UK price rise exposes failure to prepare for food and fuel shocks


Rising imports of fuel and food prices have eaten into real incomes, putting country at risk of volatile global economy

Just as the world becomes more uncertain, Britain has left itself open to the worst the world can throw at it by becoming a net importer of fuel and a bigger importer of food.

If governments are supposed to act as risk managers, protecting their populations from a dangerously volatile and unstable world economy, then successive British governments have failed.

The UK is not the only major nation struggling to deal with higher global fuel and food prices and limited home grown resources. Japan, having switched off the last of its 52 nuclear power stations last September as the Fukushima situation deteriorated, has been spending much of the wealth it built up over the last 30 years on imports of liquefied natural gas. The latest figures show gas imports hit $69bn (£41m) last year and were the primary reason the country’s trade deficit soared to $112bn in 2013 from $67bn in the previous year. Not surprisingly, the Japanese government said last month it aims to get the reactors restarted.

China, Germany and the US have acted in different ways to insure themselves – with differing degrees of success, but they have at least acted.

China has sought deals with individual countries to preserve lines of access to food and fuel. Long-term deals with Brazil and a host of cash-strapped African nations have kept the Chinese economic machine turning when harvests have failed and world markets have been convulsed by commodity price shocks.

The US, a significant agricultural producer that also controls vast amounts of the world’s food through private trading companies such as Cargill and General Mills, has always been more vulnerable to fuel price shocks than the ups and downs of food commodity prices. But in recent years, by unleashing its huge reserves of shale gas, it has been insulated even from this market turmoil.

Washington has done all it can without breaching World Trade Organisation rules to prevent its fracking boom from driving down the world price of gas by blocking the conversion of terminals designed to import the stuff into terminals that can export it.

Germany, meanwhile, has spent the last 15 years installing enough solar and wind generation to cope with 30% of its fuel needs. That leaves the country still dependent for much of its power on imports of fossil fuels, especially after the decision to run down its nuclear power stations, but provides a partial buffer against volatile prices and geo-political problems – usually in the form of a row with Russia.

In Britain most of the debate around risk has ignored food and fuel in favour of finance: reducing high levels of borrowing by households and the government and finding ways to stop banks from courting another disaster. Little attention was paid to energy and food prices until last year, when Labour highlighted how the cost of fuel was wrecking household incomes and Ed Miliband ignited the issue by arguing prices needed to be frozen to give ministers time to construct a new market structure.

The obsession with the risks posed by banks was understandable, after Britain was one of the countries worst affected by the banking crash and very obviously one of the most vulnerable to the next disaster without significant reform.

Yet analysis by Julian Morgan, chief economist of the Green Alliance thinktank, shows how rising energy prices are part of a longer term commodity price shock that poses an equally profound problem to the UK economy, if not an even deeper one.

In terms of risk management, this administration and the next will need to adopt even more unpalatable policies than those required to rein in renegade banks.

Not so long ago Britain was happy to ride the energy price rollercoaster: in the 1980s most domestic heating and industrial needs were met by North Sea gas and domestic coal. Later, when coal imports became the norm, the price was helpfully low. As a net exporter of oil, any rise in petrol prices had the positive side-effect of bringing extra foreign exchange and bumper tax receipts.

As Morgan charts in his report, The Great Resource Price Shock, for 20 years the west enjoyed an unprecedented glut of commodities and with it ultra-low prices – a period known as the great moderation. Everything from copper to wheat and oil was in plentiful supply. In the late 1990s the price of North Sea Brent crude averaged $16 to $20 a barrel. Today the figure is nearer $108.

But unlike in the 1970s, when two overnight increases in oil prices quadrupled the cost in the west and then quadrupled it again, oil prices and the gas prices that are tied umbilically to them, began their steady journey upwards from 2003.

Unfortunately, the rise coincided with the moment Britain became a net importer of oil. Though the price dropped to $40 a barrel in the aftermath of the banking crash, it has recovered strongly and ranks as a huge cost to the UK economy, with comparatively little offsetting income from the declining gas and oil businesses of Aberdeen.

Then there is the rising cost of food and the UK’s increasing reliance on imports to feed the nation.

Morgan’s report shows that between 2000 and 2012 Britain’s net dependency on imports of food rose from 33% to 38%. He documents how between 2003 and 2013 world fuel prices rose four times and metal prices trebled. Food prices roughly doubled.

In that time the Bank of England, which has the job of controlling inflation, was forced to write 14 letters to the Treasury explaining why inflation was at least one percentage point higher than its 2% target.

Morgan, who has gone back over those letters, found that on only one occasion did Bank governor Mervyn King blame an overheating economy and that was in 2007, months ahead of the Northern Rock debacle. In many he blamed the rise in VAT to 20%. In all the others, King said either the depreciation of the pound or rising import prices underpinned rising domestic prices.

In recent months, sterling has begun to rise, but this is unlikely to bring the situation back into equilibrium. North Sea oil and gas is in long-term decline, so as the economy recovers and the demand for fuel increases, Britain must import more, offsetting sterling’s greater purchasing power.

The effect can be seen in the last trade deficit figures. During the third quarter of 2013, our trade deficit equalled 5.1% of GDP, the biggest in more than 20 years.

Morgan shows how rising fuel and food prices have eaten into real incomes more than even Labour has laid out in its assault on government policy. We know average real earnings fell in the decade up to 2013 – coming down from £327 to £319 a week once inflation is factored in.

But if the effects of rising fuel and food prices are removed, by excluding energy and unprocessed food, real average earnings would have risen over the decade, to £335 a week. In other words, Morgan says, real earnings could have been around 5% higher in 2013.

An average £2,954 annual bill for food and £1,206 spent on domestic fuel in 2012 would have been £2,532 for food and £619 for fuel if fuel and food prices had risen only in line with the overall consumer prices index, rather than galloping ahead. It implies a combined household saving of more than £1,000 a year on essential bills.

Green Alliance advocates Britain take a more activist stance on energy and food conservation, alongside greater spending on renewable energy production, to protect against further price shocks and the volatility that always seems to send prices up rather than down. It is a policy that former environment minister Chris Huhne adopted before he was forced to resign and one that has dissipated under George Osborne’s austerity programme.

There are two political problems with this: first, restricting food waste and fuel conservation are unglamorous; secondly, they involve government intervention at a moment in history when most governments are likened to estate agents – trusted to do little more than look out for themselves.

And for those looking to shale gas to alleviate at least half of the problem – as Osborne admitted last month to a House of Lords committee – it will be produced by foreign companies and mostly exported, leaving only employment and taxes as the main benefits.

  • Phillip Inman © 2014 Guardian News and Media Limited or its affiliated companies. All rights reserved.

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