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Home / In Brief / In Brief: Double distraction, The damage done, The future of green subsidies, The volatility problem

In Brief: Double distraction, The damage done, The future of green subsidies, The volatility problem

Double distraction

The important – but unmentioned – fact about UK Prime Minister Johnson’s current woes is that they are apolitical.  Johnson’s – and the Tories – collapse in the polls is solely the result of a breech of trust which might just as easily have been the result of the behaviour of any of the other party leaders.  And while the temptation to make “partygate” into a party-political issue has proved impossible to resist, it really should have been left as a rift between the Prime Minister and the people.

One reason for this was seen last Wednesday when, as a result of trying to capitalise on the defection of a Tory MP to Labour, Keir Starmer succeeded in getting the remaining Tories to close ranks, with several backbenchers withdrawing their letters calling for a leadership contest, and many more agreeing to wait until civil servant Sue Gray reported.  In the meantime, the story has been allowed to morph from the original, hypocritical breech of trust into media and party complaints about the internal workings of parliament about which the majority of the British public cares not one iota.

Both partygate and the wider woes of SW1 insiders though, are a distraction from the looming storm which is about to break over us.  In just a few days’ time, we will learn just how high our gas and electricity bills are going to rise from April.  Not long after, our 2022-23 council tax and business rates bills will be dropping through the letter box… and nobody is expecting them to be lower than last year.  Train fares, water rates, food inflation and higher national insurance will be adding to already falling standards of living in April. 

And then there are the things that the establishment media has yet to cotton onto, such as the damage wrought by pandemic restrictions and lockdowns which were enthusiastically supported by the opposition parties.  The cost of a shipping container – and thus the price of everything inside – from Shanghai, for example, has risen far more than official inflation.  As Cahal Milmo at i-News reported in November:

“Prior to the pandemic in 2019, the average cost of sending a container from Shanghai to Europe was just £592. The cost of shipping a container of goods is now nearly 550 per cent higher than the seasonal average for the last five years.

“Brexit, high demand and the fact that UK-bound goods are often transferred to Britain from vessels docking in major hubs such as Rotterdam and thus incur extra costs are cited among the reasons why costs for shipping to Britain are higher.”

Then there is oil – often referred to as “the master resource” because it is used in the manufacture or transportation of just about everything in the economy.  As a result of shutdown production and a lack of investment during the pandemic, oil prices are pushing $90 per barrel and are expected to rise to $100 later in the year.  That will take the price of petrol in the UK above £1.50 per litre – meaning about £85 to fill up the average car and guaranteeing that the price of anything delivered in a van will be increasing accordingly.

It goes without saying that none of the political parties has even a vague understanding of the crisis which is unfolding.  None, of course, has a policy programme even to mitigate it.  Instead, like generals fighting the last war, the Tories are desperately trying to resurrect the ghost of Margaret Thatcher – Hence Liz Truss driving around Estonia in a tank – while Labour tries to recreate Tony Blair’s electoral triumph.

New crises though, demand new policy programmes.  And it will be the party which first looks beyond the Westminster village and develops policies that can mitigate – because it is too late to prevent – the massive downturn that is coming our way, which will carry the electorate with it.  All else is mere distraction.

Assessing the damage

Distraction of a sort was also evident in media coverage of pre-Christmas sales last year.  While December was a washout because of the response to Omicron, sales in November were enough to compensate.

This though, turns out to have been of little comfort to High Street retailers according to new research from the Centre for Cities:

“Covid-19 has cost businesses in city and large town centres more than a third (35%) of their potential takings and shut down thousands since March 2020. This is according to Cities Outlook 2022 – Centre for Cities’ annual economic assessment of the UK’s largest urban areas.

“Central London is worst affected, losing 47 weeks of sales between the first lockdown and Omicron’s onset. Businesses in Birmingham, Edinburgh and Cardiff city centres are also among the worst hit; all have also lost nearly a year’s worth of potential sales.

“Across the 52 city and town centres studied, 2,426 commercial units have become vacant during the pandemic, against 1,374 between 2018 and 2020. In many prosperous city centres, lost sales are linked to an increase in business closures. In Oxford and Newcastle city centres the number of empty storefronts increased by around eight percentage points as sales fell.”

According to the authors, the big cities should bounce back once the workforce returns to office working.  It is in the poorer towns of ex-industrial, rundown seaside and small-town Britain that High Streets will face the biggest problems:

“Government’s Covid-19 support successfully stalled the decline of many struggling high streets but was less effective in economically stronger places due to higher rents and a lack of custom from office workers.

“That said, while stronger cities have borne the economic brunt of the pandemic, their higher levels of affluence mean that, if restrictions end and office workers return, they will likely recover quickly.

“Meanwhile, while government support has sheltered weaker places, it may have simply stored up pain for the future. The report warns that many less prosperous places in the North and Midlands face a wave of new business closures this year.”

Even this may prove optimistic since, even if workers do return to their offices in 2022, the raft of price and tax increases they face from April guarantees that they will be spending far less on discretionary items than they had been in the (not so) good old days before SARS-CoV-2 embarked on its world tour.

Green subsidy cut

It is no surprise that a Tory Party which is much less keen on renewable electricity than the Prime Minister’s wife, sees the green subsidies on electricity bills as an easy target for cutting at least some of the price increases on energy bills.  The subsidies were introduced by Gordon Brown as a means of dodging EU State Aid regulation – which limits the amount by which governments can directly subsidise industries.  And so, rather than funding non-renewable renewable energy-harvesting technologies (NRREHTs) out of – progressive – taxation, they were added to – regressive – electricity bills.  These days, they account for some 25 percent of the price paid by consumers and small businesses.

Since one of the supposed benefits of leaving the EU was that Britain would once again be able to use state funding to directly subsidise its industries, and given that the Labour Party is also committed to making Brexit work, it ought to be simple enough to get bi-partisan agreement to remove the subsidies.  But Britain may not be the first to do so.  That honour may go to the self-identifying European leader in green energy according to a Reuters report:

“The German government may scrap this year a surcharge on electricity bills used to support renewable power, to ease the strain of rising energy costs on millions of households, Social Democrat (SPD) co-leader Lars Klingbeil said on Saturday…

“The surcharge was cut by 43% from Jan. 1 but is still expected to cost households an average 222 euros this year.

“Klingbeil said the government had to do more to support consumers facing soaring costs for heating and lighting, hence the talks between the SPD and its junior coalition partners.”

The open question here in the UK, however, is whether the green subsidies can be paid out of general taxation or whether they will have to be ditched entirely.

Volatility kills economies

The generals fighting the last war theme is evident in the coverage of rising prices as the world puts the pandemic behind it.  Although inflation remained stubbornly high through the 1980s and early 1990s, it is the 1970s that commentators have been looking back to in order to amplify and darken the economic storm clouds gathering on the horizon. 

This though, is the economic equivalent of expecting the next war to be fought by musketeers formed into battle squares… times have moved on.  Governments no longer create currency, private banks do… with interest attached.  And the massed ranks of organised labour ceased being able to drive a wage-price spiral when all of the jobs were shipped to China.  Indeed, the most likely consequence of the current supply-side aka “cost push” price rises is a deflationary crisis caused by too many consumers having to switch spending away from discretionary items in order to cover the rising cost of essentials – mass redundancies, debt-defaults and crashing asset prices are far more likely than the resurrection of the ghosts of Arthur Scargill and Red Robbo.

This said, one 1970s phenomenon that might well reappear in the coming years is volatility in energy prices.  This happened in the early 1970s because the USA lost its ability to act as the world’s swing producer – adding production if prices rose, and cutting production when prices fell.  Throughout the post-war years, the world oil price remained stable at around $25 per barrel at today’s prices.  But once the continental USA’s oil fields peaked in 1970, prices spiked upward, fuelling the stagflation of the period.

By the 1980s, OPEC had taken over the role of swing producer.  And although some volatility remained, a price ceiling of $40 was maintained until the global peak of conventional oil extraction in 2005; after which, volatility returned with a vengeance:

Fracking, which briefly took the USA’s production above the previous 1970 peak, held prices down from 2015 to 2017 – but only at the cost of investing billions of dollars to recover millions of dollars’ worth of oil – after which OPEC+Russia has attempted to prevent price rises triggering another 2008-style economic crisis.  But OPEC+Russia’s role as latter day swing producer may be short-lived now that most of the oil fields are in decline.  As Tsvetana Paraskova at OilPrice reports:

“As the OPEC+ group unwinds its production cuts, the oil market has realized that not only do many producers in the pact lack the capacity to boost output further, but those who can pump more are reducing the global spare production capacity, thus exposing market balances to unexpected supply disruptions, and oil prices to further spikes…

“The problem with OPEC+ is that only a handful of producers can keep some capacity in reserve while raising production. The few who can include OPEC’s top producer and the world’s largest oil exporter, Saudi Arabia, the UAE, and to some extent, Kuwait and possibly Iraq…

“With demand expected to exceed pre-COVID levels this year, the low spare capacity and the low upstream investment in recent years are setting the stage for even higher oil prices.”

Oil prices crept above $80 per barrel while the establishment media were transfixed by natural gas prices.  But even as spiking gas prices wreak havoc across Europe, the rising price of oil is set to cause the bigger global shock:

“Oil prices could hit $100 this year and rise to $105 per barrel in 2023 on the back of a ‘surprisingly large deficit’ due to the milder and potentially briefer impact of Omicron on oil demand, Goldman Sachs said this week… JP Morgan, for its part, expects the falling spare capacity at OPEC+ to increase the risk premium in prices, and sees oil hitting $125 a barrel this year and $150 a barrel next year.”

For consumers and businesses, rises of this kind – last seen either side of the 2008 crash – spell economic crisis.  But from an investment point of view, the ensuing volatility spells long-term catastrophe.  While a barrel of oil might cost £150 per barrel, the economy as a whole cannot pay the price.  Businesses and households may be forced to pay the direct additional price of fuel, but they will do so by cutting spending elsewhere.  And while this makes absolute sense to individuals, collectively it points too what Marx called a “crisis of overproduction” – in reality a crisis of under-consumption.  Those businesses producing and selling discretionary goods and services are going to go bust as their consumers switch spending elsewhere.  And their former employees – who will see a massive fall in spending power as they move from work onto benefits – will then have to cut discretionary spending too.  In such a downward spiral, demand for oil slumps as all of the discretionary businesses which used to need oil disappear.

It was the opening up of new – albeit more expensive, but still affordable – oil reserves such as Alaska, the North Sea and the Gulf of Mexico which eventually brought an end to the price volatility of the 1970s.  This time around, we are not so fortunate because there are no large enough reserves left to make a difference.  Nor, despite the false promises of the Green New Great Reset crowd, is there any energy-dense and versatile alternative to save the day.

In the coming economic crisis, the only question left to be answered is whether we voluntarily shrink our economy or whether we let a resource-depleted planet Earth do the job for us.  The first will be unpleasant, the second a catastrophe.

As you made it to the end…

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