Energy

Stock markets are tumbling, but given the tide of economic news, that’s hardly surprising. The S&P 500 index dived into bear market territory – 20 per cent down since January – after a rise in US inflation for May. Our own FTSE indices reacted badly to an unexpected 0.3 per cent drop in UK GDP for April. Interest rate rises predicted on both sides of the pond this week will make investors jumpier still. So expect further falls in markets that have been driven by weight of cheap money to stay unnaturally high despite an increasingly bleak backdrop. And wait for the turn. When might that be? When investors think they can see beyond the inflation spike and pick value among depressed stocks.

After the Jubilee dream of a lovely lost Britain, back to reality with a face-slap: the reality of the £8 pint of beer, the £8-plus gallon of diesel and the death throes of a Downing Street regime that has no discernible answers to the cost-of-living crisis. All of which takes me back to some questions I’ve been pondering for a while: whether the UK faces higher inflation and a deeper downturn than the rest of the western world, if so why, and who we should blame. By way of caveat, let’s recall the shifting pattern of Covid statistics over time: just because the UK topped April’s G7 inflation table – at 9 per cent, ahead of 8.3 per cent in the US and 7.4 per cent in Germany – doesn’t mean we’ll still look worst when this is all over.

A slip of the tongue George W. Bush condemned a political system where one man could wage a ‘brutal and unjustified invasion of Iraq’ before correcting himself and saying ‘Ukraine’. Some other Freudian slips by US politicians: – In the 2012 US election Senator John McCain, who had been the Republican candidate four years earlier, made a speech in which he attempted to look forward to a Mitt Romney presidency, but somehow managed instead to say: ‘I am confident that with the leadership and the backing of the American people, President Obama will turn this country around.’ – At another event in the same election, Romney himself introduced his running mate, Paul Ryan, as ‘the next President of the United States’.

The Financial Times story on Rishi Sunak looking at a possible windfall tax on energy firms captures how difficult such a tax is for any government, especially a Tory one. Because it begs questions why, when electricity suppliers suffered unsustainable losses in autumn and winter, when under the price cap they suffered huge and unsustainable losses – what you might call a reverse windfall – they were allowed to go bust. If you believe in capitalism and competition, you believe in swings and roundabouts: windfall profits in good times are the obverse of extreme losses in the bad. Kwasi Kwarteng repeated that mantra as failing electricity suppliers would not be bailed out.

In principle, the UK’s energy price cap is supposed to provide a buffer for consumers who might otherwise see their energy bills go through the roof. But governments can’t control international energy prices: a lesson that has been learned the hard way over the past six months, as dozens of energy companies have gone bust, unable to raise prices for customers to reflect increasing wholesale costs. Meanwhile the cap has not stopped bills from skyrocketing: Ofgem’s last price cap went up by 54 per cent, taking the total cost for an average household to just under £2,000 per year.

BP’s ‘underlying’ first-quarter profit of $6.2 billion, compared with $2.6 billion in the first quarter of 2021, was a direct reflection of the surge in global energy prices. Coming 48 hours before polling day, it also looked like a gift-wrapped on-time delivery for Sir Keir Starmer and his claim that a windfall tax on ‘excess’ profits of North Sea oil and gas extractors would knock £600 off the energy bills of ‘those who need it most’. Perhaps anticipating the BP announcement, Rishi Sunak last week seemed to trim his opposition to a windfall tax, telling Mumsnet ‘of course that’s something I would look at’ if energy companies fail to invest in the right sort of projects.

Russia is turning off the gas to Poland; the country’s state-owned gas supplier has refused to pay Gazprom in roubles. Bulgaria has also said that Russia would shut off their gas supplies. This is a serious escalation and raises questions about how other countries will respond to the demand. The risk of EU unity fracturing is growing. For Vladimir Putin, the rouble demand serves an important geopolitical purpose: splitting the West. What Germany and its energy buyers will do is critical. Circumventing the sanctions, as it seems Germany is doing, especially while other EU countries are having their gas shut off for adhering to sanctions rules, will break EU solidarity. And it will add fuel to an already-raging dispute between Poland and Germany.

This morning’s retail sales update isn’t pretty. Sales volumes fell by 1.4 per cent last month, following a 0.5 per cent drop in February (revised, and worse, than the original estimate of 0.3 per cent). The biggest fall came in non-store retail shopping: almost an 8 per cent month-on-month fall. However, the Office for National Statistics points out that overall sales volumes are still roughly 20 per cent higher now than they were pre-pandemic. But the recent drop indicates that the cost-of-living crisis is already worsening, as inflation – now at 7 per cent – is taking its toll on real incomes and is already prompting changes in consumer behaviour. As Capital Economics notes today, the 9.

Remember how David Cameron’s government was going to end Nimbyism by having local communities vote for new housing developments on their doorsteps? That didn’t end so well. Last October, following a shock defeat in the Amersham by-election, the Prime Minister gave up on building more new homes in the shires in favour of reverting to the line of least political resistance: the old favourite of trying to solve the housing shortage by building more new homes on brownfield land in the North. Why, then, does the government think it will be any more successful trying to persuade us to accept wind farms on our doorsteps?

The government's delayed energy strategy is finally due to be released this week. The Prime Minister is due to unveil his plans on Thursday, which will supposedly ensure that the UK is self-reliant on energy supply after Russia's invasion of Ukraine. Not that the proposals will lead to much change overnight. Instead, they are focussed on ensuring self-reliance in the long term – with many of the plans likely to take decades to come to fruition.  So, what's on the agenda? Part of the reason the energy strategy has been delayed several times is a difference of opinion between the Department for Business, Energy & Industrial Strategy, No. 10 and the Treasury.