The Chancellor is to knock £50 off the average energy bill by replacing some green levies with general taxation and extending the timescale for rolling out others. On the face of it, the possibility that global energy prices may start to fall over the next few years might seem like good political news for him, and some of the chicken entrails do seem to be pointing in that direction. There is, however, a political danger to George Osborne in such trends .

For Government strategists reeling from the twin blows of Ed Miliband’s economically illiterate but politically astute promise of an energy bill freeze and the energy companies’ price hikes, the prospect of lower wholesale energy prices might seem heaven sent. But in many ways it only exacerbates their problems, for the Government is right now fixing the prices we will have to pay for nuclear, wind and biomass power for decades to come. And it is fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these deals look and the more they threaten our economic competitiveness. The Liberal Democrats have not allowed the Chancellor to cut subsidies for the renewable energy industry, the most regressive redistribution of wealth since the Sheriff of Nottingham was in his pomp.

They argue that what has driven energy bills up threefold in ten years is mainly an increase in the wholesale price of energy, rather than any great lurch towards subsidising renewables. True, but most of the lurch is yet to come and as wind power capacity quadruples by 2020, it will add £400 to average bills — not to mention driving up the price of energy to industry, which will pass it on to consumers.

“There is not a low-cost energy future out there,” said Ed Miliband when Secretary of State for Energy and Climate Change in 2009, at the time an enthusiast for discouraging energy use by price rises. It even became fashionable to argue, when Chris Huhne filled that post, that higher prices would cut bills (yes, you read that right) by encouraging people to use less power.

Anyhow, the forces that have driven energy prices up in recent years appear to be fading. Consider some of the reasons that oil and gas prices rose in 2011, the year energy companies pushed up prices even more than this year. Japan suffered a terrible tsunami, shut down its nuclear industry and began scouring the world for gas imports to keep its lights on. At about the same time Libya was plunged into civil war, cutting off a key supplier of gas. Add in simmering tension over Iran, Germany’s sudden decision to turn its back on nuclear power, the legacy of a couple of cold winters and the lingering depressive effect on oil and gas exploration of low energy prices from much of the previous decade, and it is little surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have driven a surge of new exploration. Deep offshore technology is advancing rapidly and huge gas fields have been found in the Mediterranean and in the Indian and Atlantic oceans. In the United States, the shale revolution has glutted both gas and oil markets, displacing imports. Iran is coming in from the cold, Libya is back on stream and Australia is preparing to export huge volumes of gas. Should the rest of the world start producing shale gas — China, Argentina, Poland and others are on the brink, even Britain might one day deign to join them — that would further add to supply.

David Fuller's view

This is an excellent summary of what FT Money has been pointing out over the last four years, as the Archive will confirm.

Somewhat lower energy prices in real (inflation adjusted) terms is a long-term FT Money forecast, capable of eventually underpinning the next secular bull trend in stock markets.  However, the realistic opportunities for lower energy costs are not being developed by many countries at present.  Consequently, a number of them risk being left behind, not least among industrialised nations, if they continue to turn a blind eye towards their shale oil and particularly shale gas reserves.   

Although the US stock market is overvalued in the short to medium term, and faces headwinds as quantitative easing (QE) tapering commences, the USA is right on schedule to commence its next secular bull trend before the end of this decade.  Key contributing factors are the USA’s competitive energy position and its increasing technological lead during an era of accelerating innovation.  Canada would also benefit from competitive energy costs and has plenty of scope to develop and attract manufacturing industries which no longer need to be the satanic polluters of the two previous centuries.

China is still a big polluter but increasingly now has both the wealth and also the access to high-tech manufacturing capability which is necessary to achieve developed economy standards.  Crucially for China, it also has the world’s largest known reserves of shale gas.  However, opportunities can be squandered by policy blunders and no country is immune to this risk.  China needs to rein-in its military in the regional seas which it shares with many other countries.  With today’s weapons, military bravado is a lose-lose situation.

Japan is overdue for a secular bull market but that means little if the correct policies are not in place.  Shinzo Abe’s programme has a chance of restoring the mid-1970s to mid-1980s entrepreneurial culture and confidence in Japan, before they went mad and arguably created the biggest national bubble in history.  There are two known risks, assuming that Abe can stay on course and count on the continued support of Japanese citizens. 1) Serious conflict with China.  Hopefully and logically this is a small risk but no one can be sure, especially if China were to need an external distraction to keep its population in line against a background of political corruption and authoritarian control.  2) Energy costs – there is no obvious, easy or politically acceptable solution to this problem for Japan over the next several years. 

Continental Europe has plenty of economic potential but governance has long been the biggest headwind.  Consequently, Euroland is one of the worst environments for entrepreneurial development and competitive energy costs.  This will presumably change one day but meanwhile, the European Commission has much too much influence and is less accountable to the electorate.  However, some individual European companies such as the multinational Autonomies can and do still perform.  Moreover, a secular bull market for US equities would lift European share indices as we have seen in the past.

Similarly, the UK stock market should follow Wall Street in a secular bull trend before the end of this decade, particularly if Conservative Party governments are in power because they support proven GDP growth oriented policies. 

Historically, Australia and New Zealand equities have done well during secular bull trends, particularly when industrial metals and agricultural commodities are back in fashion. 

Currently, global equity risks are increasing as the USA is now somewhat overvalued and QE tapering lies ahead over the lengthy medium term.  However, we anticipate more of a choppy, rangy market environment, as we currently see for a number of indices, rather than severe bear trends for any of the majors.