On September 5th, Putin turned off the Nord Stream 1 pipeline – Europe’s main source of Russian gas. It would not be turned back on, the Kremlin announced, until the “collective west” lifts sanctions against Russia.
With the exception of Viktor Orbán in Hungary, Zoran Milanović in Croatia, Western leaders have shown no interest in lifting sanctions. So Europe will have to make do without Nord Stream 1 for the time being. This is not going to be easy.
In the long-term, Russian gas can be replaced with gas from other sources, or with other forms of energy. But in the short-term (the next 1–5 years, say) Europe will simply have to use less gas. As analyst Sarah Miller noted back in March, “Europe imports more pipeline gas from Russia than the entire LNG export capacity of either the US or Qatar”.
Less gas, of course, means higher prices. In the U.K., around 40% of electricity comes from burning gas. And the fact that we don’t import much from Russia is irrelevant. Britain buys gas from the international market, where prices have spiked due to lack of supply from Russia.
It was recently forecast that, by April of next year, the average British household would be paying six times more for energy than they had been two years before – over £6,000 per annum.
In response, Britain’s new Prime Minister, Liz Truss, announced that prices would be capped at £2,500 per annum for the next two years, along with “equivalent” protection for business. This bailout will cost an eye-watering £170 billion – about 5% of GDP or what Britain spends on the NHS each year.
Yet critics have panned the idea, which does little to address the root cause of the crisis: scarcity. In the absence of Truss’s price cap, households would have a strong incentive to conserve energy, since they’d be facing the full market price. But now that incentive is far weaker.
By April of next year, households will be paying only 40% of the cost of their energy bill – with the rest being covered by the taxpayer. Of course, households and taxpayers are mostly the same people. Which reminds one of Frédéric Bastiat’s description of government as “that great fiction by which everyone tries to live at the expense of everyone else”.
This isn’t quite true, however, as Truss plans to borrow the money. So what’s really happening is that younger Britons are footing the bill for older ones – via higher future taxes.
And because Truss’s price cap removes much of the incentive to economise, it not only burdens taxpayers with more debt, but markedly increases the risk of blackouts.
There’s another snag. If we get a particularly cold winter, market prices could go even higher – putting the government on the hook for much more than £170 billion. As analyst Javier Blas notes, “the UK Treasury effectively took the biggest short position ever in the gas and electricity wholesale markets, without a hedge”. Was it the right move? “No, no, no,” he says.
A better proposal would be to leave the energy market intact, while providing financial support to households and businesses. This way, there’d still be a strong incentive to economise.
Liz Truss likes to model her outfits on Margaret Thatcher, but she appears to have modelled her energy policy on John McDonnell. (The self-described “socialist” has called for strict price controls on energy.) Will Truss turn out to be another Prime Minister, like Boris, who pays lip service to the free market, while doing her best to undermine it?
To join in with the discussion please make a donation to The Daily Sceptic.
Profanity and abuse will be removed and may lead to a permanent ban.