False Expectations

The Ukraine War and the energy market

On September 2^nd 2022 under the headline “Life in Blackout Britain” the Daily Mail quoted experts warning that because of the energy crisis there was “no escape for 66 million people in the UK”. The use of gas and electricity would be reduced and people would be forced to “sacrifice their hot dinners and Sunday roasts” in favour of “cold leftovers”. Pubs would call last orders at 8.30pm. NHS treatments would be rationed because of soaring energy bills and care homes would be forced to limit the use of washing machines while suspending outings for their elderly residents.

The spirit of fear was not restricted to Britain. At the beginning of June the head of the German chemical business BASF warned of an unprecedented downturn which could “submit the German economy into the worst crisis since the end of the Second World War”. The consultancy Prognos predicted a 12 per cent fall in the size of the German economy if Russian gas were cut off putting 5.6 million jobs at risk.

What crisis?

None of these predictions came true.

A year on from the Russian invasion of Ukraine there have been no cuts in supply and no rationing of gas or electricity in the UK or the European Union.

Across Europe consumers, including business, responded to requests to reduce consumption by 15 per cent. Public buildings in Germany and France accepted small reductions in the levels of heating. Some statues and monuments in Berlin were left in the dark and the lights on the Eiffel Tower were turned off an hour early.

The energy “crisis” was averted but at some cost. The increase in the price of gas, and therefore of electricity, fed through to inflation – an effect reinforced by the rising cost of food resulting inter alia from the restrictions on Ukrainian grain exports.

Governments across Europe subsidised prices to energy users but the support did not cover the whole of the increase. Energy poverty in the UK (usually measured as the number of households devoting more than 10 per cent of their income to paying energy bills) rose from 4.9 million in 2021 to 7.3 million – 30 per cent of all consumers in 2022. Energy intensive businesses also received help but some were forced to cut production because energy costs were making their products uncompetitive in international markets.