Chris Johns
Jim and I are overly fond of saying nobody should pay too much attention to economic forecasts. That’s not always true of course - conditional, probabilistic forecasts are useful. We don’t call this ‘the Other Hand’ without reason!
Economics is much more than saying ‘GDP will go up by 2% next year’. We can say, with more confidence - but not certainty - that if x happens then y will follow. Basic economic tools can be very useful when telling stories about the future. We can look at the big or small picture in this way. Basic economic tools help us avoid traps - economic solecisms or just mistakes in logic. The energy crisis is a case in point.
The economics editor of the FT, Chris Giles, has just written a super article, essentially asking the question posed by the title of this post.
His column is behind a paywall, so I hope he won’t mind if I summarise it here. The message is of obvious importance, but so is the way in which he uses economics to make guesses about the future.
Natural gas prices have been falling on both sides of the Atlantic. There are many different prices: there is no such thing as ‘the’ price for natural gas (or most other commodities). It depends where you are buying (prices in Europe and the US are often very different), who you are buying from and when you want your gas delivered (the spot and futures markets). The spot price in Holland (an important benchmark) earlier this week briefly went negative. Yes, you could be paid for taking delivery of some gas. For an hour, someone was willing to pay €16 for somebody else to take delivery of a megawatt hour of natural gas. Only a couple of months ago, you would have paid close to €300 for the same amount of gas.
Spot prices subsequently recovered to about €50 (still high relative to history). Lower prices have been helped by warm weather across Europe and the fact that most storage facilities around the continent are approaching capacity. Ships carrying liquified gas (LNG) are now queuing up to unload or seeking markets further afield.
One important fact is that prices have essentially been falling since Putin cut off supplies. Blowing up the undersea pipelines only had a temporary effect: they resumed falling in a matter of days. Clearly this was not what Putin intended. As Giles says, few gas price experts forecast that prices would behave in this way. Indeed, most expected them to continue to rise. Nobody expected German industry consumption of gas to fall by 20%.
Using those basic economic tools, economists begged to differ. Prices matter - they affect behaviour. Precise quantification is always tricky but when a commodity’s price rises by a lot we can expect substitution and income effects. Consumers will switch, where they can, to cheaper alternatives and also reduce total consumption. Both effects have been in evidence. It may be no good for the environment but there have been switches to coal and oil. But there has also been a boom in the production and consumption of wind and solar energy - a record increase across the EU between March and September.
The industry consensus is that this will prove temporary. We could still be in trouble if there is a harsh Winter. Those experts are growing less concerned about this as storage facilities fill and the weather stays warm. They are more worried about next winter - the view appears to be that those storage tanks won’t be so easily refilled. Giles agrees that there could be problems but thinks, on balance, there probably will not - a probabilistic forecast. Those substitution and income effects will continue to work their magic and energy infrastructure will be expanded and improved.
I think Giles is right to analyse things in this conditional way. And correct in his conclusion. Things aren’t great, will remain sticky, but we are adapting. It’s what we do.
Anyone who reports on what the ‘industry’ thinks risks getting it completely wrong. Petrol stations have always been suspected of putting prices up quickly when the wholesale price of oil rises but being somewhat tardy when the reverse happens. To the extent that this is true it reveals a lack of competition - the same reason why petrol prices can differ between stations that are far apart from each other. The energy industry is, unsurprisingly, keen to talk things up. Here’s the Irish Times perspective: domestic prices won’t fall. Why in heaven’s name could that be true?
Because suppliers buy the gas used to generate your electricity, or that you use for heating and cooking, on a different market to one where prices are falling.
I think I know what he means by that. But if he means there is no connection between wholesale and retail prices he has swallowed the industry nonsense - hook line and sinker.
If your supplier has bought all their gas on the futures market at August prices then switch your supplier (easily said rather than done, I know). The regulator should be there to protect consumers from the industry, but I do wonder sometimes.
If Giles is right we have cause for hope. But we need to keep a very close eye on the ability of the industry to run rings around regulators - and consumers.
I think it’s more a tech than pharmaceutical company problem. Tech earnings are slowing rather than collapsing. There share prices are collapsing as there profits growth stalls. Those share prices were only ever going to be maintained by high profits growth. Simplistically, that means the big surge in corporate taxation will now draw to a close but no reason to expect a precipitous collapse. But prudent to expect a fall.
Thoughts re Musk and Twitter with Mega struggling and a number of US pharmaceutical companies in trouble will it affect Ireland's golden egg US corporation tax set up?