The energy price shock is all everyone can think about and is absorbing almost the entire political bandwidth in most countries. That, of course, is part and parcel of Russian president Vladimir Putin’s plan: to cause enough political trouble domestically in the west to distract or discourage Ukraine’s friends from supporting the country against his invasion. As I warned in my column this week, western and in particular European leaders must not allow that divide-and-rule strategy to work.
I noted last week that when energy production is at full capacity the “marginal dog wags the aggregate tail” in energy pricing. (This has happened as Putin has artificially curtailed the capacity available to Europe, which in any case is rightly working to reduce Russian energy sales because of his war). Put simply, prices have shot up far above the cost of extraction, production and generation. The result is a massive redistribution of the economic value of energy from consumers to producers.
Most of the politics has focused on how that redistribution plays out within countries: how to support consumers, tax producers and reform pricing processes. But we should also pay attention to the redistribution across countries. The transfer of money from energy importers to exporters is astounding. Consider Saudi Arabia: in the previous five years, its exports typically hovered around $20bn a month. Since Putin’s full-scale invasion of Ukraine, the value of its monthly exports has shot up to $40bn.
The chart below displays the percentage changes in export and import values, and the difference between the two, for a number of other countries. The changes are measured between the last four available months (so after Putin attacked Ukraine) compared with the same four months last year. The chart orders the countries by the size of the difference between export and import growth. At the top sits Norway, whose exports earnings have nearly doubled with imports barely changed. At the bottom is India, whose import bill has increased 50 per cent but whose export earnings only grew 15 per cent. For most countries, their position clearly reflects their degree of energy import dependence.
Apart from the enormous scale of these numbers, they show that economic interests are not completely aligned with the diplomatic faultlines of the war itself. These set a united liberal democratic world of advanced economies in support of Ukraine against Russia and its few close allies. Most of the emerging economies are staying on the sidelines at a greater or lesser distance from the two clear sides. But within each group, the energy crisis hits countries differently.
On the liberal democratic side, most but not everyone suffers from record energy prices. It is fair to describe Norway, in particular, as a war profiteer, raking it in from high prices for its exports of oil, gas and electric power — to the point that some have called for it to supply its friends at below-market prices. Other traditional commodity exporters such as Canada and Australia are also doing more than fine.
Note that the US has not seen a big deterioration in its trade balance in the past year of energy price rises. That stands to reason: the country has in this millennium gone from net energy importer to largely self-sufficient. (Instead, the US trade balance took a hit in the first year or so of the pandemic, when consumers in America shifted their spending from services to goods at a unique scale. As I have argued before, this, and not overall excessive demand, was the main driver of global inflation before the past year’s energy games by Putin.)
There are also significant differences among the G20 economies outside the rich liberal democracies. Saudi Arabia and other petrostates are obviously beneficiaries. But Indonesia, too, has seen a big jump in export earnings. (So has China, but that probably has more to do with the global recovery from the pandemic than with energy trade.) Meanwhile, other big emerging economies in addition to India, such as Brazil, Turkey and South Africa, are facing import bill increases that far exceed any export growth they may have had.
To get a handle on the magnitude of these shifts, consider this: the total import bill for energy-poor EU and Japan put together is more than $100bn a month higher since Putin started his war than it was one year ago. On an annual basis, that is more than $1tn that largely reflects more money paid from energy importers to exporters.
And then there is Russia which, of course, has racked up enormous surpluses. This is not just a function of high energy prices but also the collapse in its imports. But still, it has made enormous amounts on selling oil and gas to its enemies this year. If numbers out of Russia can be trusted these days, its trade surplus has more than tripled since last year. That profit is highly vulnerable, though. In the first seven months of the year, gas export volumes have fallen 12 per cent since the same period in 2021; the continued squeezes on the gas supply to Europe mean that drop is now a lot bigger.
And Europe is clearly determined to make itself independent of Russian gas before Putin closes the taps for good. A few days ago, news came that Germany’s gas storage was filling up faster than planned. France responded to Putin’s halting of gas deliveries to its main utility Engie this week by emphasising that its reservoirs were 90 per cent full. That the frantic quest to fill reservoirs before the winter is proving successful may be part of the abrupt fall in gas prices at the start of this week (see chart).
Indeed some observers say that once these reserves go from being filled up to being drawn down, the market could turn significantly. In any case, the view early in the war that it would be better to wean ourselves off Russian gas voluntarily before Putin cuts it off at a time of his choosing seems ever more like the right call.
Other readables
About the link between marginal energy prices and production costs — my colleagues have put together a list of options for the EU as the bloc discusses how to reform electricity pricing.
In a few days Liz Truss is expected to become the next UK prime minister. Two new reports out today offer suggestions for how to think about reviving UK economic growth and investment. One is from the BCG’s Centre for Growth; the other from the Institute for Government. Both suggest that policies have to be a lot more complex than simply pushing for tax cuts.
The UN’s report on the Chinese government’s mistreatment of the Uyghur population has now been published. The FT has an explainer.
Reasons for the Federal Reserve to take a pause in its tightening.
Britain ignores striking dockworkers at its peril.
Edward Lucas sensibly proposes to make corporations’ access to the legal system conditional on ownership transparency.
Numbers news
Eurozone inflation hits another record high.
Source: Economy - ft.com
