Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
Europe’s energy crisis has lurched into another critical phase after the indefinite shutdown of the Nord stream pipeline. These are the worst case scenario fears that European leaders had been bracing for.
Ostensibly the reason for the closure is an oil leak in one of the turbines, but industry experts have called into question the necessity of a move of this magnitude given the repairs required. Instead it seems energy is Russia’s big weapon in the ongoing war with Ukraine.
Turning off the gas taps appears to be a response by Russia to a planned price cap on its oil, designed to cause blackouts and rationing and further financial pain for companies and consumers across Europe. The price of natural gas futures, traded in Europe surged by 30% earlier before dipping back a little. This huge jump will add fuel to the fire of inflation and intensify the clamour for emergency government help.
As a storm erupts over energy supplies and fears mount that European industries may have to scale back some production in the months to come, the euro has dipped below parity with the dollar, for the first time in two decades. The euro fell to $0.988, the lowest level since 2002, while the pound hit a new two and a half year low at $1.144. The Dax and CAC 40 have plummeted on the open as investors fret about the outlook for companies faced with an immediate energy squeeze. The FTSE 100 has also opened in the red, with banking stocks among the biggest fallers as concerns intensify about potential bad debts mounting, and also some doubts have risen about the pace of future interest rate hikes, given the pile-on of pressures for economies.
The Energy Crisis may have been brewing for months, but just like the Financial Crisis of 2008, stresses in the system, such as the over-reliance on Russian gas have suddenly widened into deep cracks, and governments face the huge task of building coping mechanisms to bridge the gaps in supply. More countries such as Sweden and Finland have brought in financial backstops for the energy crisis to avert a major collapse in their markets. In the UK, Liz Truss, who is widely expected to be announced as the new Prime Minister today, will be under intense pressure to come up with an urgent package of measures to avert a cost-of-living catastrophe for millions of people and prevent a domino effect of company collapses.
Targeted support for households and companies facing frightening rises in fuel bills are crucial but this needs to come via reducing or at least limiting the energy price cap. Cash handouts to compensate for energy hikes are, for now, being assessed as rises in household income, whereas a reduction in bills would have an impact on how inflation is calculated and would help drive down the headline rate. A solution to address the immediate crisis is urgent but the government also needs broader policies to secure the country’s energy supplies in the medium term, ensure the transition to sustainable energy sources is as effective as possible, and bring about a revolution in insulation.
Oil is also in focus today, with worries oil producing nations could also turn off the taps to try and limit any fall in crude prices. Although a meeting of OPEC members isn’t expected to lead to any major production cuts immediately, warnings from Saudi Arabia that this was a possibility, is keeping supply concerns bubbling. Brent crude prices have fallen 25% since June, as fears about a global slowdown have taken hold as the era of ultra cheap money comes to an end and central banks hike interest rates. China’s zero-covid policy has also led to expectations of lower demand for crude in the world’s second largest economy.