The wondrously dreary and pointless parade of banality, glibness and soundbites that is the Tory Party leadership campaign has had an interjection from Keir Starmer (he’s so uninspiring he could be a candidate) on the energy price cap. Like the other denizens of Westminster and Whitehall, he has the delusion that a combination of rushed legislation and the magic money tree can solve all problems. If only.
Energy prices are rising spectacularly. The proximate cause for this was Putin’s invasion of Ukraine and the associated embargos and gas pipe constrictions. (It’s worth remembering that the Net Zero policy was driving the price up anyway, as I and other TCW writers have repeatedly demonstrated, for example here, here and here.
While the global oil trade is well placed to sort itself out (Barclays has cut its forecast price for Brent crude by $8 to $108 per barrel), European gas is likely to stay pricey. The drivers include the finite capacity of pipelines, the shortage of LNG (liquefied natural gas) terminals (the UK has plenty of these) and the constrained supply on LNG carriers, plus of course Germany’s lunatic energy policies.
These matters. According to British government data released last month, 42 per cent of the UK’s primary energy comes from gas – more than any other fuel. As energy is a substantial part of everything we do or purchase, any price rise affects everything; it’s inflationary. Since 2019 the UK price has risen by a factor of five to ten, depending on the base point you choose. The chart below comes from the Trading Economics website.
Note that the current spike started well before Putin’s invasion, although of course subsequent events have driven it higher.
So far, all that the politicians have offered is an extension of (super-dull) Ed Miliband’s price cap – to be paid for by more borrowing (yet another tax on the unborn). It won’t work in even the short term, for the very simple reason that gas and electricity prices are also hitting businesses, hard. As the next chart shows, industry and commerce relies heavily on both gas and electricity. (There’s more bad news here, in the UK the wholesale electricity price is often set by gas-fired power stations, which produce 40 per cent of UK electricity)
While Truss and Sunak (and Starmer) claim they are protecting households from debilitating energy bills, they’re doing nothing for business. Unless the gas price spike is a short-term phenomenon, many companies will go bust, lay off staff and stop paying tax. All of which will trash the economy and with it the Treasury’s income. Most of the bankrupt businesses will be SMEs, a fair proportion of which will be financed by security over the owner’s home. Cue bad mortgage debts, increasing repossessions and more misery.
The key question is whether the UK gas price spike is a short-term problem. Peace in Ukraine and a rehabilitated Russia opening the gas taps would fix it almost overnight. Given that it takes at least a couple of years to build an LNG terminal and longer to build an LNG carrier there’s no obvious quick fix.
The magic money tree (the existence of which remains unproven at best) can do only so much, and at increasing cost in interest rates and inflation – which itself will trigger higher interest rates, themselves likely to deliver a catastrophic impact on household incomes and business profits. It remains unclear, or at least unpublished, how much the energy spike has contributed to the outbreak of inflation. If, as I suspect, it’s the major cause, raising interest rates (the conventional response to inflation caused by louche monetary policy – or ‘quantitative easing’) will not cure inflation and will deepen the recession. Of course, it’s the financial markets that drive the cost of new UK borrowing and with some £2.3trillion of UK government debt already in the market, there must be a limit to who wants to buy more unless the interest rate is much higher.
All of which leads me to wonder what vital UK national interest lies in Ukraine. Yes, we seek to constrain Putin’s authoritarian regime, although we did not care so much as to commit armed force to supporting Zelensky’s regime – largely due to fears of Armageddon. We’ve avoided that (so far) but the price looks like being economic ruin. (Again, anticipated on TCW.)
Neither Truss, Sunak nor Starmer seems to have a plan, let alone a credible one, to avoid the wholesale destruction of the economy. Whether they can develop and implement one, rectifying years – if not decades – of delusion before it all starts to crumble, is an open question. I’m not confident.
via TCW
August 20, 2022
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