Brace yourself for the return of rationing
Russia is turning off the cheap energy. That is already leading to belt-tightening, says Matthew Lynn. Who will suffer most, and which sectors will thrive?
Right across Europe, governments are cutting back on power usage to get ready for what looks likely to be a harsh winter.
Berlin has stopped illuminating public monuments at night; Hanover has switched off the hot water in showers in public buildings. Paris is stopping illuminated signs and preventing shops from running the air conditioning while their doors are open. The Spanish are ditching their ties to make stuffy offices more bearable.
Why? Russia has reduced its supplies of gas into Europe, making it impossible to fill crucial storage facilities over the summer, and may well limit supplies even further over the winter when demand is at its highest. Emergency plans are being put in place to cope with that, mainly by rationing the use of energy.
A Covid-like blow to the economy
That is going to have a huge impact on the economy in particular sectors, and on specific companies. It will be just as much of a blow as the Covid-19 lockdowns. The UK is less at risk than Germany, France and Italy. But that doesn’t mean it can’t happen here or that we won’t be affected by closures on the other side of the Channel. Investors and businesses need to prepare for the rationing economy.
How? First, avoid heavy industry. There are a handful of power-hungry industries that can put production on hold for a month or two, or that can ship in supplies from elsewhere, without the world coming to a standstill. Chemicals, for example, or steel, or building materials, or paper and pulp manufacturing. Many of the biggest German chemical plants use as much energy by themselves as medium-sized towns. Many of them can be closed for a few weeks. Sure, that will snarl up supply chains, especially on construction sites where work may have to stop as well. And companies will take a huge hit to their profits as they will almost certainly have to keep paying their staff (although some form of furlough scheme may be available). But it will be the easiest way for governments to save a lot of power with a single measure.
Next, avoid energy-intensive services. Shops use relatively small amounts of energy, so long as they turn the heating down and don’t leave the doors open in the winter. Garages don’t use a lot of electricity. Other services use far more. A gym needs a lot of showers and it requires hot water. Restaurants burn up a lot of power in the kitchen. Car washes are energy intensive and hardly essential and the same is true of all those sunbed salons on the high street. In a second round of closures, many high-energy, non-essential services may find themselves limited to operating three days a week if they are not closed down completely – and their profits will be hammered.
Third, expect a return to working from home. Transport networks use a lot of power, and so do offices. Where possible, they may well be closed down. In fact, the rationing economy will look a lot like the Covid-19 lockdown except with restrictions on all those fuel-hungry home deliveries.
The sectors that will do well
Finally, investors should consider those essential industries where the electricity will keep flowing. There are plenty of sectors we simply can’t do without. Food and drink manufacturing, for example. The supermarkets. Hospitals and healthcare facilities will run as normal no matter how much power they are consuming. The broadcasters will still be working to keep us all entertained and no one is going to switch the internet off (although bitcoin may go up in price as it is hard to imagine anyone will be allowed to mine any more, at least in Europe).
Essential, basic industries and services may not exactly thrive, but they will do a lot better than most others. Likewise, expect companies generating alternative energy, especially wind and solar, to boom.
Energy rationing will hit the economy hard. Some estimates suggest Germany could see a 7% fall in output; it could even be a lot higher than that. But the impact will be uneven. Companies and investors need to start getting ready for that now – and long before winter approaches.