Where will the next macroeconomic crisis come from?
First published in the Daily Maverick 168 weekly newspaper.
As the global economy continues to be hit by waves of post-pandemic disruption that manifest in increasingly unpredictable and volatile ways, this week the magnitude of the supply-demand imbalance it caused in the energy markets has become apparent. Only the subsequent effects of these remain very uncertain.
Gas prices usually aren’t something that registers like a typical dinner conversation. Yet in recent years almost all major economies have become increasingly dependent on natural gas to generate electricity, power plants, and heat homes, as coal has been cut back due to concerns about global warming. . About a quarter of European electricity comes from gas.
What seems to have happened recently in European energy markets is a confluence of factors contributing to rising prices, with low level of reserve storage since the lockdown last winter – then a rapid recovery in demand as economies recover. Some also point out that Russia is limiting supplies to Europe to remind policymakers how dependent they are on Russian energy exports. As a result, European gas prices have risen by around 500% and are now trading at record highs.
This price dynamic is not unique to Europe or natural gas, but extends to markets around the world.
China, the world’s largest importer of natural gas, has struggled to source supplies to fuel its economic recovery and is now turning more to buying coal as companies tackle power shortages and blackouts. electricity in the north of the country. Coal prices have risen about 280% in the past 12 months, Bloomberg reports.
In addition, oil, which is usually a lagging indicator of energy prices, hit its highest level in nearly three years, with Brent crude reaching $ 80 a barrel, up nearly 60% this year alone. .
Although South Africa is a major producer of coal for national power plants, increased pressure on prices due to increased export volumes will affect domestic power generation costs. It remains to be seen how Eskom, which is already struggling to drive up costs to consumers, will fare with significantly higher coal costs.
It is oil, however, that is perhaps of most concern. Analysts point to a significant mismatch between supply and demand in global oil markets, largely due to supply chain disruptions after the lockdown and higher than expected demand from economies such as the China and the euro area. If prices continue to rise, one would expect oil prices to be around $ 100 or more a barrel.
There are four potentially worrying economic effects of rising energy prices.
First, it’s actually an additional tax on consumers. This puts pressure on domestic consumption, which is particularly critical for South Africa’s post-pandemic economic recovery. Rising energy prices risk stifling the nascent recovery before it has time to gain momentum.
Second, rising energy prices shifts liquidity from productive sectors of the economy, such as manufacturers, to extractive sectors, such as oil producers and traders.
The beneficiaries of a European winter of discontent are clear, but the geopolitical effects of a return of liquidity to major energy and oil capitals such as Moscow are, as always, likely to be questionable.
Third, rising energy prices are expected to spill over into more persistent inflation, which will begin to push up US and European interest rates.
Already, the US 10-year rate has risen above 1.5% for the first time since early June as bonds are sold (rates move in the opposite direction to prices). One would then typically see investors selling South African assets as part of a general “risk-free” trade, which is evident with the rand now trading above R15 against the greenback. If higher energy levels persist, expect this momentum to continue, with a weaker rand and higher South African prices for imported goods (like fuel).
Finally, rising energy prices are fundamentally a social as well as an economic problem. Few markets are felt so strongly by consumers as rising transportation costs to get to work, cook dinner for your family, or heat your home.
In Europe, governments have pledged to intervene to subsidize heating prices with billions of euros to help those most at risk. Emerging markets like South Africa, however, don’t have that luxury. If prices continue to rise for these essentials, expect anger and dissent to spread quickly among those who are most vulnerable.
It is no coincidence that, aside from perhaps food protests, energy crises have proven to be one of the most volatile times for countries that have experienced significant societal stress.
As South Africa emerges from a period of pandemic-induced lockdowns and looting, with elections looming on the horizon, it doesn’t take much to imagine an energy crisis as once again. the dynamic that illuminates the blue paper of the incendiary social fabric is South Africa. DM168
This story first appeared in our weekly Daily Maverick 168 which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest dealer, please click here.