Carrots and sticks: why energy prices won't fall for a long time
Energy is going to be more expensive for a long time before it gets both cleaner and cheaper.


We often write here about the global economy being at an inflection point. Many of the great trends that have shaped the last few decades are coming to an end. The age of cheap labour is ending as politics restricts easy migration and the world’s population ages. The easy growth, productivity gains and deflationary impulses from the integration of China into our economic systems are all fading. At the same time companies and countries are changing the way they think about supply chains (just in case rather than just in time). All this is disruptive and inflationary in itself. But there is one more factor to add into the mix – the price of energy is rising and going to keep rising. This matters.
In 2013, in his book Life After Growth, Tim Morgan noted that the real economy is at heart nothing but an energy equation. Without a steady supply of cheap energy (to provide everything from our fuel to our chemicals and fertiliser) there is nothing to drive long-term growth. What matters then is how much energy costs to produce.
There was a time when we didn’t need to worry about this much: when we could use “rudimentary wellhead equipment to access billions of barrels of energy in the sands of Arabia”, we got “at least 100 units of energy for each unit invested in the infrastructure” (the energy return on energy invested – EROEI – was 100:1). It didn’t last long. In 1990, the global energy EROEI was about 37:1. When Morgan was writing it was 14:1. Today there is much debate on EROEI – you will find endless papers online claiming that fossil-fuel numbers are lower than once thought (once refining and transport are taken into account) and that renewable numbers are higher than they first look (it depends on the life of each project, for example).
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But however you cut it, one thing that is coming out of the COP26 meetings in Glasgow this week is a promise that energy is going to be more expensive for a long time before it gets both cleaner and cheaper.
Carrot and stick will both play a role. The global financial sector seems set on defunding the fossil-fuel industry and we should expect to see rising carbon prices layered on top of the supply crunch that may cause. We should also probably expect to pay higher taxes to finance the subsidies government will keep offering to low-carbon energy production. As renewables scale up, notes Arthur Kroeber of Gavekal, we should expect the end price of electricity to rise too – the intermittency of solar and wind means we must invest more in spare-capacity storage and grid upgrades. Other problems will come in the sharp rise in demand for the metals renewables need – lithium, cobalt and nickel in particular – and in the waste created by replacement cycles for solar panels and turbine blades. None of this is insurmountable. But it is disruptive (and the more serious anyone is about net zero, the more disruptive it is) and it is almost certainly quite inflationary. We might (in many decades) end up with a clean energy system. But getting there is going to be an inflationary journey into “the unknown and the unpredictable”.
This might all seem a bit long-term (carbon prices won’t soar the minute the 400 private jets that landed in Glasgow this week leave), but it should add to the list of things making investors feel a little uneasy about valuations. Market corrections are impossible to forecast. But it really does feel like our next one is a tad overdue.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Millions of state pension records ‘set to be deleted’ – putting thousands at risk of never getting their money
Thousands of families could miss out on money owed to them if the government deletes historic state pension records.
-
What makes you wealthy in the UK? Could it make you a target in Rachel Reeves’ Budget?
Wealthy Brits could be at risk from a Budget tax raid – but how much money do you need to be considered wealthy in the UK?
-
Pierre-Édouard Stérin wants to make France great again
Conservative billionaire Pierre-Édouard Stérin is seeking to lead a political and spiritual renaissance across the Channel. The planning looks meticulous
-
Global investors have overlooked the top innovators in emerging markets
Opinion Carlos Hardenberg, portfolio manager, Mobius Investment Trust, highlights three emerging market stocks where he’d put his money
-
Pinewood Technologies: a drive for growth
Pinewood Technologies’ platform is one of the best in the business. Investors should buy in
-
'EV maker Faraday Future will crash'
Faraday Future Intelligent Electric is failing dismally to live up to its name, says Matthew Partridge
-
Investors should cheer the coming nuclear summer
The US and UK have agreed a groundbreaking deal on nuclear power, and the sector is seeing a surge in interest from around the world. Here's how you can profit
-
8 of the best houses for sale with follies
The best houses for sale with follies in the grounds – from a five-storey Victorian Gothic tower in Tonbridge, Kent, to a former mill in Oxfordshire with gardens that include a folly on an island in a lake
-
A tale of two Reits – why performance matters for valuation
AEW UK and Regional are two Reits that are valued very differently, despite a shared focus on properties outside London
-
Healthcare stocks look cheap, but tread carefully
Shares in healthcare companies could get a shot in the arm if uncertainty over policy in the US wanes, but are they worth the risk?