The night is darkest…

On the face of it, energy prices- domestic and commercial – look set to sky-rocket. Average domestic bills are forecast to rise horrendously over the winter (we will know more on Friday) from around £2000 for an average household to perhaps as much as £6000. The effect on Businesses is equally worrying. Add to that an inflation figure which some economists are predicting may reach 18% with concomitant increases in interest rates and you a have a perfect economic storm of a kind we have not seen at least since the 2007 banking crisis.So where’s this all coming from? The total cost of the 320 Billion Kilowatt hours of energy which we consume in the UK was about £35 Billion in 2020; it is about £65 Billion today- close to double. Petrol was 60p a litre in 2020, it came close to £2 a litre recently before falling back a little. Crude oil is trading just under $100 a barrel; It was around $20 a barrel as recently as 2020 (but never forget it was over $100 back in 2014.).Most observers will have a view about what lies behind all of this (although none foresaw it coming.) It’s a product of the Global economy. It’s an international shortage of oil (Saudi could pump some more if it wanted to); it’s a sharp increase in consumption post- pandemic; its Brexit (although slightly hard to see a cause and effect from Brexit); it’s from the war in Ukraine (without doubt); it’s from political weakness in the West- Macron; Chancellor Sholtz; a weak and aging President Biden; and of course political turmoil in the UK- all of these things cannot have helped. It’s the convergence of many events and influences producing a perfect economic storm.Everyone - economists, politicians, businesses and the general public are plain that “something must be done about it”, but none seem to have much clear idea of what that should be. Those who call for energy prices to be ‘frozen’ are ignoring the reality that if customers are paying £35Billion for their energy, but the producers have to buy it at £65 Billion, it won’t be long before the energy companies go bust. The reality is that oil and gas are internationally traded commodities with a fluctuating world price. Consumption exceeds demand and the price goes up and vice-versa. There are those who argue that the UK is self-sufficient in energy (the 318 billion kwh we produce is 103% of our consumption), and that we should therefore cut ourselves off in some way from the International market, peg the prices at some affordable level and wait for the storm to blow over. But I fear that, attractive as that may sound, withdrawal from the International market is neither possible nor sensible. If crude oil is trading at $100 a barrel, then why would BP or Shell sell it in the UK for -let’s say- $20 a barrel. If they did so they too would rapidly go bust.The likelihood is that some kind of a solution will be reached perhaps incorporating a Windfall Tax on the producers being used to lessen domestic and business bills; perhaps a reduction in VAT or green elements of the bills; perhaps an increase in production (renewable or Carbon based; how about fracking in the longer term); a reduction in consumption as a result of the higher prices; and my own preferred solution- some kind of levelling down of prices using financial instruments to smooth out the peaks and troughs in the market over the long term. In other words, perhaps our bills could increase from £2000 pa to £3000 at a fixed price over -say- 10 or 20 years. That would certainly be uncomfortable, but better than £6000. There are a variety of possible solutions, and I look forward to the new UK Administration implementing them.Remember that unemployment is at a record low; interest rates still historically low, and medium-term predictions of growth look pretty healthy. It looks bleak right now, so it can only get better. The night is darkest just before the dawn.