Jupiter Merlin Weekly: Warm weather confounds Putin’s plans
The Jupiter Merlin team discuss energy markets, as warm weather in Europe takes pressure off demand, but consumers and business alike continue to feel the pinch.
If Vladimir Putin was gambling that closing the gas taps to Europe ahead of the winter would subsequently create a state of twenty-first century dystopian misery (although he has certainly achieved that in large parts of Ukraine) and precipitate a major political crisis in the EU, so far that strategy has failed. The weather decided not to cooperate with his big plan. He has surely been a malign catalyst behind runaway inflation and incipient recession but the lights remain on, factories are still humming and the inhabitants of those member states previously reliant on Russian gas are still able to heat their homes and to cook.
Having noted that prices have not only fallen 80% since August but are back to where they were before Putin launched his invasion of Ukraine last February when Dutch TTF was €67/MWh, as Nick Robinson on the Today Programme was moved to ask of a business leader this week, “so what’s all the fuss about?” The hapless interviewee failed to make his point, blethering on about how difficult it all is.
The nub of the issue is what was not discussed: that even at €68/MWh and having more than halved in a month, the price of gas is still significantly higher than industry was used to paying before Putin started weaponising it, using it as a geopolitical lever, in August 2021. For the fact is that until June 2021, the wholesale gas price in Europe had never been higher than €30 in more than 10 years since the economic recession in the aftermath of the Global Financial Crisis; for virtually all of 2019 and 2020 it was less than half that, below €15/MWh (for a couple of months early in the pandemic, it was even below €5/MWh).
Essentially, industry was conditioned to thinking that energy in the form of gas was available literally on tap, unconditionally, and that it was cheap and its price nominally relatively stable. It was an important input, especially in heavy-use industries such as glass manufacture, chemicals, fertiliser production (a by-product of which is CO2 used in the carbonated drinks industry, food production and packing), and of course, electricity generation, but one whose price could be largely removed from the business margin equation. Putin exploded that myth.
Inevitably, looking behind the scenes the picture is far less simple beyond a superficial view. Other western governments have also been active in developing their own state aid packages to help with the cost-of-living crisis and to mitigate against inflation. Each is tailored to its own unique domestic economic and political circumstances however much global energy costs are a common problem. The result is far from a level playing field. Take Germany as a good example: its energy relief package for industry only began only on 1st January but lasts until April 2024, a year after ours has been pared back; further, in the German programme there is the facility for companies to re-sell their surplus specified allocations of subsidised gas back to the market (one Belgian think-tank estimated that a big gas-user such as chemicals giant BASF could potentially net a windfall gain of over €2bn through such a mechanism). From a UK business perspective, in a highly competitive environment it is easy to see why British companies feel bruised that they are being placed at a significant disadvantage.
Among commodities, energy is unique. It is the only one traded internationally which all of us uses directly, daily and in quantity in its raw or refined state; further, in the case of oil, a third of global production is controlled by OPEC+, a cartel which fixes production quotas, something which is illegal in any other environment. In some countries, energy is nationalised, in others it is fully privatised while a third model such as ours is euphemistically what might be termed a ‘regulated hybrid’ or more prosaically a ‘bit of a mess’.
But what the completely unconnected events (war and pestilence) of the past three years have reminded us of is that energy can never be taken for granted. Over four decades since the 1980s global developments have lulled us into a false sense of security that energy had a diminishing ability to cause significant economic damage, notably its effect on inflation. The landscape has changed. And all of this before we really get under way with the biggest of industrial revolutions when in less than three decades governments attempt virtually to replace the source of fuel which has powered the development of global society for the past three hundred years.
For investors, opportunities abound. However, the path remains liberally strewn with cowpats for the unwary, particularly as the western democracies on their short-term electoral cycles remain acutely sensitive to the variable and fickle winds of public opinion, are susceptible to lobbyists of all varieties and who have an infinite propensity to meddle without always understanding the consequences.
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