Politically the government has been enveloped in chaos from virtually day one. Far from introducing a credible “growth plan” the government has announced a slew of decisions that will have a negative impact on economic growth and/or will weaken the public finances. It appears that the marketing of the Starmer/Reeves combination as pragmatic centrists was an illusion, hiding the fact that this government does not understand how markets and business work.
Unfortunately, this is not the worst of it. The biggest threat to the UK economic outlook in this parliament may lie with the energy policies of Ed Miliband, the cabinet minister who appears to least understand markets and economics and whose policies are driven instead by zealotry. Miliband claims that his accelerated drive towards net zero will reduce electricity prices, create jobs and improve energy security. This is nonsense on stilts. In the last three decades renewables have gone from powering 2% of the UK’s electricity to around 40% now, during which time UK electricity prices have soared and are now the highest of any developed nation. Globally, trillions of dollars have been invested in renewables, and yet world oil, coal and gas consumption continue to increase. Increased spending on renewable projects in the UK will create a few thousand new jobs, but many more will be destroyed by our grossly uncompetitive energy costs. Furthermore, N. Sea oil and gas production is projected to fall by 30-40% in the next five years consequent on Miliband’s refusal to allow any new oil and gas licenses, failure to fight legal opposition to new licenses already granted, as well as the Chancellor’s decision to increase the windfall tax from 75% to 78% and withdraw generous investment allowances for new oil and gas capital spending (which by the way will significantly reduce tax revenue over the next five years).The already announced closures of the Grangemouth oil refinery in Scotland and steel blast furnaces in Wales are merely the tip of the iceberg. And how can the UK’s energy security be improved by increasing our imports of oil and gas, or by making us more dependent on importing the Chinese-made equipment needed to attempt the (impossible to achieve) 100% decarbonisation of the National Grid by 2030?
The public debate about the best route to net zero is clouded in confusion, with wildly conflicting data bandied about, often distorted by tax breaks, subsidies (hidden or otherwise) and dodgy assumptions. Much greater clarity can be gained by using the outstanding work, publicly available on their website and deserving of much wider recognition, of the highly reputable US commodity research firm Goehring and Rozencwajg. Their analysis is distinctive in two ways: firstly, they look at the long-term history of global energy use, and secondly, they have independently estimated what is called the Energy Output Input Ratio (EOIR) – how much energy input is required to produce the energy output of each of the main sources of energy – renewables, fossil fuels, and nuclear. For much of human existence wood was the main source of fuel. This has an EOIR of about 5 times, i.e 5 units of energy for every 1 unit of input. This was enough for subsistence but not to generate significantly rising living standards, which did not materially increase for many centuries. The great breakthrough was the use of coal in the UK, which has an EOIR of roughly 30 and provided the great springboard for the industrial revolution. The other fossil fuels, oil and gas, also have an EOIR of about 30. Nuclear has an EOIR of up to 100, and since it also has zero emissions it must provide the long-term solution in the quest to combine continued economic growth with achieving net zero. Mr Miliband claims to be in favour of nuclear, but seems to have slowed down the UK’s already painfully tardy nuclear programme.
The bad news for Mr Miliband, and the UK if his kamikaze policy approach continues, is that the EOIR of solar and wind is about 5-10 – that is not much better than burning wood! This explains why so many renewables’ companies are getting into financial difficulties despite massive subsidies and tax breaks, and why Shell and BP have done a reverse ferret on their renewable energy plans. In contrast to the UK much of our competition is becoming more realistic about the route to net zero, so Miliband’s stewardship of UK energy policy poses a major threat to our national well-being. The PM and Chancellor appear to be blissfully unaware of the dangers, so he might do immense damage without being brought to heel.
Five decades as an economic forecaster have made me wary of predicting economic disasters and crises. The great economist Adam Smith wisely warned pessimists that “there is a great deal of ruin in a nation” i.e. it takes a lot to bring ruin to a country. However, the UK’s economic “Achilles Heel” is that is has run current account deficits in a 2-6% of GDP range in each of the last 25 years, and as a result has accumulated net foreign investment liabilities of around $ 1 trillion (30% of GDP). The deficit has fallen sharply from its peak of 6% in 2016 to the current 2.5-3% level, due to a big post-Brexit rise in services exports to non-EU markets, but this still means the currency is vulnerable to a sustained loss of investor confidence. Current UK energy policy will weaken economic growth, destroy jobs, widen the current account deficit – the fall in N. Sea output alone could raise it by 1.5% of GDP – increase the fiscal deficit, and very conceivably see the lights going out in a cold winter before too long. Every post-war Labour government has experienced a serious currency crisis on its watch. Since 1945 the Pound has depreciated by about 70% against the US Dollar. Virtually all that depreciation (net of the large cyclical swings of the period) took place while Labour was in office. I fear it is going to happen again. Even a government with a huge parliamentary majority could not survive such a calamity and Mr Miliband will be as culpable as anybody.
