro, more help for Ukraine, holding the line against Russia, food inflation and, dare I say it, rationing. All of the above are inextricably linked.

The threat of a Russian gas blackmail has been hanging over Europe since before Putin’s tanks rolled into Ukraine on 24 February. The Reagan Administration issued warnings about it 40 years ago. Moscow supplies 25 percent of Europe’s gas. This week the main supplier – Gazprom – shut down Nordstream 1, the main gas pipeline from Russia to Europe. They claimed that the halt was for “maintenance purposes” but everyone knows that the shutdown is a thinly veiled threat.

Europeans have been actively hoarding gas supplies in storage facilities in preparation for the winter to come. German economists reckon that if they increase stocks to 80 percent of capacity by November then there will be enough for winter. Before the heatwave struck supplies were at 60 percent capacity. Now they are dropping as sweltering consumers switch on their air conditioning.

Germany has other energy problems. Consumer gas prices have been subsidised for years with an unrealistic price cap that at the moment reduces the household price by more than a third of the market price. This is unsustainable but politically difficult to change so the government of Chancellor Olaf Scholz is tiptoeing around the subject of gas rationing.

Italy is as – if not more – dependent on Russian energy than Germany. It is in the middle of a political crisis as the government of Mario Draghi this week handed in his resignation over its failure to push a financial package through the Italian parliament. The Italian political crisis occurs at the same time as a Roman financial crisis which threatens the unity of the Euro which this week dropped below parity with the dollar.

Facing even bleaker prospects are the East Europeans who are even more dependent on Russian energy and do not have the gas and oil storage facilities of Western Europe. With the exception of Hungary, most of the Eastern half of the EU has held a firm line against Russian aggression and its energy blackmail. But as companies fail and consumers shiver, it will become increasingly difficult to maintain unity.

High energy prices and the inflation it causes is not confined to Europe. Energy prices are set at a global level. If Russia reduces the flow to Europe it pushes up the price in Pakistan as well as in Berlin.

Global consumers should perhaps take inspiration from Ukraine which will be the hardest hit of all this winter. Ironically, Russian gas is still flowing into the country, but Russian artillery have been heavily focused on destroying the country’s power grid-generating plants, electricity substations and internal gas pipelines and pumping stations. Any discomfort that many will suffer this winter will be magnified a thousand-fold in Ukraine.

* Tom Arms is foreign editor of Liberal Democrat Voice and the author of “The Encyclopedia of the Cold War” and the recently published “America Made in Britain” that has sold out in the US after six weeks but is still available in the UK.

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  • Steve Trevethan 16th Jul '22 - 1:06pm

    Might it help everyone, especially the Ukrainians, if discussions and negotiations were encouraged?

  • Brad Barrows 16th Jul '22 - 1:22pm

    Negotiations mean trying to resolve the issue by both sides compromising, and compromise would result in territory being conceded to Russia that it did not have prior to 2014. Therefore the West/NATO instead offers supplies of weapons to encourage Ukraine not to opt to negotiate a settlement. Sadly, this approach will probably mean Russia will continue until it achieves a military victory that results in Ukraine having to concede much more territory than would be the case if they negotiated now.

  • Tom Seelye Arms 16th Jul '22 - 1:43pm

    @Steve, Are you suggesting that Ukrainians relinquish sovereignty over Crimea and Eastern Ukraine, and hand over control of their foreign and defense policy to Russia? That would be the effect of what Putin is demanding?

  • Both Ukraine and other former soviet states around the Caspian basin have large reserves of natural gas that can more than make-up for the loss of access to Russian supplies. There is, however, no easy means of significantly increasing supplies from Azerbaijan or Kazakhstan through the trans-caspian pipeline and and the big oil and gas companies were forced to halt drilling operations in Ukraine when hostilities escalated.
    As the European economy enters a slowdown inflationary pressures will ease and oil prices have already begun to fall at least in dollar terms.
    Let’s hope it will be a mild winter in Western Europe or I fear support for Ukraine’s struggle to maintain its independence may come under severe pressure.

  • But Inflation fuelled by energy shortages will affect almost every one.

    High energy prices and the inflation it causes is not confined to Europe.

    Inflation is always and everywhere a monetary phenomenon. Current inflation was caused by the huge amount of Quantitive Easing (QE) during the pandemic. Now the worry is that the monetary tap is being turned off too quickly…

    ‘The monetarists were right about inflation, but now they have a very different warning’ [May 2022]:

    Folklore has it that monetarists are hard-money evangelists, always on the hawkish side. They are nothing of the sort.

    They follow a mathematical lodestar wherever it takes them, and over the last few months they have become increasingly worried that we will swing too fast from monetary bubble to monetary bust. What scares them is mounting evidence that the aggregates are buckling across the G7 economies.

    They fear that central banks will again ignore the signals and hit the brakes after a cyclical economic downturn is already underway. In short, the monetarists are today’s doves.

  • Energy prices are set at a global level.

    That’s true for oil, but not for gas. Natural gas is mostly consumed in the region or country where it’s produced. Just over 10% is exported by pipeline and a similar amount as LNG. Although traded internationally there is no global price. Currently, the US spot price at Henry Hub is $5.90 per million BTU while the UK NBP price is currently $23.76 – four times higher…

    Henry Hub Natural Gas Spot Price:


    NBP = National Balancing Point, a virtual location in the UK pipeline network where supply and demand balance at the quoted price.

    MMBTU = Million British Thermal Units.

  • Jenny Barnes 16th Jul '22 - 3:56pm

    “Inflation is always and everywhere a monetary phenomenon.”
    Well, not exactly. In this case, what the inflation is telling us, is that we are not as well off as we thought. OIl & Gas are more expensive, and they are essential, so they cost more. We therefore cannot have as much of other things – and so prices of everything rise until the money in circulation balances the supply. This is a supply side shock. The likely outcome is either hyper inflation or a slump/recession/ depression in the oil importing – and therefore the world – economies, which will result in energy demand falling till it is less than the supply. It won’t be pretty.

  • As President Zelensky considers historical precedents he can look at Czechoslovakia and the Sudetenland in 1938 – not a good outcome. Poland in 1939 was counting on Britain and France opening up a Western front with Germany. The polish war was over within a month as the country was invaded from the East by Stalin’s Soviet union. There is Finland in 1939-40. They gave up territory, but only after fighting the red army to a standstill.
    The soviet union was able to defeat Nazi Germany and recover its lost territory with the help of lend-lease and vast supplies of munitions from the US and the UK.
    The USSR was forced to withdraw from Afghanistan in part as a consequence of US weapons supplies to the Mujahadeen.
    Chechnya has become a police state ruled by a brutal puppet dictator. Georgia has lost a big chunk of its territory, but retained its independence after the Bush administration indicated it was prepared to intervene to protect Tbilisi and prevent the deposing of the elected Georgia government.
    Zelensky won’t be able to rely on unlimited Western support indefinetly, but there are no easy choices for him. Putin has given no indication of any willingness to compromise on his goals of occupying eastern and southern Ukraine and installing a Russian regime. What can Ukraine gain by surrending to Putin’s demands beyond a Vichy style administration in that part of the country not occupied by Russian troops?

  • Peter Martin 17th Jul '22 - 9:09am

    @ Jeff,

    “Inflation is always and everywhere a monetary phenomenon.”

    Even the monetarists don’t believe this any longer. They would now more correctly be described as interest-rate-ists! The idea being that higher interest rates discourage borrowing and spending and encourage saving.

    A stash of £20 notes in a safe might well be counted as part of the money supply but it isn’t having any other economic effect. If it is spent then it does have an effect.

  • nigel hunter 17th Jul '22 - 11:05am

    Vichy Ukraine? WW2 the US were only able to land in the South of France when the 2nd front was opened.The Germans held a defensive delay line with limited troops. This option only means that over time Russia would take Ukraine over.There is no 2nd front for Ukraine at the moment.

  • David Garlick 17th Jul '22 - 11:38am

    Europe along with the UK has been slow to expand plans for renewable energy facility expansion both before the Russian invasion of Ukraine in order to combat Climate Change and since to avoid the worst effects of any supply issues arising as a result of the invasion. Yes I know the time to bring theses facitities on line is not quick but the fact that nothing significant has changed means that time lag has not yet started let alone in progress.
    The Uk is in poll position to influence the world with a toehold in Europe and, if it wants, a major influence through the Commonwealth. The later being a potential problem beater if, and only if, we can reduce the ‘me first’ mentality and come to the inevitable conclusion that if the human race is to survive in anythin g like good shape then close cooperation and working together nation with nation is th only answer.

  • David Garlick 17th Jul '22 - 11:41am

    Apologies for the typos. Medicime induced brain fog.

  • Inflation is always and everywhere a monetary phenomenon. The term inflation refers to expansion of the money supply. It is, however, only one source of price increases that applies when supply of goods and services cannot be increased sufficiently to meet the increased demand created by expansion of lending and money creation in the economy.
    The clearest example of monetary inflation is in house prices that inflate when mortgage loans are readily available and deflate or plateau as lending is reduced.
    While inflation will result in an increase in general prices and wages across the economy; supply chain restrictions in essentials like energy or in transport of manufactured goods that impact costs of production can have the same effect. These supply restrictions should, however, be temporary (except in the case of land and non-renewable resources) whereas money supply expansion tends to be permanent only contracting temporarily in recessions.
    The price of oil is very sensitive to fractional changes in the balance between supply and demand. Saudi Arabia can produce one barrel of oil at a cost (including taxes, administrative and transportation costs) of $8.98 per barrel. Iran and Iraq have similar costs at $9.09/barrel and $10.57/barrel, respectively. At the same time, Venezuela with the largest reserves of the resource has a total cost of oil of $28.99.
    The cost of oil production bears little resemblance to market prices. The price is determined by supply and demand in world markets which itself is impacted by access to and the exchange rate of dollars in international markets.
    Energy security and climate change are inextricably linked. As David Garlick comments if the human race is to survive in anything like good shape then close cooperation and working together nation with nation is the only answer.

  • Europeans have been actively hoarding gas supplies in storage facilities in preparation for the winter to come. German economists reckon that if they increase stocks to 80 percent of capacity by November then there will be enough for winter. Before the heatwave struck supplies were at 60 percent capacity. Now they are dropping as sweltering consumers switch on their air conditioning.

    Now risen to 65% for Germany, just above the average for the EU as a whole…

    Aggregated Gas Storage Inventory:

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