Anti-nuclear movement, helping the German economy go wrong

This week we have witnessed the incredible announcement by German Chancellor Angela Merkel saying Germany will abandon nuclear power totally by 2022, when it will shut down the last 3 remaining nuclear plants that will be in service on that date. Germany has a total of 9 nuclear plants providing energy to the grid as of now, accounting for 23% of the energy mix. Merkel's bet is to replace nuclear power with renewable energies, a move that is expected to harm the German industry greatly by increasing its energy bill. In fact this will be the second most important factor to hit Germany's industrial competitiveness in a row, the first one being the actual exchange rate of the euro against its clients' currencies. 

Neckarwestheim nuclear plant

Even though Germany is the world's 4th biggest economy and Europe's number one, it is not bullet-proof. The last thing the German industrial sector needs is its energy bill rising non-stop or being unpredictable. Because let's face it, whether you are pro-nuclear or anti-nuclear you know shifting from nuclear power to any other source of energy is an expensive move. 

In the case of Germany, the shift will be made towards renewable energies, which are expected to add up to 35% of the total energy mix in 2022 (up from 13% today). In a country where the industrial sector takes more than 50% of the total energy used, the main problem with renewable energies will not be their price, but its unpredictability causing blackouts. The sun not shining, the wind not blowing or simply a specially cold winter day could cause a blackout on peak-hours. When renewable energies are used to cover domestic demand, this unpredictable behavior can be covered with some natural gas power plants, which are fast enough to be plugged into the grid when needed and disconnected shortly afterwards. But industrial demand is far bigger and more important, so that could mean said natural gas plants have to be on most of the day to avoid power disruptions, which would probably kill Merkel's objective of slashing carbon emissions by 40% in 2022, meaning she would have hurt German industry for nothing.

So what are the reasons for such a sudden rush in leaving nuclear energy behind?

Canada goes the cost reduction way

Canada had its general elections last Monday and while the winner, the actual Prime Minister Stephen Harper from the Conservative Party, was totally expected; the result boosted him to a majority government. With their hands untied from a minority government against the New Democratic Party, Mr Harper's Conservatives are now free to apply the keystone point in their electoral program, taxes and government spending reductions.

Stephen Harper celebrating victory

I have expressed my concerns on excessive government spending worldwide on previous posts, Canada was not an exception there, with 39.7% of GDP going to government expenses every year... Canadians have expressed their concerns with the matter too, strongly supporting the only party that promised to reduce said spending. With this move, Canada joins the trend of slashing government spending, a trend that started in Europe to fight troubled economies like Greece's, but that has gone mainstream since then on developed economies. Finally everybody begins to notice the weight of the state is unbearable as of now, recession has made this blatantly visible.

I will not analyze in detail the politics behind Mr Harper's party, but from a macroeconomic point of view Canada is in a far better position to boost recovery than for example European countries. Canada is one of the few net energy exporters (together with Norway) among developed countries and is also the world's second biggest uranium producer with 20.7% of production. Not only they are exporting energy abroad (which at actual prices is quite a good business) but they are energetically independent as they control the supply for their main energy source, nuclear energy.

This independence means their recovery plans will not be heavily altered by raising energy prices, or tensions in the Middle East for that matter... If the Conservative's deficit reduction plan works as planned and corporate tax reductions really help boost employment I would say it is quite possible for them to be able to beat IMF's expected GDP growth of 2.8% for 2011. I am confident on every economy that successfully covers its energy needs and Canada has been doing it for a long time.

Energetic independence partly shields Canada from the never-ending commodities rally and thus gives it the most desirable ground for economic recovery and growth: a ground where it can focus on its own economic efficiency.

Oil prices shape the present and the future of the economy

Modern economies are oil-junkies, and they will still be for a long time. Every movement in the price of oil, no matter how small, reaches the furthermost endpoint of the economy. Without hesitation I can say that oil price is the key factor shaping (and limiting) the behavior of our day-to-day economy. An even more important factor than interest rates or currency exchange rates, which are predominant in the long term.

Actual oil prices are the result of a deadly combination of circumstances: political instabilities in oil producer countries, a low exchange rate of the US dollar (still the preferred currency when trading oil), rise on total demand due to developing economies and last but not least speculation. The extended duration of this situation is very worrying for both oil consumers and oil producers. Consumers, meaning developed and developing economies as a whole, have their GDP growths strongly linked to oil prices, as it has the power to increase the cost of production and distribution processes and also personal transport expenses; all of them key drivers for a healthy economy.

On the other side, oil producers fear that high oil prices can harm demand. Even though oil demand has historically been highly inflexible, as energy is a primary need, it also has its breaking point. This breaking point is that where more expensive energy sources (think alternative energies) become affordable when compared with oil.
Oil producers are aware of this breaking point and on the last days we have seen reactions from Saudi Arabia and Kuwait, biggest and 7h biggest oil exporters worldwide respectively, saying they do not endorse such insanely high oil prices. They are profiting largely from these high prices, but at the same time they show some much needed common sense by acknowledging high oil prices can brake or break economic growth. They need their clients' economies to grow, to need more and more of their precious oil.

Reasons for an oil producer to go nuclear.

This same week I read at Bloomberg's Businessweek that Abu Dhabi, the 7th country in the world by estimated oil reserves, is building a civilian nuclear reactor to go-live on 2017. The article mainly focused on the assertiveness of the United Arab Emirates (UAE) going forward with their plans despite the ongoing events at Fukushima. Nothing exceptional here from my point of view, as there is nothing in common between the Fukushima plant and and what  the UAE is building in Braka together with Korea Electric Power Corporation (KEPCO).  What I am most interested about is the fact that one of the oil-richest countries in the world is going nuclear.

Illustration of the future, 4-reactor nuclear plant.

Internal energy demand is growing fast in Abu Dhabi, but it is still marginal compared with all the oil the UAE is exporting worldwide. We know Abu Dhabi, as every other producer, can have oil for cheap, so its domestic oil consumption would not justify the huge investment a nuclear energy facility demands. We could also consider Abu Dhabi not a front runner in climate preservation, and because of their small population density they do not have to be much worried about their fossil fuel emissions neither. 

So what could be the reasoning behind this ambitious nuclear plan started in 2008. Are their oil reserve estimates too optimistic? Do they prepare for a sooner-than-expected post-oil era? Or are they simply trying to keep their energy independence? Not being suspicious here, just trying to make some sense of such an expensive and (unfortunately) controversial decision.