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.
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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?
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Bei vollkommen Gas stop aus Russland muss Deutschland seinen Gaskonsum um 29% ab jetzt reduzieren, um leere Speicher zu verhindern. twitter.com/GeorgZachmann/…
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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.
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"What are the macroeconomic & distributional consequences for Germany of a stop of Russian energy imports?" Our @ECONtribute policy brief provides an answer
@BachmannRudi @DBaqaee @christianbaye13 @kuhnmo @andreasloeschel @ben_moll @APeichl #KarenPittel @MSchularick
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We also collected a number of concrete examples of how firms were able to substitute in other contexts.
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In our import stop paper we emphasize that it makes a big difference how much people and firms can substitute for Russian energy inputs.
How might such substitution work in concrete terms?
A new supplement to our paper has some more thoughts
benjaminmoll.com/RussianGas_Sub
Thread:
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Many people, especially industry lobbyists, claimed "substitution is impossible"
Remarkably, prices usually weren't mentioned. So it's really "no substitution even when prices skyrocket."
Of course, this then conveniently implies that subsidies to industry aren't all that bad😉
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0. (= actually one where everyone agrees) Substitution of gas in electricity generation: switching on coal-fired power plants.
This is big, e.g. in 🇩🇪 electricity accounts for ~12% of gas consumption.
EU countries are now preparing this. But this should have happened long ago!
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1. Screw manufacturer Würth is converting some of the ovens it uses to make screws from gas to electricity.
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This could take up to a year.
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
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Also Umrüstung von Gas auf Strom bei Schrauben geht jetzt doch in 12 Monaten… Deswegen wollten wir im März anfangen…und nicht jetzt, aber Industrie musste erstmal 5 Monate Lobbying betreiben. Umrüsten auf Strom heisst übrigens, dass wir dann mehr Strom verbrauchen Herr Habeck! twitter.com/FAZ_Wirtschaft…
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2. can apparently substitute by producing ammonia (which is used in fertilizer production) in the U.S. rather than in Germany.
So the substitution via imports can even happen *within* the same firm.
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3. This study looks at German fertilizer production and shows "that increased ammonia imports have allowed domestic fertilizer production to remain remarkably stable."
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How does European industry respond to high energy prices?
@ClemensStiewe, @LionHirth, and I took a closer look at 
#Ammonia production.
Check out our summary figure, short working paper (hdl.handle.net/10419/253251), and thread 
#Ammonia production.
Check out our summary figure, short working paper (hdl.handle.net/10419/253251), and thread Show this thread
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4. Consistent with these stories, what looks like substitution via imports is starting to show up in aggregate trade data:
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Does German trade data show first signs of import substitution for energy/gas intensive products? Maybe... Chemical imports have outpaced domestic production in the last 2-3 months with the latter having plummeted to by far the lowest level since GFC/pandemic. 1/
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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.
Shocking I know.
faz.net/aktuell/wirtsc
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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.
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European nat gas prices have increased 15-fold since early 2021. You would expect gas consumers to respond by cutting their consumption, wouldn’t you?
We haven’t seen any rigorous study on that question, so we did one. hdl.handle.net/10419/261082
Here is what we found: (1/6)
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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.
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How exposed are German households to increasing natural gas prices? It depends (see graph). My understanding: both data are averages of old and new contracts, but DESTATIS is volume-weighted and BDEW isn't. Am I right? Any other sources, maybe even on quantile prices? (1/2)
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That's my list for now. I'll append this thread as new cases come in.
#Econtwitter are you aware of other cases? Perhaps some from countries other than Germany for a change? I'd love to hear about them!
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New additions:
7. Some German dairy producers will switch from gas to oil in case gas deliveries get cut.
tagesschau.de/wirtschaft/unt HT @resilietas
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8. Munich's energy supplier
- is postponing the conversion of a heating plant from coal to gas
- will convert two heating plants from gas back to oil
zeitung.faz.net/fas/wirtschaft
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9. CEO of German chemicals producer H&R tells the they "could only replace about 25% of its gas consumption with coal and oil"
: 25% is a hell of a difference from the "no substitution possible" typically claimed by the chemicals lobby.
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“Wösten said H&R could only replace about 25 per cent of its gas consumption with coal and oil.”
*only 25%* — from a chemical company. That’s a actually a lot of substitution that becomes possible all of a sudden… on.ft.com/3yNRvPa
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10. Related to point 6 above, industrial gas consumption in the Netherlands is
- down 25% (!) since Jan 2022
- down 40.5% (!!) since Jan 2019
HT cc
Data: Statistics Netherlands (CBS) & gas network operator (GTS)
cbs.nl/nl-nl/visualis
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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.
Clearly not: fred.stlouisfed.org/series/NLDPROI
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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".
n-tv.de/wirtschaft/Aud HT
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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.
mbpassion.de/2022/07/merced HT
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13. Remember the lobbyists' favorite example of "substitution is impossible": the glass industry. Surprise surprise:
Glas manufacturer Wiegand Glass "will be able to heat its melting tanks [...] with light fuel oil instead of natural gas"
zeit.de/news/2022-07/2 HT
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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."
Plus they've cut gas by 1/3 to date.
faz.net/aktuell/wirtsc HT
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15. (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
nzz.ch/wirtschaft/che HT
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For comparison here's 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"
Lobbyism at its best.
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It’s also always good to remember how got to be so reliant on Russian gas. For German speakers, this video summarizes it nicely. See in particular the timeline around minute 1:00.
amp.zdf.de/nachrichten/wi
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