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).
Subscribe to 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.
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.
-
Should you invest in UK equities?
The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
By Katie Williams Published
-
State pension errors: DWP urged to check for mistakes among divorced people
Former pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
By Ruth Emery Published
-
AstraZeneca CEO’s £1.8mn pay rise approved despite shareholder opposition
AstraZeneca hiked its dividend to persuade shareholders to accept CEO Pascal Soriot’s pay rise. Is he worth his salary?
By Dr Matthew Partridge Published
-
Adidas, Nike or Jordans - could collectable trainers make you rich?
The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
By Chris Carter Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published