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This economy is going down

UK gas prices have fallen back this week – although they are still some 400 percent higher than at the start of 2021.  And the reasons for the fall in price should not breed complacency.  First, the arrival of a south-westerly airflow off the Atlantic has finally begun to spin those offshore wind turbines after last week’s doldrums.  At the time of writing, wind is supplying 28.5 percent of our electricity, allowing gas to fall back to 27.4 percent, and for coal plants to be switched off – although nuclear is being run flat out at 20 percent, reflecting the still too high price of gas.  With stronger winds forecast for next week, demand for gas may fall even further.  But the winter is only just beginning, and it is doubtful that we will get through January, February and early March without at least one more week of cold, still, high pressure air.  And if we are unlucky, we could face several weeks in a row.

The second reason for the lull in price is worrying for a more complicated reason.  On Wednesday, Marwa Rashad at Reuters reported that:

“At least ten cargoes of liquefied natural gas (LNG) have recently been diverted from Asia to head west drawn by Europe’s record high prices amid supply concerns ahead of peak winter demand, industry sources said…

“In addition to the above cargoes, a U.S. cargo onboard Marvel Crane had headed toward Panama bound for Asia before being diverted northeast and now signalled it was bound for the UK’s South Hook terminal, according to ICIS LNG Edge.

“Data Intelligence firm Kpler said it has listed more tankers diverting towards Europe from Asia and Other destinations like Brazil including British Contributor, Tembek, LNGShips Manhattan, LNG Alliance and are eying two more for possible route change.

“Furthermore, West African cargo onboard Maran Gas Sparta, a vessel chartered by Shell, has been called back to Europe after it was on the cusp of passing the Cape of Good Hope, said Felix Booth, head of LNG at energy intelligence firm Vortexa.”

Liquified natural gas is expensive.  And the reason these ships have done a U-turn to head toward Europe and the UK, is that – for the moment – the pound and the euro still carry enough nominal value for our gas supply companies to outbid their Asian competitors.  This though, is about to change.  And in future, countries like the UK are going to struggle to outbid anyone for fossil fuels that are now either depleting or being used by producing countries for domestic supply.  In short, Western Europe, and especially the UK, are about to be hit with higher import prices just as the value of our currencies take a post-pandemic dip.

Inevitably, the UK establishment media only sat up and paid attention when the supply companies threatened a 50 percent increase in energy bills, hitting the salaried liberal class and prompting calls for the government to take action.  But it is far from clear at this point that governments can do much more than the energy equivalent of rearranging deckchairs as the ship goes down.

Neither the government, the supply companies nor the establishment media understand the essential role of energy in the economy.  In part this is because – until now – we have only had to pay the cost of extracting and supplying fossil fuels, not the true value they provide to the economy.  And saddled with economic theories – both left and right-leaning – which simply assume that there will always be enough supply to meet demand, politicians and the economists who advise them will claim that we only need to issue some additional new currency to solve the problem.

Once we understand, however, that nothing gets done without energy – including securing future energy itself – then we can begin to understand that the rise in gas prices – coming on the back of big rises in the price of oil and oil-derived fuel – are about to rip through what remains of the post-covid economy like a hot knife through butter.  Rising energy costs translate into rising costs of everything else in the economy.  And while this – sort of – aligns with rising prices, its real impact is on value itself.  That is, rising energy costs are essentially a symptom of the deeper problem that there is not enough energy to go around.  In the past, this has been temporary – for example the oil shocks or the “three-day week” of the 1970s.  And there may be some degree of artificiality about the current gas supply shortage insofar as Germany and Russia are playing politics.  Nevertheless, the harsher reality is that, as the first place to begin using fossil fuels, Western Europe is also the first to deplete them – including the more recent oil and gas from the North Sea.  And there is no law of the universe that says that the rest of the world has to give Europe first preference in supplying what is left – only the relative value of our respective currencies does that.

So, here’s the problem: as the cost of energy goes up, the amount of economic value that can be generated from its use plummets.  This unfolds as a price issue.  Rising prices render businesses uncompetitive.  Those which export goods and services are no longer able to compete internationally unless they can somehow lower their costs.  But even though it is high cost energy which is the cause of the problem, in financial terms it is still the wage bill which accounts for most of a business’s costs.  And so, businesses seek to de-layer – getting rid of middle management roles not directly concerned with output – cut wages, and/or lay off workers.  They may even up sticks and offshore to somewhere where wages and regulations are far lower… I believe Africa is going to be the new Asia as the global energy cost of energy increases.

Offshoring is, of course, disastrous for the value of the currency, since it cuts exports still further while increasing the goods that must be paid for by converting pounds into another currency.  But even if some companies manage to keep going where they are, the increased unemployment caused by cuts to the wage bill translate into falling demand across the domestic economy.  And that demand is already being undermined by the rising cost of energy itself. 

In a prosperous economy, people seldom consider the difference between discretionary and essential spending.  They are simply the items that we pay for – many on a direct debit – every month.  Nevertheless, there are things – housing, food, clean drinking water, a degree of light and warmth, some transport, and at least some work clothes – which are essential within a developed industrial economy.  As the cost of energy rises, the cost of these essentials tends to increase far more than the cost of discretionary items, including the cheap imported consumer goods that a large part of our workforce is employed to sell in our many retail outlets.

As the prices of essentials rise, we each adjust our budgets accordingly – cutting back to some extent on our previous discretionary spending.  And with the eye-wateringly high rises in energy prices in 2021, a large part of the UK population will cease buying discretionary items entirely in 2022.  Indeed, even those at the very top of the income ladder will have to cut back to some extent.  The result, whichever way you cut it, is yet another round of business failures in hospitality and retail, and very likely cutting even deeper into what remains of the UK’s economy.

This comes on top of recessionary trends which were already unfolding in the years prior to the pandemic.  But these have been accelerated and exacerbated by the various lockdowns and restrictions which largely failed to prevent loss of life, the overloading of the NHS or – as we are beginning to see – economic decline.  Neil McCoy-Ward’s tours of post-lockdown Cardiff, Cornwall, Coventry and London give an insight into the damage that was already done even before rising energy costs and supply chain disruption sent prices upward.

Unfortunately, out of a misplaced optimism as lockdowns and restrictions came to an end in the summer, the government chose to raise taxes, cut benefits and withdraw pandemic support measures in the insane belief that the UK economy was about to match rates of growth last seen in the 1950s.  In reality, we experienced a brief spending spree as we went out to get post-lockdown haircuts, some new – and usually larger – clothes, and a few drinks and meals at the surviving pubs, cafes and restaurants.  Even the anaemic 1.3 percent growth in the third quarter had to be revised down to just 1.1 percent.  And with the Omicron variant arriving in November and city-centre footfall collapsing weeks before the government implemented its scatter-brained “Plan B,” Christmas 2021 is shaping up to be among the worst on record.

Even those of us who survive the winter unscathed can look forward to more misery in the spring.  Tax increases – national and local – will be arriving in April, as will the lifting of the domestic energy price cap – which will add £2,000 to the average bill.  April is also traditionally the month when water charges and rail fares are set – usually at a rate higher than inflation, which, because of the pandemic distortions, was exceptionally high last year.  Moreover, like generals fighting the last war, the central bankers are raising interest rates to stave off a wage-price spiral which is not only not happening but cannot happen in today’s neoliberal economy.

In the course of 2022 then, we can expect an energy crisis to morph into a generalised economic crisis about which neither the economists nor the politicians – whether left, centre or right – has the first inkling of an understanding.  Most likely they will each attempt to cast blame on their respective bogey men – welfare scroungers, grifting corporations, tax-dodging billionaires, profligate governments, migrants who simultaneously take your jobs and abuse unemployment benefits, privileged baby-boomers and over-sensitive millennials.  Demands will no doubt be made for more public borrowing on each groups’ favoured cause – bailouts here, absolving student debt there, infrastructure spending, restoring the £20 a week to benefits, and more money for the NHS, etc..

The trouble is that borrowing and spending only seemed to be a solution in periods when the additional currency could bring new energy and resources into the economy – as happened in the years after World War Two.  In periods like today, when energy is depleting and resources are ever harder to produce, increased borrowing serves only to devalue the currency – making the imports we depend upon – including oil and gas – even more expensive.  Meanwhile, increased spending translates into debt-repayment and saving for a rainy day more often than it produces real economic growth.

The only “solution” to the energy crunch that is now beginning to bite is to add another, even more energy-dense fuel source to the mix – in the same way that our ancestors added coal to wood and peat burning, and then added oil and gas on top of coal.  The trouble is that all of the energy sources currently on offer – wind, solar, biomass, geothermal, hydro, wave and tide – are far less energy-dense than the oil, gas and coal which still account for 85 percent of global energy.   This means that no matter how rapidly we are able to deploy them – and depleting energy and resources make deployment ever harder – they can never provide us with the surplus energy to continue growing the economy.

In a saner world, perhaps, our best academic minds – and let’s face it, that excludes most of us – would be working on discovering and developing new high energy-density sources of power on the off chance that we might maintain the best and eradicate the worse of what we have achieved in three centuries of industrial civilisation.  In the meantime, the rest of us would be best employed creating more resilient and localised – albeit far less material – economies, as we adjust to what is possible in a world without fossil fuels.  Sadly though – as the old saying goes – those who the Gods seek to destroy they first drive mad…

As you made it to the end…

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