The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Matthew Lynn

Anyone looking at their heating bills over the next few months will be painfully aware that the price of gas has soared. Over the course of 2021 it has more than quadrupled. In frantic trading last week it was moving upwards by more than 20% a day. Why? Renewable energy sources, an important part of the mix, have not been generating as much power as expected and massive stimulus programmes, along with the bounceback from the pandemic, have led to a surge in demand. 

The energy market has not seen price rises quite so dramatic since the “oil shocks” of the 1970s, when the producer’s cartel Opec discovered it could hold the developed world to ransom by turning supply on and off. The result was an era of “stagflation”, that is, of rapidly rising prices and stagnant growth, and a shift of power to the Middle East. The turmoil it unleashed destroyed governments on both sides of the Atlantic. 

It’s not the 1970s, but energy still matters

It is not likely to be so dramatic this time around. We use far less energy as a percentage of GDP than we did 50 years ago. It accounts for about 4% of GDP compared with a peak of 11% in the 1970s. Services are far more important than they used to be, we are far more energy-efficient, and all the investment in green energy means we do at least have alternatives that are growing in importance, even if they can’t replace natural gas yet. But this doesn’t mean that huge increases in energy prices don’t matter. In truth, they will impact the economy in three significant ways. 

First, they will slow down growth. Rising energy prices will suck demand out of every major economy. Whether it is higher costs for industry or rising prices for consumers doesn’t make much difference. Either way, people will have less money to spend. True, some of that money will be recycled, in that the energy-exporting nations will be able to buy more. But earlier commodity cycles show that the process is rarely smooth. Plenty of demand will be lost and every major economy will struggle. Worst of all, it will come at a time when they are still just starting to recover from the pandemic. 

Second, expect an industrial recession. Soaring energy prices are a pain for consumers, but can mostly be absorbed by trimming a few costs elsewhere. For many industries that use a lot of power, however, it can be catastrophic. If costs can’t be passed on to consumers – and if there are alternatives to what is produced, or the product is not essential, then often they can’t – the company may well be in real trouble. Industries such as chemicals, building materials, paper, glass and food production may well see widespread closure.

The more a country relies on industry, the worse it will be hit – most services don’t use a lot of power – so within Europe expect Germany and Italy to suffer the most. The precise impact will vary. Poland, for example, an increasingly important part of Europe’s manufacturing base, mainly uses domestically produced coal rather than imported gas (more than 70% of Polish electricity comes from coal). The result? Polish factories will be even more competitive than their German rivals.  

Shifting geopolitical currents

Finally, expect to see some major geopolitical shifts. After the oil shock of the 1970s, all the Opec countries, and especially in the Middle East, became a lot more assertive. They had plenty of money – and money is power. This time around it won’t be any different.

Russia, no stranger to power politics, is already demanding more in return for ramping up its production. It is the biggest gas exporter in the world by a large margin and it is already benefiting from that. The Moscow stockmarket is up 60% in the last year, hitting an all time high. Russia will soon be a lot richer and a lot more assertive around the world (and it was already aggressive to start with).

Qatar is also a major exporter – if you were expecting a boycott of next year’s World Cup over its appalling treatment of foreign workers, forget it. It isn’t going to happen. Countries with gas to export are now in a far stronger position. 

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