Do you feel lucky? That was Alexander Novak’s subliminal message when Russia’s Deputy Prime Minister channeled his insider Clint Eastwood to warn the West of the consequences of extending his sanctions on his country’s oil.
Undoubtedly, there was a hint of bravado and desperation as Novak said it was possible – although unlikely – that the cost of rough could reach $300 (£227) a barrel. The measures imposed since the invasion of Ukraine are starting to hurt.
Even so, much like the cop played by Eastwood in Dirty Harry, Novak knows what many Western European politicians are thinking: giving up Russia as an energy source is far from free.
Starting with the obvious, rising oil and gas prices threaten to intensify cost of living crises across the West. It is a fundamental rule of economics that if the supply of something is reduced, the price will rise until the cost becomes prohibitive. At that time, there is a drop in demand which drives prices down, which is why every spike in oil prices has been followed by a drop.
It seems unlikely – given the differing opinions among member states – that the EU will be ready to widen its sanctions to include oil and gas. But unless the war ends soon, energy prices will remain high, deeply eroding consumers’ profits and purchasing power.
A second problem is how to compensate for the loss of Russian energy while meeting net zero commitments. In the medium and long term, the answer is obvious: Western countries must accelerate the transition from fossil fuels to renewable energies and the invasion of Ukraine will give further impetus to this trend. In the short term, however, governments keen to keep the lights on and transportation systems running will seek to replace Russian fossil fuels with fossil fuels from other parts of the world.
This makes sense, as energy shortages would lead to a severe recession in the West – and in the past, economic downturns have led to a decline in interest in green issues. This has not happened so far, but there is a real risk of it happening.
Obviously, this is a messy compromise. More progress should have been made earlier on the green energy transition, but it has not happened. It would have been helpful for politicians to link pandemic recovery and net zero plans more meaningfully, but they did not. Given the current state of affairs, it may be two steps forward, one step back.
Ministers boast about P&O
Kwasi Kwarteng says the government is angry and disappointed with P&O Ferries’ decision to lay off 800 staff and replace them with cheap contract labour. Not to be outdone in the sentencing stakes, Rishi Sunak calls the company’s behavior appalling, horrible and wrong.
It’s bluster. Kwarteng’s sales department knew what P&O had planned 24 hours before the news broke. The chancellor is happy enough that P&O’s parent company, Dubai-based DP World, is continuing to invest in the free ports it holds dear.
In his letter to P&O, Kwarteng pointed out that the company could face an unlimited fine for failing to follow the proper consultation process. In other words, it is normal to make British workers redundant and replace them with cheap foreign labour, provided you warn them beforehand.
The reality is that ministers have been caught with their pants down. After promising but failing to deliver a jobs bill, the P&O case shows exactly why tougher protections for workers are needed.
No barrel of laughter
The price of a barrel of Brent crude oil hit $138 two weeks ago. Since then, it briefly dipped below $100 a barrel and is currently trading at $114 a barrel, around $25 a barrel below its recent high.
Motorists would be hard pressed to find evidence of falling crude prices. As the AA points out, wholesale petrol prices were down 12 pence a liter at their March 8 peak, but the retail price at the pump was 9 pence more expensive. It’s funny how markets work so asymmetrically. Anyone would think that retailers took their customers for a ride.