Llewellyn King: The new normal will take time, not politics

WEST WARWICK, R.I.

Loud detonations are going off in the economy. When the debris settles, new realities will emerge. We won’t return to the status quo ante, although that is what politicians like to promise.

After great cataclysmic events — wars, natural disasters or the impact of new technologies — we need to acknowledge the realities and find the opportunities. 

The inflation that is shaking the world is the inflammation that arises as markets seek equilibrium — as markets always do.

The greatest disrupter has been the COVID-19 pandemic, and the ramifications of how it has reshaped economies and societies are still evolving. For example, will we need as much office space as we did pre-pandemic? Is the delivery revolution the new normal?

Russia’s war in Ukraine has added to the pandemic-caused changes before they have fully played out. They, in turn, were playing out against the larger imperatives of climate change, and the sweeping adjustments that are underway to head off climate disaster.

Some political actions have exacerbated the turbulence of the economic situation, but they aren’t the root causes, just additional economic inflammation. These include former president Donald Trump’s tariffs and President Biden’s mindless moves against pipelines, followed by attempts to lower gasoline prices, or wean us from natural gas while supplying more natural gas to Europe.

In the energy crisis (read shortage) of the 1970s, I invited Norman Macrae, the late, great deputy editor of The Economist, to give a speech at the annual meeting of The Energy Daily, which I had created in 1973 — and which was then a kind of bible to those interested in energy and the crisis. Macrae, who had a profound influence in making The Economist a power in world thinking, shared a simple economic verity with the audience: “Llewellyn has invited me here to discuss the energy crisis. That is simple: the consumption will fall, and the supply will increase. Poof! End of crisis. Now, can we talk about something interesting?”

Of the many, many experts I have brought to podiums around the world, never has one been as warmly received as Macrae. Not only did the audience stand and applaud, but many also climbed on their chairs and applauded. I’m not sure Washington’s venerable Shoreham Hotel had ever seen anything like that, at least not at a business conference.

In today’s chaotic situation with political accusations clashing with supply realities, the temptation is to find a political fix while the markets seek out the new balance. Politicians want to be seen to do something, no matter what, and before it has been established what needs to be done.

An example of this was Biden increasing the allowed amount of ethanol derived from corn and added to gasoline. It is so small an addition that it won’t affect the price at the pump, but it might affect the price of meat at the supermarket. Corn is important in raising cattle and feeding large parts of the world.

There is a global grain crisis as a result of Russia’s war in Ukraine, which is a huge grain producer. Parts of the world, especially Africa, face starvation. The last thing that is needed is to sop up American grain production by burning it as gasoline.

We are, in the United States, gradually moving from fossil fuels to renewables, but this is going to move our dependence offshore, and has the chance of creating new cartels in precious metals and minerals.

Essential to this move is the lithium-ion battery, the heart of electric vehicles and battery storage for renewables, and its tenuous supply chain. Lithium has increased in price nearly 500 percent in one year. It is so in demand that Elon Musk has suggested he might get into the lithium mining business.

But lithium isn’t the only key material coming from often unstable countries: There is cobalt, mostly supplied from the Democratic Republic of the Congo; nickel, mostly sourced in Indonesia; and copper, where supply comes primarily from Chile.

Across the board, supplies will increase, and demand will decline. Equilibrium will arrive, but vulnerability won’t be eliminated. That is an emerging supply chain constant as the economy shifts to the new normal.

The aftershocks of the pandemic and Russia’s war in Ukraine will be felt for a long time — and endured as inflation.
 

On Twitter: @llewellynking2
Llewellyn King is executive producer and host of White House Chronicle, on PBS. He’s based in Rhode Island and Washington, D.C.

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Llewellyn King: Wind drought, gas shortages suggest worrisome winter coming for Europe

British wind farm rated capacity by region
(installed 2015 and 2020, projected by 2025)

WEST WARWICK

If you are thinking of going to Europe this winter, you might want to pack your long undies. A sweater or two as well.

Europe is facing its largest energy crisis in decades. Some countries will simply have no gas for heating and electricity production. Others won’t be able to pay for the gas which is available because prices are so high -- five times what they were. Much of this because Russia has severely curtailed the flow of gas into Europe, following on a wind drought.

Things are especially bad in Britain, which has been hit with a trifecta of woes. It started with a huge wind drought in and around the North Sea, normally one of the windiest places on earth. For the best part of six weeks, there simply wasn’t enough wind, and Britain is heavily invested in wind. Also, it has never installed much gas storage, which is one way of hedging against interruption.

Britain took to decarbonization with passion, confident of its great wind resource in the North Sea, where the wind is measured in degrees of gale force by the Met Office. The notoriously rough sea off Scotland hasn’t been getting its usual blow. Most European countries are 10-percent dependent on wind, but Britain relies on it for 20 percent of its power.

One result has been to propel gas prices into the stratosphere; consequently, the price of electricity has soared. Of 70 British electricity retailers, 30 have failed and others are expected to shut up shop as well. These aren’t generators but buyers and sellers of power, under a system which had been encouraged by the government when it broke up the state-owned Central Electricity Board during the Thatcher administration.

Britain, which opened the world’s first nuclear power station at Calder Hall in 1956, has been indecisive about new nuclear plants. Those now under construction are being built by Areva, a French company, which is partnering with the Chinese. This has raised questions about Chinese plans for a larger future role in British nuclear at a time when relations have soured with Beijing over Hong Kong and Chinese criticism of Britain’s right to send warships to the South China Sea, which it did in September.

One way or another, the input of electricity from nuclear in Britain has fallen from 26 percent at its peak to 20 percent today.

The biggest contribution to Britain’s problems, and to those of continental Europe, come from Russia limiting the amount of gas flowing into Europe. The supply is down 30 percent this year, and Russia looks set to starve Europe further if this is a cold winter as forecast.

Russia is in open dispute with Ukraine, which depends on Russia’s giant gas company, Gazprom, to supply gas for the Ukraine distribution system to other parts of Europe. At the heart of the Russian gas squeeze is the Nord Stream 2 pipeline, which has been completed but isn’t operating yet. It takes gas directly – 750 miles -- to Germany under the Baltic Sea and parallels an older line. Its effect will be to cripple Ukraine as a distributor.

The United States opposed the pipeline, but President Joe Biden reversed that in May. Ukraine feels betrayed, and much of Europe is uneasy.

Going forward, Europe will be more cautious of Russian supplies and less confident that the wind will always blow. Its Russian gas shortage has put pressure on international liquified natural gas markets, and counties are hurting from China to Brazil.

Britain has a separate crisis when it comes to gasoline, called petrol in the United Kingdom: There is an acute shortage of tanker drivers to get the fuel, which is plentiful, from Britain’s refineries to the pumps. British service stations are out of fuel or facing long lines of unhappy motorists.

This problem goes back to Brexit. Driving tankers is a hard, poorly paid job -- as is much road haulage -- and Britons have stopped doing it. The average age of British drivers is 56 and many are retiring.

The slack was taken up by eastern Europeans when Britain was part of the European Union. But after Brexit, these drivers were sent home as they no longer had the right to work in Britain.

So, the electricity and gas shortages are compounded by a gasoline shortage, which is quite a separate issue but adds to Britain’s woes as a winter of discontent looms.

Llewellyn King, a veteran columnist and international energy expert, is executive producer and host of White House Chronicle, on PBS. His email is llewellynking1@gmail.com. He’s based in Rhode Island and Washington, D.C.