I am always amazed at what makes the news. Here in North America, where we are preoccupied with a debt ceiling, China and the Pandora papers, there has been scant mention of the fuel crisis in the UK.

But given South Africa’s close ties with the UK, it is obviously a flashpoint. But I think it’s a flashpoint regardless, simply because it highlights the fragility of systems that we take for granted. Lets unpack this a little.

Minksy Moment

Hyman Minsky was an American economist who developed a theory of instability. It is often used in analyses of market and debt cycles, but I would argue could be applied in other fields. Simplistically, Minsky postulates that observed period of stability belie an underlying and building instability which when it unravels, tends to do so with catastrophic results.

When natural gas prices surge from $2.50 to almost 3 times that in a few months, you know we have a problem. So what’s underlying this and more importantly what warning can it give us about the future?

A confluence of events

There are many different narratives doing the rounds on the wires. I will mention a bunch of them because there is partial truth to many. They each contributed to the growing veins of instability which led us to this point.

There’s the global logistical and labour shortages post pandemic. Truly a bigger topic and one for another day. But surely, this is a large contributor.

Some have cited the push to Net Zero as the bogeyman as it’s led to an underinvestment in conventional energy projects. I would counter this by saying its perhaps an overreliance on a single renewable energy source (wind in the case of the UK) that is the key risk factor. We need MORE renewables and we need DIVERSE renewables. But most importantly, we need storage!

Talking of storage, the lack of gas storage capacity in the UK has also been a long standing sore point. The UK has a 2% capacity for gas storage compared to 25% in the rest of the EU. If there was a lack of investment, one could argue it was in building storage capacity to smooth the supply/demand dislocation which are a seasonal factor in the UK.

Winter is coming

We are not yet in winter. Winter is coming. The seasonal demand swing factor is massive. (For more on this, check out this thread). With tight supply, no storage, the UK must rely on imports to balance the system. That’s where this devolves into a ‘Game of Thrones’ set up. It’s all geopolitics.

With Brexit, the UK has effectively shot itself in the foot. The EU has a great ‘systemic balance’ set up allowing outages from renewables in some countries to be balanced by energy transfers across the EU region’s system.  The UK is literally an island unto itself now.

Already, France has tried to ‘flex’ by using this crisis to pressure the UK on fishing rights. The UK is touting a new line with Norway (green hydro power) as a mitigant. The balance of power shifts and is fluid but doesn’t help a constrained system where the brunt is borne by the consumer. Then there’s Russia and China….and the list goes on. Pay attention to these dynamics and games. There’s more to this than meets the eye.

 

Dystopian future or dystopian present

When you see soldiers called in to drive fuel trucks and fights breaking out in fuel lines, you know that the dystopian future you thought of is here. OPEC continues to keep the oil market tight. Global supply chain constraints are looking a lot more entrenched than I initially thought.

They are further compounded by shifting global polarities in alignment and power. All of these pressure points culminate in an increasingly smaller margin for error. Mistakes like the UK missing warnings in March that it was going to face an energy shortage just can’t happen.

But there are also energy shortages in China. As China realigns to its own societal ambitions and aspirations, the cost of higher prices may well shift disproportionately to the west.

The west has been a multi-decade beneficiary of lower prices and cheaper labour from the east. Onshoring as a risk mitigant may work but means higher prices. With its own labour constraints, unless robotics (I like this sector long term) come on stream faster, we may face an uneasy medium term. But I digress.

Tectonic shifts

There are massive shifts underway. These all mean that we need to contextualize our own frameworks and recalibrate as new information emerges. These are mega trends I am watching and all the while hoping that we don’t have policy missteps along the way that leave us all out in the cold.

These blog posts are commentary. There is ALOT more beneath the surface.

For more detailed and in depth analysis of macroeconomic and markets drivers, and what they mean for your business and strategy, please reach out at moe@moe-knows.com for a quote.

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