How governments are making the energy crisis worse

I didn’t know how they’d make the energy crisis even worse. But I did know it was only a question of when we’d find out. And, sure enough, politicians haven’t disappointed. They’re taking every disproven and discredited economic policy of the past century and are busy deploying them, or threatening to.

Having figured out that a price cap on Russian gas is a really bad idea, governments are back with different price caps, this time on Russian oil. As the Washington Post helpfully summarised, “US Treasury Secretary Janet Yellen is wrong when she says ‘this cap will help us keep global energy markets well-supplied.’ It won’t.”

Of course not. Bloomberg reminded us that even the EU officials know why price caps are a bad idea: “The European Union’s planned package to curb surging natural-gas prices must avert an increase in the use of the fuel amid an unprecedented supply crunch, said EU energy chief Kadri Simson.”

Now, let’s quickly review why this is an unbelievably ironic comment.

The reason why gas prices are high is a lack of supply. Politicians have come up with a solution that treats the symptom, but not the cause. Their solution is a  price cap to ensure that prices are low.

But, of course, this just brings us back to square one. There is too much demand at those low prices. And so lowering prices artificially is what causes the problem of gas shortages – the very reason prices were high in the first place.

The solution to high prices cannot be to push those prices back down again. Because it is the amount of energy, not the price, which is the problem.

Pushing down prices will only result in a new problem: that is the need to ration the gas – to decide who gets it and who doesn’t at the low price. We’ll need a government programme for that too. Simson is now proposing to ensure that demand isn’t too high – as though gas demand is the problem…

Well, that makes sense if your primary concern is to keep prices down. But shouldn’t the primary concern be the amount of gas that is available?

The cycle of government created problems and solutions is infinite.

Having figured out that a price cap on gas is a bad idea for all these reasons, governments are now planning to learn the same facts again when it comes to oil. And you’ll never guess who’s happy to teach them that lesson.

On 12 October, Vladimir Putin quoted Milton Friedman, “If you want to create a shortage of tomatoes, just pass a law that retailers cannot sell tomatoes for more than 2¢/lb. Instantly you will have a tomato shortage. It is the same with oil or gas.”

It’s funny how times change, isn’t it? The Russians quoting free market economics to the West…

Bloomberg points out that everyone knows what’s coming as a result of the latest price cap plan.

Administration officials, who have held meetings nearly every day to work out implementation of the price cap, are also increasingly worried that Russian President Vladimir Putin may retaliate by cutting off supplies, one person familiar with the matter said.

I’m not sure about you, but I wouldn’t sell my produce below the market price…

The point is that the price cap could make the energy shortage even worse – the very problem it was trying to solve.

Now, we already face a shortage of energy today. But what do you think price caps will do to the supply of energy in the future?

Do you think energy producers will be falling over each other in an attempt to produce and sell more energy? Do you think investors will be keen to deploy their money in production of more energy in the future?

If you’re confused, the UK government has made the problem more obvious. Bloomberg reports “UK to Cap Revenues of Renewable, Nuclear Power Producers Starting in 2023”.

There’s nothing like limited revenue to incentivise the investment we need…

Actually, there’s something even better: an export ban like the one being considered in the United States.

But notice how the UK’s cap is on revenue, not profits. That makes it significantly worse. As any business leader will tell you, they won’t invest in a capped upside.

The underlying “problem” of too much revenue at energy companies is of course the way electricity is priced in the first place – another government intervention making the crisis worse. Given the way things are set up, it’s usually the gas price that’s determining everyone’s wholesale electricity prices.

They didn’t just make Europe reliant on Russian gas. They made the whole system reliant on gas prices too!

Here’s another angle. Europe’s energy market is an interconnected grid. This creates a bit of an incentive problem. National politicians can promise to save the planet by shutting down local energy production, knowing that it’ll simply flow from elsewhere.

Unfortunately, it appears they all did it at the same time. From the North Sea to the Groningen gas field to nuclear power in Germany, they shut it down. And so now they find themselves without enough electricity to heat their homes or power their factories.

Oops.

The solution is of course to allow those nations pursuing sensible energy policy to make a whopping profit from others’ stupidity. That’s how the free market works. It provides incentives to do the sensible thing. And if you don’t, you pay a price. Literally.

But it’s precisely the incentives to do the right thing which governments are fighting with their price caps, windfall taxes and demands to cut power usage. If you don’t reward good policy, there won’t be any.

Unfortunately, thanks to their numbers, those who sabotaged their own energy supply are in the majority in the EU, allowing them to commit those who pursued sensible energy policy to stupid solutions like price caps.

If the solution is to reverse course on all this, governments are leaving it to the very last minute – another helpful policy decision.

After many months of political chaos, the Titanic that is German energy policy has finally done a U-turn. It struck an iceberg long ago and the country is sinking into a recession. But at least they’ll have some nuclear power to go along with it now that the decision to keep the power plants online has finally been made.

Funnily enough, this comes after leading members of the governing coalition described such a policy as “madness” only weeks ago…

This uncertainty in policy is precisely what causes high electricity prices in the first place. It cuts investment, forces markets to price in bizarre situations and raises volatility in energy markets.

Will the German nuclear plants be ready in time for winter? Not according to the government ministries responsible. But that was the analysis a few months ago…

Another option for making your energy crisis worse is to shift it from an energy crisis into some other sort of crisis.

For example, you could force households to shut off their heating, turning the energy crisis into a health crisis. That’s the solution the European Parliament is pursuing by shutting off its heating.

You could leave your citizens to burn rubbish to keep warm – the Polish model. Others are enquiring about burning dung. Neither seem good for the environment or health, but I’m not a scientist.

Or you could force your heavy industries to shut down, turning the energy crisis into an industrial goods shortage crisis, recession and trade balance crisis. That’s the German model.

Or you could shut down your greenhouses, turning the energy crisis into a food crisis. That’s the Dutch model.

Not content with ruining the European energy position, politicians are now spreading the love. They’re buying gas everywhere they can get their hands on it. But this is only shuffling the energy crisis around the world, to the places which can’t afford to outbid Europe for gas.

You might think the Europeans will get away with this even though they will endure very high power prices this winter. But you’d be wrong.

By causing energy shortages around the world, which will likely lead to food shortages too, I suspect Europe will learn another lesson – by causing refugee crises overseas.

Tunisia is seeing the consequences of Europe’s policies, with shortages of fuel, flour, sugar, butter, milk and cooking oil. “We’ve become like refugees in our own country,” complained one Tunisian.

Better to be a refugee in Europe then…

The International Monetary Fund (IMF) is already struggling with record assistance, often for governments that subsidise their populations’ energy and food supplies. Bloomberg sums it up in this way: “Emerging economies, sold gas as a low-cost way to navigate the energy transition, will be feeling the pain of Europe’s energy crisis for years to come.”

Well done, EU.

All this busy-bodying stands in stark contrast to what actually solves such problems, of course. As all new subscribers to Fortune & Freedom find out about, I believe the real solution is to abolish government controls and measures. That’s a big part of how the Germans triggered their economic miracle after World War II.

In coming days, we’ll look into a similar example, when a government official solved an inflation problem by locking himself in a broom cupboard.

If you accept that governments cannot solve problems, but can only make them worse, then it makes perfect sense that the government which governs least governs best.

Right now, governments are busy trying to solve the energy crisis. I have complete faith in their ability to deliver a proper calamity this winter.

The question is what you’re going to do about it. My suggestion is to try and profit from the chaos. Here’s how.

Nick Hubble
Editor, Fortune & Freedom