The good news is that energy prices will be coming down. The bad news is nobody knows when for sure. The UK’s biggest energy supplier, Centrica, says high gas and electricity prices could last for another two years. The International Energy Agency (IEA) reckons that’s too optimistic. Expensive bills are a problem for firms, consumers and the government. Households could face a doubling of annual energy bills to £2,400 a year from October - a cost-of-living catastrophe for millions. While Labour proposes a support package, Conservative ministers have said little – fuelling suspicions that they intend to reduce demand for energy by making people poorer.
Carbon-based energy will fade, but it won’t disappear completely. To keep temperatures to 1.5C above pre-industrial levels, the IEA says the world in 2050 would have to use about half as much natural gas as today and about one-quarter as much oil. British policymakers must wake up to the security implications of greening the economy. Britain replaced coal-fired plants with wind power to reduce carbon emissions, becoming dependent on natural gas imports – especially in calm weather. Traditional suppliers like Russia might see opportunities in volatile fossil fuel prices that result from the transition to net zero. This is not reassuring. Fuel price protests sparked unrest in Kazakhstan this month, but they also brought Britain to a halt 22 years ago.
Britain should look to John Maynard Keynes for answers. The basic fault of commodity markets, he saw, was the private sector’s failure to make effective use of stockpiling. Keynes proposed government storage of raw materials and foodstuffs to stabilise prices – by buying up essentials from world markets when they were cheap and selling them to consumers when they were dear. In 1942, he went further to propose an international system of buffer stocks to limit the fluctuation of the prices of key commodities. Keynes showed that buffer stocks could secure macroeconomic stability. His proposals were adopted partially by the United States, and others, after the second world war – becoming a defining feature of the golden age of capitalism.
Producing and consuming countries have conflicting interests when it comes to key commodities but they share an interest in stable prices as a pre-condition for sustained investment. Keynes saw a pricing policy as a solution to high, unstable prices. This makes sense but is anathema to current economic thought. Britain closed its last big gas storage facility in 2017, a shortsighted decision by Centrica that left the country able to store only 2% of its annual demand. Other big gas importers, by contrast, can store at least 20%. As the economist Isabella Weber notes, the orthodox view today is that the state should put “free prices” above welfare considerations. History suggests that this is about politics, not economics. Ms Weber, in her book How China Escaped Shock Therapy, speculates that Keynes may have been inspired by ancient Chinese economic thinking on smoothing grain prices.
A mixture of extreme weather, rising demand, post-pandemic economic nationalism and spiking energy prices will have profound effects. In Britain, post-Brexit economic barriers will also push up the cost of trade. Commodity prices can potentially have a very powerful inflationary effect on the cost of goods. The United Nations says average food prices jumped about 28% last year to a 10-year high. In Italy, pasta risks becoming unaffordable. Britain has an energy price cap that does not live up to its name. The answer to soaring bills is not to raise interest rates and make families poorer. Instead, Britain should have a serious conversation about key commodities as a source of power and their absence as a strategic vulnerability; and heed the wisdom of the past to deal with crises of the present.