Well, it’s that time of year again. Our now traditional annual energy crisis is already on the way. And so we’re all going to have to prepare for another round of energy drama… including investors.

The Telegraph has finally caught onto the story, a few months after our own energy analyst James Allen began writing about it at Strategic Energy Alert:

British households will have to cut energy use again, says National Grid

Preparations for second winter without Russian gas signal energy crisis is not yet over

Of course, many of you would also like to blame Vladimir Putin for the mess. But I think you need to re-examine your timelines if you do…

The kerfuffle began in the summer of 2021, when governments rolled out a long series of fiscal packages to help those struggling with an energy crisis caused by… hmmm… caused by what? Can anyone remember?

It must’ve been important because it was wreaking havoc. Get a load of this from Forbes on 19 October 2021:

Crude oil is up 65% this year to $83 per barrel. Gasoline, above $3 per gallon in most of the country, is more costly than any time since 2014, with inventories at the lowest level in five years.

Meanwhile natural gas, which provides more than 30% of all U.S. electricity and a lot of wintertime heating, has more than doubled this year to $5 per million Btu.

Even coal is exploding, with China and India mining as fast as possible. The price of U.S. coal is up 400% this year to $270 per ton.

The situation is considerably worse in Europe, where electricity prices have quintupled and natgas prices have surged to $30/mm Btu—the energy equivalent of paying $180 for a barrel of oil.

All this before the invasion of Ukraine?

Even the pent-up inflationary impact preceded it:

All this is feeding into the inflation loop, pushing up the prices for energy-intensive metals like nickel, steel, silicon. Fertilizer, mostly made from natural gas, has ramped past 2008 record highs to nearly $1,000 a ton, obliterating the $300 to $450/ton range of the past few years. China announced this week it would halt fertilizer exports. Copper, perhaps the most vital raw material in building out a wind and solar industry, is near a record at $4.50 per pound.  

Think tank Breugel reminded us of just how big the government’s fiscal aid packages, which began in 2021, were:

As shown in the Bruegel dataset National fiscal policy responses to the energy crisis, governments across Europe allocated and earmarked €758 billion to shield households and firms between September 2021 and January 2023. EU governments collectively allocated and earmarked €646 billion, the UK €103 billion and Norway €8 billion.

Then, in 2022, Putin took advantage of the open goal that was a lack of gas storage, a reliance on gas, and an intermittent renewables system. He invaded Ukraine, knowing Europe’s response would have to be mooted for want of real power – energy.

Energy prices spiked anew due to sanctions on Russian gas and energy. Luckily, much of Europe still had legacy coal and nuclear to turn back to. In the future, that will be gradually less so, but the UK government has already committed to keeping coal at the ready this year.

Does anyone else remember when getting coal for Christmas was a bad thing?

In 2021 and 2022 it was a rather good investment!

Europe’s shopping spree on fossil fuel markets was less good news for those countries left in the dark while Europe bought up their gas and coal. But those countries have likely learned their lesson. German power company EON is already warning about competition from Asia adding to demand in gas markets this year.

Keep in mind that the Germans are already in a recession, facing high inflation, and now the prospect of a third year in energy limbo. Being at the mercy of the weather is not a very German state of affairs.

And things are not much better elsewhere. Overall, it’s a nightmare scenario that presents very few profitable opportunities to investors. James Allen has them covered for his subscribers, but will be sharing more with you soon.

Today, my worry is of a different sort though. After all, it takes decades to turn around energy policy. Monetary policy and inflation are much closer to home.

The fear is that a return to energy crisis conditions is also going to reignite inflation. At least as the government measures inflation, which is rising prices.

True inflation is the devaluation of money by creating more of it. And an energy crisis does not fit this definition, even if the symptoms are the same – rising prices.

But prices can rise for all sorts of reasons that have nothing to do with an inflated money supply. The distinction is important because of the response.

My worry is that central bankers will misdiagnose the problem and react with precisely the wrong cure. They’ll panic about soaring energy prices triggering a new surge in the Consumer Price Index. And, because they can’t, or choose not to, tell the difference between true inflation and rising prices, they’ll impose the wrong cure for the true disease.

The only thing that can cure high energy prices is of course more energy supply. And the best way to encourage that is higher prices.

Unless there’s some additional artificial constraint which is reducing energy supply. Can anyone think of one? Perhaps a cause that might’ve undermined energy supply back in 2021, before sanctions on Russia could?

Anyway, back to misdiagnosing inflation. If central banks respond to a new outbreak of “inflation” caused by energy prices spiking again, that’ll mean higher interest rates.

Now, first of all, ask yourself whether higher interest rates improve energy supply. Do they make it easier or harder for energy companies to find, develop and produce energy? Do higher interest rates make it easier or harder for energy companies to finance expansions of energy supply projects?

What higher interest rates definitely do is cut energy demand, meaning shrinking our living standards. The monetary policy solution to an energy crisis is, therefore, to shrink the economy to fit to the energy system as we have it.

Is that a solution? Or is it merely the creation of a different problem? Would we just be swapping high energy prices for a recession?

Would you rather be unemployed or facing high energy prices? Is it fair to those who lose their jobs because of higher interest rates so that we can enjoy lower energy prices?

And aren’t energy markets and prices global anyway?

A bigger worry is that even higher interest rates risk igniting a financial crisis by making debt unaffordable. But I’ve been covering that in detail recently.

It’s extraordinary to think how many of today’s problems are caused by a lack of energy supply. Inflation, geopolitics, economic growth, government finances, tight monetary policy, deindustrialisation, and so much more.

It’s frightening to think how long it’d take to turn this situation around, even if we do decide to.

And all this amounts to the investment opportunity which we’ll reveal next week. But for now, batten down the hatches for another round of energy driven chaos across so much of our life.

Until next time,

Nick Hubble
Editor, Fortune & Freedom