Where is the next macroeconomic crisis coming from?
Natale Labia was born in Cape Town and lives in Milan, Italy, and writes about economics and finance. Partner in private equity firm Lionhead Capital Partners. MBA from Università Bocconi. Support Juventus.
First published in Daily Maverick 168 weekly newspaper.
As the global economy continues to be plagued by wave after wave of post-pandemic disruptions, manifesting itself in increasingly unpredictable and volatile ways, this week it became clear the extent of the demand and supply imbalance it has created in energy markets. Only the consequences of this remain highly uncertain.
Gas prices aren’t usually something that registers itself as typical dinner party conversation. In recent years, however, almost all major economies have become increasingly reliant on natural gas to generate electricity, run factories, and heat homes as coal has been scaled back due to global warming concerns. Around a quarter of Europe’s electricity comes from gas.
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European energy markets seem to have recently seen a confluence of factors that have contributed to price spikes, with low reserves since last winter’s lockdown – and a rapid recovery in demand as economies recover. Some also point out that Russia is capping supplies to Europe to remind policy makers how dependent they are on Russian energy exports. As a result, European gas prices have risen by around 500% and are now at all-time highs.
This price dynamic is not unique to Europe or natural gas, but is spreading to markets all over the world.
China, the world’s largest importer of natural gas, is struggling to meet supplies for its economic recovery and is now shifting more to buying coal as companies grapple with power shortages and blackouts in the northern parts of the country. Coal prices have increased about 280% in the past 12 months, reports Bloomberg.
Additionally, oil, which is usually a lagging indicator of energy prices, has 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 domestic power plants, the increased price pressure from higher export volumes will have an impact on domestic electricity production costs. It remains to be seen how Eskom, which is already struggling to impose higher costs on consumers, will manage with significantly higher coal costs.
However, it is oil that is perhaps more important. Analysts point to significant demand / supply mismatches in global oil markets, mainly due to post-lockdown supply chain disruptions and unexpectedly high demand from economies such as China and the Eurozone. Should prices continue to rise, oil prices of around $ 100 or more per barrel can be expected.
There are four potential economic effects of higher energy prices.
First, it is effectively an additional tax for consumers. This is putting pressure on domestic consumption, which is particularly important for South Africa’s post-pandemic economic recovery. Higher energy prices risk stalling the nascent recovery before it has time to pick up speed.
Second, higher energy prices are shifting liquidity away from the productive parts of the economy such as manufacturers to the extractive sectors such as oil producers and traders.
The beneficiaries of a European winter of discontent are clear, but the geopolitical implications of the return of cash to major energy and oil producing capitals like Moscow remain in question.
Third, higher energy prices should lead to more persistent inflation, which will lead to higher US and European interest rates.
The 10-year US yield has risen above 1.5% for the first time since early June as bonds are sold (yields go inversely with prices). Ordinarily one would then see investors selling South African assets in a general “risk-off” trade which is evident that the rand is now trading above R15 against the greenback. Should higher energy levels persist, this dynamic can be expected to continue with a weaker rand and higher South African prices for imported products (such as fuel).
After all, higher energy prices are not just an economic issue, but also a social one. Few markets are as strongly perceived by consumers as the increased prices for transport to work, cooking for the family or heating the home.
In Europe, governments have pledged to intervene to subsidize heating bills with billions of euros to help the most vulnerable. However, emerging countries like South Africa do not have this luxury. Should the prices of these essential goods continue to rise, anger and disagreement can be expected to spread rapidly among the most vulnerable.
It is no coincidence that energy crises, aside perhaps from food protests, have proven to be one of the most volatile periods for countries exposed to severe social stress.
With South Africa past a period of pandemic lockdowns and looting and elections looming on the horizon, it doesn’t take much to reimagine an energy crisis as the dynamic that illuminates the blue paper of the seditious social fabric that is South Africa. DM168
This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click on here.