DABERIAM XIX

October 2005

September was an extraordinary month; the two hurricanes being viewed in real time on the world’s television as they wrought havoc across the Gulf of Mexico was palpable. Real time genuine reality television generated a massive amount of smugness amongst the voyeurs in the rest of the world. To a frightening extent the reaction outside America and to a small extent in the liberal press in America, to the terribly human tragedy was viewed with little sympathy for the some million people who suffered. 

There seems to be growing evidence of extraordinary complacency in the political circles of Western countries. The disaster showed up the incompetence of the State Governments of the area whose long-term neglect contributed to the damage caused by the hurricanes, and the apparent breakdown of all the disaster planning, that now appears to be largely political rhetoric, that was supposed to have come out of the internal security budget post 9/11. The most worrying feature, however, is that I doubt whether any other country’s government response would have been any better. 

The economic fall-out of the two hurricanes has been a spiking in energy prices and a real awakening to the incredibly tight energy situation in the World. The good news is, the shock to the system has demonstrated in no uncertain terms the lack of capacity in the world’s energy supplies. Rita and Katrina destroyed 108 oil and natural gas platforms, and badly damaged a further 50 or so. The US Department of the Interior estimates that it is a negligible 0.5% of US oil production, and a somewhat higher percentage of refining capacity. The very tight supply situation has ricocheted around the world. American consumers are curtailing their fuel consumption, US vehicle miles travelled in July were already down dramatically year on year, the free market economy response but, most importantly, more recently Asian countries from China to Indonesia had to allow fuel prices to rise dramatically. 

In the UK the supply situation prompted the CBI to mount an attack on the Labour Government’s non-existent energy policy. The national grid which is responsible for operating the gas and electricity transmission network slipped out a forecast "that an average winter would require small cuts in supply to large gas users such as Gas Fired Power Stations, a really cold winter would face heavy energy users with substantial cuts". 

The Government response from Alan Johnston, the Trade and Industry Secretary has been that "domestic users will be protected!" so that’s all right! Industry does not matter. The Government’s longer term electricity generating policy predicts cutting Nuclear capacity from something over 20% down to something under 10%, roughly replacing it with renewables and an interesting category called ‘other’. At the same time the forecast shows a halving of coal generated electricity from over 30% to just over 15%, and the difference between being taken up by gas by 2020. 

I am not an expert on energy supply, but it is difficult to observe other than that this seems to be a very high-risk economic strategy. Apart from the fact that it will blow a hole in Mr Blair’s Kyoto promises. 

Apart from Britain, most other countries are beginning to take seriously increasing electricity generating capacity and endeavouring to diversity away from oil and gas. China, in particular, is building coal-fired power stations and upping its nuclear capacity, planning some thirteen new plants. The world, however, is facing and will continue to face a shortage of oil and gas and other commodities as industrialisation continues to grow at a fast rate in China and India. One of the perverse effects of the energy shortage is on agricultural products. Sugar, palm oil and other starchy product prices are being driven up dramatically as they are used to substitute the petroleum-based products. 

Inflation will inevitably pick up. Even China’s not-for-profit economy will have to pass on the increase in commodity prices to its customers in the rest of the world. The good news is, German and Japanese industries seem to be coming out of the doldrums. Painful corporate restructuring in the last five to ten years is bearing fruit. The US economy will receive a boost from the rebuilding required following the hurricanes and seems to remain hugely resilient. 

The building up of Government debt in the US and Europe, however, continues unabated. Twelve out of twenty-five EU countries are running deficits of over 3% of GDP, including the four biggest economies: Britain, France, Germany and Italy. Adding the EU deficits to the increased US borrowing will in the end push up interest rates. With commodity prices rising and Government borrowing rising, there is a certain inevitability that inflation will become an issue. The when will largely be, I believe, precipitated by some shock or tipping point in the trends. At the moment, the trends are relatively benign but something will come along to trigger a change of attitude. It’s anybody’s guess what the trigger will be, perhaps another hurricane, a major earthquake or, as interest rates rise the collapse of an international financial institution possibly in the early part of next year, 

In the meantime, let us enjoy a beautiful autumn.

Damon de Laszlo 
October 2005