Geopolitics: Energy price surge in Europe
Chilo Ketlhoafetse | Monday September 12, 2022 06:00
This week started with an announcement by Russia that it will cut off gas supplies to Europe indefinitely and the unfortunate, sad truth is that Africa will feel the ultimate pinch of this.
Let’s give this context: the economic sanctions imposed by European nations are deemed punitive by Russia which has now closed the taps on the Nord Stream 1 which is the main gas pipeline to Europe. Unfortunately, this is occurring at the beginning of winter and thereby puts Europe in a position of duress to either give in or fight further while finding remedies for their people. This is the biggest energy crisis that Europe has faced for decades when already this supply was volatile even before the war began.
Well, "winter is coming" and policymakers in Europe are racing to secure underground reserve facilities to keep their homes warm during winter. Over and above this, there are a couple of other economic policies being put in place all over Europe to ease the pressures caused by the energy crisis including a joint decision by European Union member states to cut their gas consumption by 15%.
We can mention a few of these before we explain the macroeconomic effects that result from these latest decisions by Russia. Germany will limit heating in public buildings effective 1st of September and turn off unnecessary lights in monuments and buildings. France has ordered stores with air-conditioning to keep their doors closed or face a €750 fine and switch off all illuminated advertising at night. Spain prohibits businesses from setting their air-conditioners below 27 degrees in summer and raising their heaters above 19 degrees in winter while also ensuring lights in public buildings are switched off before 10 pm. Italy has followed the same steps as Spain but has themed their intervention Operation Thermostat. The Netherlands has introduced new legislation to ensure there is investment in energy-saving measures which will give returns in five years.
Imagine these types of changes towards your day-to-day living in Africa, if any of our member states were to partake in provoking the Kremlin by placing their own sanctions when already we struggle with our resources.
The European energy crisis will result in a sovereign debt crisis for many western economies. A sovereign debt crisis refers to a period where a country faces a collapse in financial institutions, high government debt and rising bond yield spreads in government securities.
We have lived through this back in the 2008 global economic recession and I foresee the next six to twelve months throwing strong tides and economic shocks our way. The rise in energy prices, which is a major component of the consumer price index, will cause inflation to explode higher and we indeed highlighted this before as the cost will be passed on to consumers.
We know at some point there will be the risk of civil unrest with consumers refusing to pay these prices and eventually protesting. At the very least, the European governments are making efforts to intervene but is it enough? Absolutely not. One option to consider may be to deploy price caps on energy for consumers but they would need to print more money into the economy to cover this shortfall. This is in an effort to protect sovereign yield bonds and eventually prevent the collapse of financial markets and from what I see, both the European countries and America would rather print more money in their economies than give in to Putin.
Conversations have been driven towards alternative energy sources through Africa and in fact, Africa has some of the world’s biggest supplies of crude and has the potential to come to the rescue. Last year closed off with the government of South Africa courting the United States of America, the United Kingdom, France and Germany in its efforts at decarbonisation, resulting in the announcement of a new ambitious Just Energy Transition Partnership.
A couple of months back as well, the Nigerian President called on Europe to help with $25 billion for a gas pipeline from Nigeria to Morocco. This would rescue Europe if it gets funded and would create more opportunities in Africa such as employment and stimulate economic activity within those regions. Other countries which the pipeline would go through are set to benefit from this as well including Ghana, Guinea, Senegal and Mauritania.
Italy as well has since secured a deal with Algeria for a $4bn gas development project which will eventually bring new supplies on stream.
To sum up, most countries should brace themselves for several further economic shocks and governments should prudently use their monetary policies to ensure their people are taken care of.
Africa in particular should ensure it takes up opportunities thorough due diligence, not just based on the bilateral relations it has with the First World nations, but being mindful of the cost-benefit impositions presented by the same opportunities.
*Ketlhoafetse is a Chartered Accountant and seasoned finance specialist focusing on economic issues affecting the local business environment. Commentary and interactions can be sent to ctketlhoafetse@gmail.com and Twitter @chilo_ket