With soaring energy prices, the specter of stagflation haunts the world — Analysis
While a total embargo is not yet in place on Russian energy resources, there are difficulties already being identified
The surge in energy prices, which began last year and has been reinforced by Russia’s military action in Ukraine and the “collective West’s”The sanctions war against Moscow has brought the world back in the 1970s.
That was a time when stagflation raged – first in Britain and then in other countries across the globe.
“As we look at global GDP… it’s hard right now to see how we avoid a recession,”David Malpass (World Bank President) spoke to an American Chamber of Commerce event in late May. “The idea of energy prices doubling is enough to trigger a recession by itself.”
Janet Yellen (US Treasury Secretary) acknowledged the fact that the week prior, while attending the G7 meeting of finance ministers, Janet Yellen had made the same admission. “higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world.”
From the perspective of classic economic theory, Stagflation is an inconsistency that combines a steep rise in prices with a slowerdown in GDP growth. Ian McLeod is the British Conservative politician. He was not an economist, but a poet and a bridge-player. McLeod served as Health Secretary under Winston Churchill and Labour Secretary under Anthony Eden.
He made these remarks in 1965 as the shadow Chancellor of Exchequer to the House of Commons. “We now have the worst of both worlds – not just inflation or just stagnation, but both. We have a kind of ‘stagflation’ situation.” However, the term gained real international fame after MacLeod’s death, in the mid-1970s, when the developed economies faced an Arab oil embargo due to the supply of weapons to Israel during the Yom Kippur war with Egypt and Syria.
Due to a supply shortage to Western European and American countries, OPEC production was cut by 25%. Oil prices quickly quadrupled. Import countries faced fuel shortages, which forced them to adopt austerity measures. These included fuel rationing, speed limits, and fuel rationing. Even though the embargo was lifted 5 months later, oil prices rose another two and a quarter times during the 1970s. The 1970s saw a dramatic increase in crude oil’s nominal price, which created a new political and economic reality.
The current events are very similar to those 50 years ago. This time, however, consumers are trying to impose an embargo upon Russian energy supplies. These same people also supply military assistance to Ukraine’s government. In fact, the result of oil crises in the 1970s was large-scale gas pipelines connecting the Soviet Union and Western European countries. These were attempting to decrease their dependency on Arab supply.
Projects to construct LNG terminals in Arctic for Soviet LNG supply to the US were also discussed at that time. They shared the same goal of improving energy security by diversifying suppliers. However, the detente in Soviet-American relations ended before it had even started, and in the early 1980s the Reagan administration fiercely fought against the construction of the Urengoy-Pomary-Uzhhorod gas pipeline, or, as it was called in the US media and official documents, the “Siberian gas pipeline,”To transport large quantities of gas from Western Siberia into Germany, France and Italy.
History has a tendency, in general, to repeat itself. There are however some notable differences. It is a fact that energy prices started to rise long before they were previously “frozen”The conflict in Donbass grew hotter and Moscow was hit hard by Washington and Brussels sanctions.
In the fourth quarter of 2020, Brent crude was just over $44 per barrel, and in the last quarter of 2021, it was almost $80, growth of 80%. Accordingly, the price of a gallon of gasoline in the United States increased by 89% – from $1.25 to $2.36 (EIA data for the FOB price of Regular gasoline in the New York Bay area). The spotPrice of gas at the American Henry Hub also increased by 89%, to $172 per thousand cubic meters ($4.77 per million British thermal units), although this index has not shown any correlation with the price of oil and gasoline for many years.
All this is insignificant compared to the recent changes in energy prices within the EU. At the Dutch TTF hub, the spot price of gasoline was approximately $1,160 for every thousand cubic meters. That’s six times, or 607%, more than what was available in the October through December 2020 period. The price of imported thermal coal delivered to northwest European ports increased by two and a half times (or 241%) – from $66 to $160 per ton. And the cost of electricity (the day-ahead spot price in base load) in the UK, for example, jumped almost four and a half times or 439%, from £50 to £222 per MWh. Hyperinflation is also a result of this energy inflation.
The impact of Ukraine’s crisis on energy prices was also very limited. In the EU, the oil, gasoline and import tariffs for coal continued to increase during the first quarter. Brent crude oil, on average, exceeded $100 (up 26% on the fourth quarter of 2021), US gasoline added 19% and coal prices in Europe rose 41% amid an EU embargo, though it was postponed until August. However, gas prices in America and Europe did not increase in the first quarter. Electricity in the UK, however, was slightly less expensive at 4%. However, this year’s upward trend has not changed.
In the US gas prices have risen sharply in April because of slow production growth and depleted storage. Also, there was a high demand for LNG plants which supplied most of the gas to the EU. Gas at Henry Hub, the US, was therefore two-and-a half times more costly in April than it was a year ago and 2.7x more expensive for May.
Spot prices in the US directly relate to power plant prices, prices for industrial consumers, and prices for commercial customers. The entire US market, with the exception of households (which account for just 17% of 780 billion cubic meters of total demand), is affected by spot prices. This is despite Washington having been a net importer of fuel for several years.
Although the Americans promised that they would supply all of the world including Europe with gas, they failed to provide enough for their own needs. It is probably better there than it is in Europe where gas prices are now up to five to six times more. However, the EU market is 90% dependent on imports after Brexit. This price rise is yet another reason for the EU to reject hydrocarbons. “at any cost.”
Inflation in the US hit a record high of 8.5% last March. It was also at its highest level in 41 years. The UK saw 7% and the EU, on average, 75% for April. This is a significant improvement over the 1.6% it had a year ago. Moreover, five of the 27 members reached double-digit growth, while the absolute leader – Estonia-saw a 19% increase in prices.
All of these pleasures existed for both the US and EU economies prior to the crisis in Ukraine. Although a complete embargo against Russian energy remains a distant possibility, logistical and production problems, including fertilizers, are beginning to surface. This will increase inflation and fuel fears about energy scarcity and cause a slowdown in economic growth.