[To avoid the energy catastrophe and reverse the huge loss in
living standards already under way, we need to take over the fossil
fuel companies and phase out their production with increased
investment in renewables, to reduce fuel prices for households and
small businesses. ]
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ENERGY, COST OF LIVING AND RECESSION  
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Michael Roberts
September 4, 2022
Michael Robert's Blog
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_ To avoid the energy catastrophe and reverse the huge loss in living
standards already under way, we need to take over the fossil fuel
companies and phase out their production with increased investment in
renewables, to reduce fuel prices for households and small businesses.
_

Nord Stream, Андрей Перцев, CC0, via Wikimedia Commons

 

The G7 governments have a problem.  The war in Ukraine against Russia
is not won.  It looks set to be a long grinding conflict, possibly
with no end.  And yet the world and particularly Europe depends on
Russian energy supplies.  The G7 has agreed to stop buying Russian
oil, as part of its programme of using economics sanctions as a war
weapon.  But up to now, energy imports from Russia have not been
stopped because it would mean a catastrophe for the EU countries,
particularly Germany.  And Russia is still selling huge
volumes—globally – albeit at a discount from the world price—to
India, China and other energy-thirsty economies.

At the beginning of June, the European Union agreed to bar its
companies from _“insuring and financing the transport, in
particular, through maritime routes, of [Russian] oil to third
parties_” after the end of 2022 to make it _“difficult for Russia
to continue exporting its crude oil and petroleum products to the rest
of the world.”_  But that is still not being implemented and
Greek-owned tankers are delivering Russian oil exports across the
globe and until this week, Russian gas was still being imported into
Europe.  As a result, the Russian trade surplus has rocketed as oil
and gas export revenues rise, driven mainly by huge price increases.

In a mirror image, the Eurozone trade balance has sunk into a severe
deficit and the euro has slumped in value below the dollar for the
first time in over 20 years.

European governments have been desperately trying to find alternative
sources of energy supply and have shopped around the world to buy gas
and oil at going market prices.  This has led to spiralling natural
gas and oil prices.  However, at great expense, Europe has been
building up its gas storage to get through the coming winter.  Gas
storage levels are now at 80%of capacity and even higher in Germany.

This has been done by switching to expensive liquid natural gas (LNG)
imports brought in by ships.  Europe has reduced its gas imports from
Russia (partly by policy but mainly because Russia has cut gas
supplies down to 20% in the key pipeline – and now this week to
zero).  To replace that loss, it has bought LNG from Spain and North
America.

Even so, it will have to use up all its storage capacity to get
through the winter without electricity cuts.  And then what?

That’s why the G7 leaders have decided on a new sanction against
Russia which they hope will speed up Russian capitulation on the war
in Ukraine.  Led by Janet Yellen, the US Treasury Secretary, they
propose to introduce a price cap on all oil imports from Russia. 
Instead of applying a blanket ban on insuring or financing any Russian
oil shipments, credit and insurance will be made available, as long as
the price paid for Russian energy is below a certain level. 

What level is still to be decided for the new year 2023.  Currently
the Brent crude oil price is about $90-100/barrel.  So if the price
cap were fixed at, say, $50/b, then Russian export revenues would
presumably plummet and so Putin would lose funding for his war, while
energy prices would drop sharply.  Indeed, on this news gas and oil
prices have dropped back, although they are still four times higher
(gas) and 80% higher (oil) than before the war started.

Will this price cap weapon work?  There are many holes in it. 
Russia could refuse to export oil at the lower price, though that
would not only reduce one of its few sources of external revenue, it
also would require shutting down oil wells that aren’t easily
restarted. An extended shutdown of Russian oil wells could do severe
and lasting damage to its production capacity.  But Russia could
continue to export oil to countries that refuse to abide by the G7
price cap, eg China and India. Indeed, before the invasion, India
imported almost no Russian oil. By July it was importing close to 1mn
b/d of Russian crude (heavily discounted), or about 1 percent of
global supply.  And then all countries must agree to use G7 insurance
facilities and not resort to those outside their restrictions.  Many
countries may not follow the G7 strictures.

Meanwhile, the huge rises in global energy (and food) prices are
creating a cost of living catastrophe.  Everywhere in Europe, real
wages are crashing.

It’s worst of all in Britain.  The Bank of England (BoE) forecasts
the inflation rate to peak at 13.3% in October and real household
disposable income is set to fall by 3.7% across 2022 and 2023, making
those two years the worst on record.  But it may be even worse than
that.  Citibank forecasts inflation is on course to rise to 18.6 per
cent in January, the highest peak in almost half a century, due to
soaring wholesale gas prices. 
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Goldman Sachs goes further as it expects even larger gas rises, and
now expects UK inflation to peak at 22%!

As always, it’s the poor that take the hardest hit.  Over 40% of UK
households will not be able to heat their homes properly in January
when energy bills rise yet again. Yes, this is Britain in 2022.
 About 28mn people in 12mn homes, or 42 per cent of all households,
will not be able to afford to adequately heat and power their
properties from January, when a typical yearly energy bill is forecast
to exceed £5,300.  Even by October, when Britain’s energy price
cap will rise 80 per cent to £3,549 9m households will face fuel
poverty.  With the current cost-of-living crisis being felt hardest
by low-income households, absolute poverty is on track to rise by
three million over the next two years), while relative child poverty
is projected to reach its highest level (33% in 2026-27) since the
peaks of the 1990s

But what is this energy price cap that is applied in the UK? 
Supposedly it is to stop energy companies hiking their bills too much
and making super-profits at the expense of households.  In the UK, a
regulator called Ofgem sets a price cap every six months that
supposedly regulates the profitability of the privatized energy retail
companies that charge customers for gas and electricity.

But this price cap has rocketed from under £1000 a year in 2021 to
£3549 in October and then is forecast to reach an eye-watering £6600
by summer next year.  These sorts of rises are completely impossible
for average households and small companies to absorb, let alone the
poorest and those with uninsulated homes.

How can these price rises be explained?  Much is made of the profits
being made by the retail energy monopolies and it is true that they
are making big profits and distributing millions to their
shareholders. But when you look at the breakdown of the costs for
these retailers it tells a deeper story.

What you find is that the energy retail companies are restricted by
Ofgem to just a 2% profit rate on (total, not operating) costs.  But
those costs include the costs of getting the gas and electricity
distributed down the pipes and lines to households.  The suppliers of
these services are a separate bunch of monopolies (in the UK, the Big
Six).  The Big Six can charge up to a 40% profit rate in their prices
to the retail companies and so take up about 7-10% of the price to the
householder.  The distribution companies are owned by various hedge
funds and private equity companies who take their cut. 

But the biggest part of the household bill is the price charged by the
global energy companies for their gas and oil ie the likes of Shell,
BP, Mobil, Exxon etc.

This is where the real profits bonanza is.  The profits bonanza in
the second quarter included a record $11.5bn profit for BP’s rival
Shell, record profits of $17.6bn and $11.6bn respectively for the
US’s ExxonMobil
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$9.8bn for France’s Total. In the first six months of the year the
companies made combined adjusted profits of nearly $100bn.

So when the head of the UK’s Ofgem, Jonathan Brearley says
that _“We can’t force companies to buy energy for less than the
price… we all need to work together”,_ in a way, he is right. 
If the market rules, then his regulatory powers can do little because
he works on the principle that companies must make a profit.  But if
the goal of Ofgem is to ensure a fair deal for households in
conditions of natural monopoly, then it has clearly failed in this
mandate.  The privatisation of gas and electricity distribution in
the UK since the late 1980s and early 1990s has resulted in a handful
of very large and very powerful firms enjoying large profit margins
with shareholders reaping big dividends, while UK households are
subjected to sky-high energy bills.

For example, the big six distributors have paid out almost £23
billion in dividends, six times their tax bill in the last ten
years.  But then as one CEO said, _“Businesses are there to make a
profit, and dividends are one way of sharing that with
shareholders”._

The powers-that-be are also shocked by the energy price explosion. 
Indeed, several have put into question the economic principle of
market pricing, calling it _“frankly ludicrous_” (Boris
Johnson), 1
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Macron), 2
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concluding _that “this market system does not work
anymore”_ (Ursula von der Leyen).  The EU chief admitted that this
was_“exposing the limitations of our current electricity market
design_”. But what’s the answer? Well, _“we need a new market
model for electricity that really functions”
(!)._  _“Alternative market designs that could potentially include
the decoupling of gas from the formation of the market
price”.  _So gas prices would be controlled and not subject to the
market – but how?

I won’t go further into the myriad of proposals coming from the UK
government, the opposition Labour party and various think-tanks about
how to relieve or avoid the catastrophe ahead for millions of
households in Europe and particularly the UK.  I won’t because
there is one thing that they all have in common – there are no
proposals to end the market for energy prices or to bring into common
ownership the energy companies, retail, distribution and wholesale
(the UK TUC proposes nationalization of retail only
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To do so would require a revolutionary transformation of the structure
of economies starting with energy.

And yet even on a limited scale, public ownership of energy works. In
Germany, for instance, two-thirds
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all electricity is purchased from municipally owned energy companies
and, since 2016, the Munich city council has supplied enough renewable
energy for the needs of every household.  Denmark has a fully
publicly owned transmission grid, and the highest proportion of wind
power in the world.  A publicly owned energy system can be
complemented by smaller-scale developments, like community-owned
energy. In 2008, the isle of Eigg was the first community to launch
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off-grid electric system powered by wind, water and solar, allowing
local people to have a greater stake and say in their energy.

But these steps are limited and partial.  Overall, the market rules
and Big Oil runs the show. And now market pricing is being aggravated
by the desperate attempts of the G7 leaders to defeat Russia in the
war. 

As a result, efforts to control carbon emissions and meet global
targets are being reversed as fossil fuel energy production is
accelerated and fossil fuel subsidies to help control energy prices
are increased.  Energy tax subsidies not only enforce the EU’s
reliance on fossil fuel imports but also work against achieving the
climate targets of the European Green Deal.

In the US, coal-fired power generation was higher in 2021 under
President Joe Biden than it was in 2019 under then President Donald
Trump, who had positioned himself as the would-be saviour of
America’s coal industry. In Europe, coal power rose 18 per cent in
2021, its first increase in almost a decade.

Economist Dieter Helm, professor of energy policy at Oxford
university, says the shift away from fossil fuels has rarely looked
more complicated. _“The energy transition was already in trouble
— 80 per cent of the world’s energy is still from fossil
fuels,”_ he said.  _“I expect that in the short term, the US
will increase oil and gas output and EU coal consumption could
increase”._

There is no escaping from the obvious conclusion.  To avoid the
energy catastrophe and reverse the huge loss in living standards
already under way, we need to take over the fossil fuel companies and
phase out their production with increased investment in renewables, to
reduce fuel prices for households and small businesses. 

But that means a global plan to steer investments into things society
does need, like renewable energy, organic farming, public
transportation, public water systems, ecological remediation, public
health, quality schools and other currently unmet needs.  Such a plan
could also equalize development the world over by shifting resources
out of useless and harmful production in the North and into developing
the South, building basic infrastructure, sanitation systems, public
schools, health care.  At the same time, a global plan could aim to
provide equivalent jobs for workers displaced by the retrenchment or
closure of unnecessary or harmful industries. 

Fat chance of that now.  Instead, millions face a cost of living
crisis of record proportions.  And don’t forget the prospect of a
new global slump in production, investment and employment. According
to the IMF, real GDP in the G20 countries (or more exactly 18 top
economies exc Saudi Arabia) fell in Q2 2022. But the inflation rate
continued to rise.

And the IMF notes, _“The global outlook has already darkened
significantly since April. The world may soon be teetering on the edge
of a global recession, only two years after the last one.”_  Jacon
Frenkel, head of the Group of 30 consortium of global policy makers,
summed it up: _“We have the energy crisis, we have the food crisis,
we have the supply chain crisis and we have the war, all of which has
profound implications for the economic performance of the world’_.

_MICHAEL ROBERTS worked in the City of London as an economist for over
40 years. He has closely observed the machinations of global
capitalism from within the dragon’s den. At the same time, he was a
political activist in the labour movement for decades. Since retiring,
he has written several books.  The Great Recession – a Marxist view
(2009); The Long Depression (2016); Marx 200: a review of Marx’s
economics (2018): and jointly with Guglielmo Carchedi as editors of
World in Crisis (2018).  He has published numerous papers in various
academic economic journals and articles in leftist publications._

* Energy
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* Fossil Fuel
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* Russia
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* Ukraine invasion
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* Natural Gas
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* inflation
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* European Union
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* cost of living
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* big oil
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* profits
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