Nightmare Fuel
On scarcity, subsidies, and who really pays the price.
In the early months of 2020, a crisis was slowly moving across the globe. The first warning signs emerged in Asia, then spread to Europe. Our own government remained relaxed about it. “Business as usual” was the mantra, until it rapidly wasn’t. We all know what came next, with the abrupt turn into lockdown and the greatest challenge to our ordinary lives since the war. We also now know something else. Thanks to the recent reports from the Covid inquiry, we can see how a lack of government preparedness, seriousness, and, most of all, honesty made it far worse than it could have been.
Now the alarm bells of a new crisis – an energy shortage – should be starting to ring. The Straits of Hormuz, the route for 20% of global oil capacity, have been closed for weeks. The system’s lag is being used up, and the timelines for ramping up production remain long. Even if the war ended tomorrow, there would be a severe energy shock. Indeed – there already is one. In Asia, governments are trying to slash demand. France is reporting fuel shortages. Britain may be a month or so from running out of jet fuel. Yet our political class, and the debates around the issue, remain deeply unserious, failing to reckon with the realities of such a supply shock.
The government is telling people to keep their usage “normal”. The main policy interventions so far have been to provide financial support for the most affected and most vulnerable. The various opposition parties are calling for greater demand subsidies. The Lib Dems have called for fuel duty to be cut. So have the Conservatives, as well as urging for VAT to be removed on home energy. Reform has added a call for cuts in air travel taxes. These may be attractive to voters and align with the parties’ priors, but they are wholly inadequate to meet the challenge at hand and may ultimately worsen the problems the country faces.
In economic terms, the situation is relatively straightforward. The blockade of Hormuz means there is less energy available than normal. Globally, there is a shortfall between supply and demand. Depending on where you sit between sources and the independence of production and existing supply levels, it depends quite how that hits you. But it will hit eventually if the crisis remains unfixed. Should this happen, decisions have to be made about who gets the energy and who loses out.
Nature (or, well, the market’s) way of doing that is through pricing. Costs go up, demand falls away. The newly scarce resources go to those who either value it the most or have the resources to pay. The political challenge here is obvious. There is some energy use we can’t easily eliminate, and it’s becoming painfully expensive. Prices rise for everyone but become particularly challenging for those on the lowest incomes. It becomes harder for them to heat their homes or afford transport to work, and so on. These become compounding problems – triggering poor health, job losses, and increased vulnerability.
Demand subsidy, however, will only make this problem worse. If the government makes oil, petrol and other fuels cheaper, demand won’t fall as quickly. The supply-demand shortfall will be greater, and there is a risk of shortages. There is an obvious moral case for subsidies to the poorest. The government is sensible to lead with this approach. Universal tax cuts, however, are the worst possible way forward. They amount to a fiscal transfer to the best off and fail to stem demand. Rather than curtailing their fuel use as prices rise, people continue to consume at the same level, placing the same demand on the now-dwindling stocks. The poorest would be hit even harder by this, as they would again struggle to keep up with surging prices. They also have a global impact, making it even harder for poor countries to obtain fuel for essential uses.
In the worst-case scenario, the government will have to find an alternative way to control demand – rationing. For petrol and diesel, the government has existing plans to address supply shortfalls. These include individual purchase limits, prioritisation for emergency vehicles and relaxation of working conditions to allow tankers to move supplies more easily. These, however, become less effective the longer the shortfall lasts. They also do nothing for the more complex demands for heating and electricity. In the ultimate eventuality, a supply shock on the scale of the 1973 crisis (which is currently plausible, if not likely), the government would have to resort to more restrictive measures. The International Energy Agency is already discussing measures such as lowering speed limits, avoiding air travel, and encouraging working from home to reduce usage intensity. Proper rationing remains a possibility. In the 1970s, ration books were issued, but never used.
None of this is likely to be popular. Increased fuel prices always hit governments hard, and the events in Iran are likely to drive another round of inflation across the board. Restrictions will also be unpopular. You can see why the government doesn’t want to talk about them and is currently downplaying the risks and stonewalling inquiries about contingency measures. They also do not want to trigger a more acute crisis by encouraging people to panic-buy, or worse, stockpile under dangerous conditions. But by not properly preparing the country for the risks, the political shock will likely be greater if it does come.
The government should instead be preparing and advising people on how to use less. We need to normalise the idea that a supply shock is likely, and that if it does occur, it will not be “business as usual”. This requires educating people on the best ways to reduce energy consumption. We should show people how to avoid energy waste and encourage best practices. Give people time to adjust, both mentally and practically. Instead of distracting and specious attacks on business, the government needs to prepare the population. Likewise, opposition parties also need to get serious. The worst response to a supply shock is the subsidy of demand, especially where it is hitting the poorest most acutely.
The sooner we cut the softest bits of demand, the better. Encourage people to reduce their journeys or replace them with more sustainable forms of transport. Talk to them about vehicle sharing and combining trips. Get people tweaking their thermostats and boiler flow rates. Have businesses reduce air conditioning usage. Help people to understand the scale of the problem, the looming risk, and what they can do about it. In COVID, the government floundered partly because it didn’t trust people, yet when the lockdowns were introduced, they were generally understood and followed. The response this time is nowhere near as intense – but we do need people to start shifting their behaviour.
The core lesson of COVID was that delaying government reaction doesn’t make the worst problems go away. Nor does it stop the public reacting. Even before the government announced the lockdown, patterns of behaviour were already changing. Proper messaging allows you to optimise that change. Here, the message should be a clear one – don’t panic, don’t hoard, but be prepared for a supply shock. Think about your behaviour, start to cut demand now before it becomes a necessity. This will smooth the transition and help to alleviate the current situation. The public doesn’t need to see the full details of worst-case scenario planning, but helping them to understand the risks could promote the right changes in behaviour.
If the energy shock fully materialises, demand will have to drop. Price will be part of how we do that. The opposition parties should step back from calling for de facto subsidies for everyone and show a little crisis consensus. The government is right to target financial support where it is most needed. Universal support, whether through payments or tax cuts, will only make it harder to reduce demand, thereby increasing the challenge of supply shortages. Scarcity has to be allocated somehow, and bungs for the rich to keep driving are the worst way to do it. The government is right to ensure people don’t panic, but they should be doing more to ensure they prepare. This crisis will not be as deep or as deadly as COVID, but it will be equally resistant to pretending it is not around the corner.
