Thread by @AndrewPRLevi

Energy Armageddon - & how to avoid it

The stress on our economies & societies (not just UK) will rapidly become unsustainable, in the absence of sweeping, wartime-style measures in the immediate term, & radical strategic adjustment.

There’s no time to lose.

A (very) long 🧵/1.

There’s understandable, deep concern about the energy-price-shock-induced ruin which, absent unprecedented government action, faces most of the middle class & less prosperous social groups, along with the businesses on which they often rely for a living. /2.

That description isn’t hyperbole. Pretty basic arithmetic shows how unsustainable finances will quickly become, for tens of millions of people & hundreds of thousands of businesses in the UK, unless most of their future energy costs are, one way or a other, paid for them. /3.

Without profound government intervention now, sustained for a significant period, the UK will descend into darkness. In more - terrifying - ways than one. What we experienced in the 1970s is nothing to what will face us if we fail. /4.

We (obviously) don’t know for sure how high international market prices for fuels - notably, gas & oil - will rise. Nor whether we will get lucky & the worst will be avoided. So (obviously) we need to assess a range of scenarios, their likelihoods, & how best to address them. /5.

Thousand-page documents doing exactly that litter government, financial & energy company desks, around the UK & the world.

Let’s see what we can do in a few dozen tweets … . /6.

Looking back to 1971, the proportion of GDP spent on energy in advanced industrial economies has typically been in the range 8 +/- 2%. Some countries have been at, or even a bit above, the top end of that range, for extended periods. /7.

In that half-century no advanced economy has been anywhere even close to double the top end. Ever.

Just as well. The evidence suggests that energy expenditure levels above 10 - 12% of GDP become increasingly, eventually unsustainably, stressful & damaging to the economy. /8.

20% of GDP, without far-reaching government help, would almost certainly be disastrous. Very fast.

Yet a doubling of energy costs for households & businesses, & the economy overall, compared to the long-term trend (of 8% or so) now looks like a highly optimistic scenario. /9.

In short, we face imminent energy Armageddon.

In the medium & longer term we have the potential to:

(a) use (energy-efficient) growth to steer our way out of the problem (bigger GDP, similar absolute energy cost = lower % of GDP spent on energy) /10.

(b) reorient & upgrade our energy provision, reducing prices & increasing security of supply (lower energy cost, same or greater GDP = lower % of GDP spent on energy)

But, we’ll never get there if we:

▫️collapse now

▫️don’t take radical, strategic action, starting now /11.

Let’s look at the immediate crisis first.

Putin’s war is certainly relevant. We’ll come back to it. Just to note at this stage:

(a) relying on Russia for energy supplies can form no part of any responsible scenario-plan, for the indefinite future, “peace” or not in Ukraine /12.

(b) other factors, independent of Russia - such as Chinese energy demand - are having a significant impact on global energy price levels. And Brexit is a unique form of self-harm, seriously exacerbating the crisis for the UK /13.

Thinking about how not to collapse now, we need to consider how to afford (on a scenario in which overall energy costs have “merely” doubled) to pay an amount equal to 10% of our GDP effectively to subsidise energy costs for users throughout the economy & society. /14.

Let there be no misunderstanding: this is a huge amount. And it may be a significant underestimate.

But the costs of collapse are, clearly, vastly higher. The reasons for the stress which leads to collapse are easy to understand, but worth stating explicitly: /15.

▫️for businesses, the ability to afford necessary non-energy inputs erodes, then disappears; & with it the ability to survive /16.

▫️for households, the ability to afford the essentials of shelter, food, heat & light erodes, then disappears; & with it the ability to live: safely, healthily, with dignity, or at all

The financial resilience of businesses & households varies widely. /17.

At 20% of GDP going on energy expenditure even many - perhaps most - of the normally highly resilient just won’t make it. Let alone the devastation the already vulnerable clearly face. /18.

The only realistic way 10% of GDP (to fill the affordability gap between the top end of the 8 +/- 2% range & 20%) can be mobilised is by government.

Some (a few percentage points, perhaps) might be achieved by energy-saving measures. /19.

Either “soft” mandates - using the moral force of government exhortation to encourage energy saving (no direct help to those already on the edge, though). Or “hard” - all the way up to legally mandated & enforced rationing.

That still leaves a very large problem. /20.

Several percentage points of GDP, at least, need to be mobilised by the government & directed effectively, one way or a other, to paying the lion’s share of businesses’ (& public institutions’) & households’ energy costs. Each 1% of GDP is over £20B per year. /21.

That’s the small change of this effort, which is measured in the order of £100B, £200B, maybe more per year.

There are social justice reasons for taxing the wealthiest more; & inflation control reasons, depending on economic conditions, to increase overall tax take. /22.

But if all the less well-off & most of the middle class, along with a large proportion of businesses, are in financial trouble, taxing them more will tend to increase the stress - & the economic, social & human tragedies. /23.

And taxing the wealthiest, while no doubt justifiable for other reasons, is never going to come close to being able to “pay for” the necessary scale of intervention. /24.

So: the UK needs of the order of an additional £100B or more in government deficit spending per year. For at least a year. Probably several.

A total over five years of, say, £0.5T to £1T. To survive the 2020s energy shock.

Pretending otherwise is grand, likely fatal, folly./25.

Cutting back elsewhere to reduce the government deficit isn’t an option. Not for a government which understands its job & has the security, prosperity & well-being of the country & all its people at heart. /26.

Everyone wants the most efficient use of public funds. But the idea that (genuine) efficiency savings in services like the NHS, education, the armed forces etc can (responsibly) actually reduce expenditure is for the birds. /27.

Every £ of efficiency saving needs to be recycled into improving vital public services desperately in need of increased capacity & quality. /28.

So, the government has to create the money. One can think of it as “borrowing”. But that’s misleading. The government’s (central) bank creates the necessary £ at the stroke of a computer key. The government appropriates those funds - via parliamentary vote - & deploys them. /29.

During the pandemic, the government budget deficit reached a peacetime record of 15% of GDP (over £300B per year). Normally, we might expect that to drop back. Nothing is normal. Such levels of deficit, if not higher levels, are now existentially necessary for the country. /30.

But, pumping additional £ into an economy unable to absorb them - because it’s operating at its capacity to use human & material resources to create economic output - will tend to stoke inflation. Clearly any additional, excessive inflationary pressure must be avoided. /31.

However, failing to provide the £ needed to avoid the economic & social heart attack of mass business & household defaults, & consequent destitution, would be even worse. /32.

Any avoidable constraints on the effective human & material resources of the UK - that’s to say, those in practice capable of economically productively absorbing the many £Bs of vital government deficit spending - must urgently be removed. /33.

The throttling of economies due to pandemic-induced disruption of supply chains & labour markets can be reversed by coordinated international action. But it’s complex & not under UK control. We must mainly rely on the US & EU: even they have limited ability to direct events. /34.

The UK’s unique, & serious, additional dose of such problems, due to the Johnson-Frost-ERG Brexit, can be reversed more or less immediately, provided the UK & EU agree on an emergency arrangements. /35.

To allow the UK to participate in the EU single market & customs union (including freedom of movement & establishment for people), pending discussions on a longer-term way forward, once the crisis is under control. /36.

That, facing catastrophe, a widespread assumption among commentators is such solutions are “unrealistic”, “politically impossible”, “only available in 10+ years”, shows how disconnected from the scale & imminence of the emergency UK, & some EU, political discourse has become./37.

Putin’s war has, of course, significantly contributed to the energy price shock. The notion that forcing Ukraine to concede to Putin would be likely to reverse the shock (or a good proportion of it) is fanciful. /38.

Anyone who didn’t already understand that Russia is an unreliable - because politically motivated & blackmailing - supplier, must surely now have got the message. Irrespective of the wider (overwhelming) arguments against conceding to such a regime. /39.

Defeating Putin & his faction is vital. But it would be foolhardy to assume that their departure from the scene will, or should, lead to a restoration of Russian energy supplies westwards. /40.

Or that such supplies could ever again be considered a reliable basis for any US-allied country’s energy security (absent a newly Trumpian US administration: in which case, we’ve lost). The assumption will, instead, need to be that demand must be met from elsewhere. /41.

In the short term, some purely internal UK measures can no doubt be taken to increase availability of effective, productive human & material resources. But they’re likely to be fairly marginal. /42.

Enhanced non-EU immigration (always possible: no Brexit required) alongside the EU points noted above, & well-designed to supply UK labour requirements, could have a significant beneficial impact. /43.

In extremis, commandeering UK North Sea hydrocarbon production for purely UK use might be considered. But it’s complicated. And could encourage others to take similar action, potentially with essential supplies - energy or otherwise - leaving the UK dangerously exposed. /44.

For extremely urgent reasons of climate emergency, & now because of a rapidly developing crisis of energy security, the UK (with its international partners) needs to execute a gigantic energy transition. /45.

From carbon to zero carbon. From geo-strategically insane, vulnerable & fragmented, to secure, resilient & integrated. In Europe, among like-minded allies, that requires, among other things, a robust, continental scale, energy system. /46.

The investments required for the UK’s transition are enormous. Estimates vary. Let’s say £0.5T over the next decade, meaning £50B a year. But we need to find a way to move faster. To do far more than currently envisaged in the next five years. /47.

Again, there’s no prospect of action on such a scale without the government taking the lead. Concerting the human & material resources, & creating, appropriating & deploying the funds. /48.

That means, by any reasonable meaning of the term, big government:

▫️detailed, direct government involvement in key aspects of the economy: energy & other essentials, at a minimum

▫️government expenditure around 50% of GDP /49.

▫️government deficit spend at 15% of GDP or higher, probably for 5+ years

The UK isn’t unique: the Eurozone/ EU will need to operate much more flexible fiscal rules, if they (& we) are to survive & prosper. /50.

The urgency, scale, sophistication & complexity of the required UK government response are such that there is no credible prospect of any likely cabinet formed by the current governing party recognising them, let alone delivering what’s needed to address the challenge. /51.

Most MPs know it.

And that this cannot stand.

And that the country needs them to do their patriotic duty, protecting the security, prosperity & well-being of the UK.

By forming a cross-party governing majority, supporting one of their number to lead a new cabinet. /52.

Many aren’t fully conscious that they know, though. Or haven’t yet worked out how to take over.

A general election might help, if a competent government resulted.

But even if it would help - which is by no means certain - we no longer have the time for one.

Do we? /53. End

Note:

Small corrections

Tweet 21: “… one way or another …”

Tweet 35: “… an emergency arrangement.”

Also, if you’re interested in some of the massive challenges, based on current tech & systems assumptions, just sourcing the metals required for the energy transition referred to in tweets 46 & 47, read on👇

tupa.gtk.fi/raportti/arkis…

A further PS to the above 👆 🧵 on “Energy Armageddon”:

1. I didn’t explicitly address windfall taxes etc. They surely have their place: my taxation comment in tweet 24 was intended, very briefly, to cover the point.

2. The UK electricity market is dysfunctional. See short🧵👇

https://twitter.com/andrewprlevi/status/1564188421656018944