Rising energy prices due to disrupted supply chains mean a tough winter is upon us.
$10.4 trillion of global stimulus has reignited demand following prolonged lockdowns due to the coronavirus. However, the supply-side of the economy is suffering: vacant container ships are anchored off California waiting for ports to clear, while lorry drivers are receiving signing bonuses. These shortages are caused mainly by decarbonisation, but protectionism has also played a role. They have implications for inflation, innovation, and domestic firms.
Causes of shortages
One of the leading causes of the problems that economies are experiencing with shortages is decarbonisation. The switch from coal to renewables has left Europe vulnerable to energy shortages and caused natural gas spot prices to rise by over 60%. Consumers face a brutal winter as the costs of heating their homes has risen, particularly for those on lower incomes. While this argument blames decarbonisation as the reason for the shortages, if economies had transitioned earlier to sustainable energy sources, they could have dealt with a fall in the supply of fossil fuels. A more significant push to renewable energy is now more important than ever to weather disruptions to the supply of fossil fuels in the future.
Another leading cause of the problems that economies are facing with shortages is protectionism. Biden’s continuation of an average tariff of 19% on Chinese imports and Britain’s withdrawal from the EU has meant that companies’ flow of cross-border investment has fallen by more than half relative to world GDP since 2015. Disruptions to global trade flows have caused shortages of previously imported goods and services. However, protectionist trends began before shortages hit economies in 2020: Brexit was agreed upon in 2016, and Trump came to office in 2017. Hence, while protectionism has contributed to supply chain disruptions, decarbonisation has had a more significant impact.
Shortages cause inflationary pressures. Pent up demand coupled with dwindling supply has meant that prices have risen in the UK and the US by over 3% and 5%, respectively, with more extreme price rises across developing economies such as Brazil. It has discriminatory effects on the latter since deprived nations are often net importers of food, meaning they must pay higher prices for their commodities. Additionally, unstable governments and poorly established institutions mean they do not have the expertise or the tools to fight price rises. However, developed economies are suffering too, but from 1970s-style stagflation. Judging whether such price rises are temporary or transitory is incredibly difficult: tightening too early and the recovery will be compromised, tightening too late, and runaway inflation will threaten monetary stability. While developed economies face challenges, the developing world faces more significant problems as they do not have the tools to battle inflation.
Shortages change the nature of public and private sector investment. Fossil fuel shortages have spurred Boris Johnson to announce a package of 18 deals worth £9.7 billion At the Global Investment Summit in October 2021, which involves contributions from entrepreneurial oligarchs such as Bill Gates. In the long term, this is likely to incentivise further innovation from the private sector and accelerate the transition to net-zero. However, it does not solve the short-term energy shortage. Narrowed corporate margins due to higher prices caused a scale-back of investment at the critical moment due to status quo biases and panics during crises. Hence, this will boost innovation in the long term, but not enough is being done to solve the short-term problems.
Shortages will increase the importance of domestic firms in the future. Nationalism has restricted the ability of economies to import their goods and services, which puts extra pressure on domestic firms to perform. While increased investment and reliance on these industries can benefit local businesses, such as UK farmers facing less competition from European farmers, prices may rise further due to unspecialised business practices. Globalisation has allowed economies to benefit from comparative advantages, meaning they can produce more with less since local enterprises may be less accustomed and may not be as productive as their foreign rivals. Hence, productivity falls, and inflation creeps up, exacerbating the current crisis and stunting future growth.
Decarbonisation has played a significant role in causing global shortages, while protectionism has also contributed to a lesser extent. Such shortages have impacted developing economies vulnerable to higher commodity prices and unable to curtail rising prices. Increased reliance on domestic firms following the crises may also cause inflationary pressures and reduce trend growth. A rethink may accelerate the long-term transition to net-zero within governments looking to mitigate future shortages. They must address such issues in their recovery plans following the pandemic.
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