The certainty of uncertainty

Energy prices came off at the end of the week. There is a cautiously positive sentiment that having coped with the Nord Stream 1 shutdown without price carnage and with European storage stocks on target, the August peaks are in the rearview mirror. But, whilst it is very positive that we didn’t see prices erupting in recent weeks and that we have seen a strong and determined response by European governments (whatever your take on different interventions) there are many uncertainties still about winter:

  • Weather (consensus seems to favour it being “normal”)
  • Further elasticity of demand (particularly domestic heating given the variety of policies supporting consumption across Europe)
  • Levels of performance of interconnected energy infrastructure (think returning French nuclear),
  • Actions of key states outside of Europe to their own economic and energy situations (US energy cost inflation & Japan LNG restocking leap to mind)
  • Financial sustainability of /money market responses to hundred billion pounds and spending programmes to freeze prices which scale on movement in wholesale energy prices (how markets/the £ responds to UK fiscal event & the next BoE rates decision)
  • Implementation detail and effects on the energy industry from new policies to cap revenues, tax profits & hold up liquidity (the devil is in the detail)
  • Further events in Ukraine and in Russia and what this means for the medium-term posture of Russia as a seller of gas & Europe as a buyer

I am frankly intellectually humbled when I think about how the jigsaw of variables will come together and what picture will result, and as neither an economist or geopolitical analyst I lack the ability to compute it entirely. But I do sense it is neither a complete nor valedictory picture at this stage in early Autumn. It’s better than expected in the late summer analytical consensus, which is a good thing, but it is not the final word

As the energy price tide goes out a bit, we are glimpsing the wider price paid to hold it back and costs yet to fully be accounted for:

  • The pain of industrial demand reduction needs to be sustained to keep prices down
  • Households and wider businesses feel considerable pain no matter policy measures
  • Inflation is still high, rates are still rising, currencies are under pressure, emissions are rising
  • G7 countries are teetering on the brink of a recession

With winter to come, energy prices are still volatile and many economic factors lagging energy prices, it is early to be declaring victory in the “energy war”

Europe and the UK have so far taken extreme gas supply actions of Russia on the chin, fought back and are winning on points. But with deep economic cuts opened up, we may need more stoicism resolve, and agility to come, irrespective of whether gas prices flatten or fall further. I think we and Europe have that capacity but need to be prepared for further surprises and to shoulder more pain along the way. As news emerging of atrocities in Ukraine reveals, it is far far less than the people of Ukraine have to deal with after all.