The
United Kingdom in 2022 is facing an historic energy problem. An island sitting on top of vast reserves of coal,
surrounded by gas and oil in its waters, and with great hydroelectric potential, has seen vast increases in energy pricing and has become dependent on foreign gas, without
having significant storage capacity. In addition, a ‘green’ environmental
agenda, recently compounded by ‘net zero’ policies with regard to carbon, has generated massive subsidies to underperforming renewable resources, and a confused
and restrictive policy with regard to nuclear power. As world gas prices rise
because of competition from East Asia and declines in supply, a price cap and marketisation
policy in gas markets has caused the collapse of a large number of domestic gas
suppliers and a forced increase in the cap which caused many bills to rise by
over 50%. There is every indication that these bills will rise further.
The
microeconomic effects of this rise are simple to list and do not require a
great deal of analysis. Consumer surplus disappears in the face of forced price
rises because of wholesale rises alongside an inelasticity of supply. Although
the price rises in gas are projected for April (and the UK does not rely on air
conditioning during the summer) they will be combined with price spikes in
petrol and diesel costs, and compound a separate food price inflation. This
means lower disposable incomes, lower revenues for firms producing normal or
luxury goods, and a decline in investment.
It
is possible that the fall in disposable income could lead to a negative multiplier
in the economy as a whole. This is because rising costs and a lack of
alternatives could lead to unemployment, and to extended falls in aggregate
demand. An alternative, however, could be that an accumulation of covid savings
by families over the years of lockdown and low travel since 2019 could create a
boom in cheap supermarkets and in non-branded supermarket options, as well as
warehousing that could see the release of savings into the economy. The
maintenance of quantitative easing policies, which move money to banks, and negative
real interest rates, could also encourage financial institutions to continue to
extend credit in the form of overdrafts and credit cards, allowing families to
adapt.
In
the mid- to long-term, the UK is also capable of being a net energy producer. This
means that it could replace the more expensive energy, provided that its
companies and government can be persuaded to offer it to British people rather
than selling at profit on the open market. Energy price increases affect every
stage of the supply chain globally, however, and when set alongside food price increases
because of poor harvests and oil-related increases in the price of foodstuffs,
animal feed, and fertiliser, the likelihood is that increases in domestic production
will not impact positively on cost-push inflation.
Similarly,
the projected pattern on the balance of payments is mixed. British terms of
trade could decline as the exports of the country—goods and services such as
tourism, insurance, legal services, education, aircraft engines, biochemicals,
and luxury goods—declined globally. This could be offset by a decline in non-elastic
imports as households moved away from retail consumption towards food staples
and energy, and endured another year of reduced tourism.
Changes
to the student loan system could see universities and schools attempting to
attract more than a million international students a year, which would represent a strong
rise in exports, but this could be offset by students studying in home
countries or being discouraged by the effect of war and government policy in
places such as the People’s Republic of China.
This points to a deficit in the current account (the balance of trade) which,
if not offset by inflows of money to the capital account, will result in a
decline in the balance of payments. Such a decline will be represented by a fall
in the pound and a decrease in living standards.
A
decrease in living standards in the UK could also impact upon the ability of
the financial system to function. The UK has high levels of household debt, and
a ‘precariat’ class of people on reasonable incomes who are one to two salary
cheques away from being unable to pay bills, mortgages, rents, or loans. It has a very large gap between rich and
poor, and a very poor allocation of housing and property ownership which
worsens every year.
Conversely,
the incomes of workers in energy industries, and of those in key transport and
warehousing facilities, might increase because of the combination of derived
demand for their services and labour shortages. UK inflation may remain less
than global inflation, leading to arbitrage-related investment into the UK, and
the creation of an oligopoly in energy markets as smaller firms go bust could
lead to competition to buy those firms by global concerns.
In
the short run, the UK cannot grow and sustain a radical net-zero agenda in
which energy for a growing electric car market is provided by highly-subsidised
and currently unreliable ‘renewable’ sources.’ Reliable non-carbon sources of
energy include small- and medium-sized nuclear plants and clean coal
initiatives. Opening mines, re-acquiring mining expertise, or building new
nuclear stations, is not easy or quick, however, and might take years to bring
into effect.
The construction of new storage for gas would
require significant investment and given that private companies have no
incentive to create the storage as demand is inelastic and the price cap is
high enough to guarantee large profits, only government action would cause new
storage to be built. The government has taken no action to increase storage
rapidly. In addition, the government, concerned at the growth of a
trillion-pound national budget and a huge £327 billion deficit as a consequence
of covid spending in 2021, has instituted a policy of fiscal contraction
powered by national insurance rises which will hit all employees and employers
below those classed as rich.
The
short-term outlook is therefore bleak. Some environmentalists might celebrate a
potential decline in carbon dioxide emissions as economic activity contracts,
car and aircraft journeys fall, and consumption decreases. The agricultural
industry will also see a post-Brexit fall in meat production as diesel prices,
which impact farms, rise, and imports of cheaper Australian and Canadian meat
rise following trade deals. Rises in energy use may also be associated with
more electric cars, which the green movement sees as environmentally better
than petrol-driven cars. More electric vehicles means more use of rare metals, more pressure on the electricity grid at all times, and more dependence on large oligopoly producers with proprietorial rights over the maintenance or repair of such vehicles, which means higher costs for drivers. The growth in positive externalities, and the decline
in negative externalities, from all of these developments, will not offset stagflationary
losses in terms of human and economic capital.
It is therefore worth pointing out, once again, that the UK faces very tough economic headwinds for the rest of the decade.
Comments
Post a Comment