Can a good recovery do damage? The answer is: yes, sometimes it can, if it triggers major imbalances. The capitalist mode of production is a source of imbalances, inequalities and asymmetries. This time, the imbalance is largely due to the states which have concocted an unexpectedly strong recovery, pulled along by private consumption, with their stimuli, subsidies, relief, tax cuts and zero-rate credits.
According to The Economist, the stimuli handed out by governments during the pandemic amounted to about $10,400 billion in the world, equal to one eighth of the 2020 gross world product in current dollars.
According to the April IMF Fiscal Monitor
, governments, additional expenditure and lost revenue
in the advanced economies were equal to 16% of the sum of their GDPs, in the face of losses which, in the final balance sheets, amounted to 4.5% of it. A good part of this went on government spending for welfare and capital allocations, but a sizeable share, especially in the United States, ended up in current accounts and in private spending, on durable goods, but also to cover debts and mortgages, and in gambling on the stock exchange or in cryptocurrencies.
The roar of fossil energies
The overdose of state interventions in the rich economies was only partly the result of the lessons of the global financial crisis, which suggested acting immediately and super-abundantly in order to avoid new waves of bankruptcies, populism and electoral revolts. But a sizeable part of the public interventions is set aside for investment in digitalising services and public administration and to accelerate the energy transition, i.e., the decarbonising of the economy, with the adoption of alternative sources to fossil fuels in the generation of electricity and the electrification of civil transportation.
The pandemic of the century, with the bottlenecks and labour shortages it has caused in many sectors, has overlapped with the electrical transition in a combination which has led the recovery onto the pathway of a new energy shock. The Brent crude oil price has exceeded $85 a barrel, as against the $40 of October 2020. In April, the IMF predicted a 30% increase in oil prices for 2021; in October 2021, the forecast doubled this in crease to 60%.
The price of natural gas in Europe rose by almost six times between the end of September 2020 and the end of September 2021, rising from $3.95 per million British thermal units (Btu) to $22.84; in the same period, the price of American natural gas at Louisiana’s Hub Henry tripled from $1.83 to $5.53 per million Btu, at an enviable discount to European prices. The United States is the world’s leading gas producer and covers all of its domestic production, while EU’s domestic production accounts for only 40% of its internal consumption.
The increase in natural gas prices in Europe has pushed up the prices of liquefied natural gas (LNG), exacerbating the competition between Asian and European purchasers: the price in a year has risen from $5 to $30 per million Btu; on the spot market, Japan is offering $56 for November deliveries. LNG imports to Europe fell by 15% with respect to last year, succumbing to the prices offered by Asia.
Coal, whose cut is the main target of the green economy, is following the other fossil fuels: between October 2020 and today, the price tripled, from $76 to $232 a tonne, Growth requires energy and demand puts pressure on all the segments of power generation. China, which accounted for 54% of the world’s consumption of coal in 2020, has reopened or boosted 78 mines in Mongolia and has reactivated imports from Australia, in spite of the bitter controversy with Canberra.
Asynchronous cycles between the old and the new
The deadlines set by the Paris climate deal were accelerated by the European Commission in September 2020 with the aim of reducing EU’s greenhouse gas emissions by at least 55%
by 2030, with respect to its 1990 levels. This acceleration was codified in July with the Fit for 55
package, together with other targets including zero emissions
in transport by 2035, which would mean banning sales of fossil-fuelled vehicles. The accelerations announced or outlined in international seats have led to a fall in investment in prospecting plants, in the extraction of the more polluting fossil energies and in the power stations which use them. Half of the 320 coal-fired power plants in Europe are expected to close down by 2030.
The key element in the energy situation is that, in the present peak of the Keynesin economic cycle, the new investment in clean
energy, in spite of important growth rates, is not yet able to guarantee enough energy to make up for the drop in the capacity of dirty
energies. Since 2015, overall investment in fossil fuels has fallen by 40%. One tenth of Europe’s electrical power is tied to wind: according to various experts, wind energy was the Achilles’ heel of electricity generation, especially in Germany, because of the poor air flow in 2021. The Economist speaks of the first big energy shock of the green era
and places it within a shortage economy
framework, understood as relative shortage of the supply. It warns that, without a decisive reform — which implies a global carbon price which is high enough to reduce emissions and increase fiscal resources — there will be more energy crises and, perhaps, a popular revolt against climate policies
Seasonal, technical, economic and political factors mingle in the basic imbalance between old and new energies. One aspect is the one defined by Rana Foroohar (a Financial Times editorialist) as asynchronous national recovery cycles
, in which differentiated vaccination rates (58% in the advanced economies, 36% in the emerging countries, and 5% in low-income countries), together with different rates of supply and demand adaptation between countries and sectors, create bottlenecks in the production and distribution chains.
We find an example in the figures of the annual OPEC Statistical Bulletin, published in October. In 2019, world demand for and production of crude were balanced, at respectively 100.03 and 100.12 million barrels per day (Mb/d); in 2020, the closures and labour losses caused by the pandemic reduced world demand to 90.73 Mb/d, while production fell more slowly to 93.63 Mb/d; in the first quarter of 2021, supply and demand balanced themselves out again, but at more than 7 Mb/d lower than in 2019, at respectively 92.82 Mb/d and 92.69 Mb/d; with the take-off of the recovery in the second quarter, demand quickly exceeded production by about 1.8 Mb/d, at 95.62 Mb/d as against supply of 93.86 Mb/d.
Gas and bills
There was a similar trend in the natural gas market. According to Mike Fulwood, of the Oxford Institute for Energy Studies, in the year of the lockdowns demand for gas fell while production continued to grow, bringing prices to historically low
levels. This year, the situation is the opposite: supply has stalled, but the accelerated demand has taken prices to historically high
levels. Fulwood lists a number of the coldest in forty years, in spite of global warming — made demand for gas leap in Asia; the fall in Latin America’s hydroelectrical production deprived Europe of various LNG supplies; malfunctions in the LNG plants slowed down production; the lack of maintenance during the pandemic hindered the arrival of Russian gas in Europe; and the storage of liquefied gas in Europe and Asia has been replenished on different timescales. In reply to Brussels’ complaints about a reduction in gas supplies, Moscow points out that one reason for the price increase is to be found in the EU’s abandonment of long-term oil contracts and the indexing of gas on the basis of oil prices, in favour of prices negotiated on the market.
Natural gas — writes Simone Tagliapietra of the Bruegel Institute — provides one fifth of Europe’s electrical energy and is crucial to the formation of electrical energy prices: this would lead to the risk of an increase in bills to the tune of about €150 billion, with a high potential of social rejection.
The IEA against OPEC again
In the face of the dilemma posed by the energy shock (whether to dole it out by degrees or to accelerate the energy transition), the International Energy Agency (IEA) places itself at the head of a powerful group of companies, central banks, institutes and investment funds in favour of acceleration. OPEC places itself at the head of the opposing group, which is just as combative and numerous.
The latest IEA yearbook (World Energy Outlook 2021) is presented by its executive director Fatih Birol as the guidebook
for the next Conference of the UN decision-making body on climate change. Of the four scenarios presented in the fore. cast for 2050, the one preferred by the authors is Net zero emissions by 2050
which we can compare with the scenario predicted for 2045 by OPEC in its publication World Oil Outlook 2045 — in a nutshell, represented by the composition of the scenario in the final year of its forecast. The comparison is approximate, both because the final deadline is different and because the OPEC scenario regards the composition of primary demand while the IBA’s looks at the mix of supplies. However, from the political point of view, the two scenarios represent the maximum programmes
of the two bodies. One report is the antithesis of the other.
As the IEA sees it, at the end of the period, oil will account for 8%, but in OPEC’s opinion, for 28%; coal for the IEA will account for 4%, but for OPEC for 17.4%; gas 11% for the IEA, but 24.4% for OPEC; nuclear energy 11% for the IA, but 6.2% for OPEC; hydroelectricity 6% for the IEA, but 3% for OPEC; biomass energy 19% for the IEA, but 10.5% for OPEC; and wind power, solar power and other renewable energies 41% for the IEA, but 10.4% for OPEC. The green economy will be a battlefield, with line-ups which are not entirely a foregone conclusion. For Europe, which is the main supporter of energy neutrality
on the 2050 horizon, the significance of the battle is energy rearmament.
A useful Cassandra
Philip Verleger is an American economist specialised in energy markets, the director of the Carter administration’s Energy Planning and Policy Office in the 1970s, and now a member of the Peterson Institute. In a note for the Energy Intelligence Group, he expresses a sorrowful and melancholic opinion on the ongoing energy shock, attributing to it a more harmful potentiality than the oil crisis of the 1970s. He states that the 1970s crisis regarded oil alone, whereas the present one regards all fossil fuels. Verleger observes that this time the energy tax
will be collected more by gas and coal than by oil. He believes the main factor of the soaring prices is the belligerent hoarding of fuels on the part of China and predicts that, if prices remain at their present level for another six months, the economy will fall into the most severe recession in 50 years. All of the author’s warnings may contain a certain amount of truth to be kept under observation. However, it seems to us that, more than a catastrophe, they herald the toughness of the battle for global energy restructuring which we have also observed in the comparison between IEA’s and OPEC’s scenarios.
The most interesting part of Verleger’s analysis is to be found in the graph we have reported: this proposes an estimate of the cycles of the OECD countries’ overall energy expenditure (and not only its income) over a more than 50-year period: from the 1% of the years of the so-called economic miracles
, to the almost 11% of the second oil crisis, to the long 20-year period of what Ben Bernanke called the great moderation
with an average of 5%, up to the 9% of the global financial crisis.
— Capelluto, Nicola. Nuovo shock energetico
Lotta Comunista, , p. 21