When the Energy Bubble Pops…

If you google the word “Lehman”, you will get tons of results these days, related to the threatened explosion of the financial energy bubble. The analogy is with the insolvency of Lehman Brothers in 2008, which threatened to bring down the entire financial system. What is now occurring, is that utilities exposed on the gas futures market are receiving margin calls they are not able to meet. “When the price goes up by a factor of 10, suddenly you have a huge need for liquidity to cover your collateral. And that is something you cannot escape,” explains Kristian Ruby, secretary general of Eurelectric, the EU’s electricity industry federation.

Utilities sell most of their electricity years in advance to guarantee a certain price. To do so, they need to set aside a “minimum margin” in an account, as a safety net, in case they default on payments before the electricity is actually produced and marketed.

A margin call occurs when the balance in the account falls below the minimum deposit required for a trade, forcing the company to hedge the deal with more cash. A rise in gas prices leads to a proportional increase in the need for collateral.

The Norwegian state-owned utility Equinor has estimated that the sector needs at least $1.5 trillion in emergency liquidity this month. Otherwise, this will be another “Lehman moment”.

On Sept. 10, ECB head Christine Lagarde supported the call, but said that the government, and not her bank, should provide the liquidity. In other words, a bailout with taxpayers’ money. EU energy Ministers, on the Commission’s recommendation, approved “liquidity support” for energy companies at their Sept. 9 extraordinary meeting.

Thus, we are faced with a potential repetition of the great bailout of 2008 when, instead of reforming the bankrupt financial system, governments decided to bail out megabanks and hedge funds. That bailout has only made the problem worse, increasing global debt and decreasing credit for the real economy.