An Opportunity as the World Moves Away from Russian Energy

In today’s Money Morning…pumping trillions into the economy isn’t normal…if anything, this will turbocharge the green energy transition…energy security is now a priority…and more…

Inflation is starting to bite.

Over the last week, I’ve noticed higher prices on some items at the supermarket. Lunch at my local café is now almost 5% dearer.

But the big one, of course, is energy prices. Fuel prices are soaring, and that will hit the rest of the economy.

High inflation doesn’t win elections.

It’s why the government, last night, put together an $8.6 billion cost of living package to stop households from feeling the pinch.

The measures include a 50% cut to the 44.2-cent per-litre petrol tax, a one-off $250 cost of living payment for millions of Australians, and a $420 tax rebate for low- and middle-income earners.

Of course, coming from Argentina, you know that fighting inflation by throwing more money at it…well, it could add more fuel to the fire.

On the other side of the pond, things aren’t much better either when it comes to inflation.

Surging fuel prices have been hitting consumers in Europe for months.

A month after Russia invaded Ukraine, the expectation is that the next inflation numbers will come in between 6.7% and 7.7% after taking a hit from high energy prices, and governments are also taking measures to shield households from high prices.

The belief over there is that this is a short-term thing. As European Central Bank Chief Economist Philip Lane told Politico in an interview:

‘We would still diagnose that this essentially is an imported inflation shock, it’s a supply shock. Most of this inflation will fade away.

‘Fading away from inflation doesn’t mean that these high prices will reverse. Europe may have to get used to higher prices.’

In the US, annual inflation hit 7.9% as energy, food, and shelter prices soar.

Central bank rhetoric has gone from inflation is ‘transitory’ to inflation will come down by the end of the year.

Now the notion that this is a short-term thing is pretty much dead, with the US Fed vowing to become more aggressive with inflation ‘much too high’.

Pumping trillions into the economy isn’t normal

Inflation is something to worry about.

It acts as a tax on your money. It creeps up, stealing your purchasing power and your wealth.

For a while I’ve thought that a bout of inflation was inevitable.

First, there’s been the trillions of dollars pumped into the economy.

In order to keep the boom going, policies have included lowering interest rates to record lows and central banks increasing their balance sheets to provide increasing amounts of stimulus, both before and after the real crisis hit — the pandemic.

The result has been an economy that’s a complete mirage. An economy mostly driven by stimulus than by real demand from people.

In a fake economy, things don’t work the way they should. Amid all the ‘growth’ in recent years and low unemployment, we’ve barely seen any salary growth. Instead, the growth has mostly come from inflation in asset prices like property.

It’s, of course, also created lots of debt. And while inflation is a tax for people, inflation can benefit governments when there’s high debt.

Second, for a while now, the global economy has been moving towards deglobalisation.

It mainly started with the US and China trade war and the introduction of tariffs.

The pandemic shortages and the war in Ukraine have made it even more apparent that countries need to bring supply chains closer to home to secure them.

If the last decade’s globalisation and cheaper imports decreased prices, a deglobalisation of the world economy will bring more inflation.

The conflict in Ukraine in particular has caused prices in energy to go wild. And if it’s made one thing clear, it’s that Europe has a dangerous dependency on Russian energy…and that energy independence is key to a country’s security.

If anything, this will turbocharge the green energy transition

The EU gets 25% of its oil and more than 40% of its gas from Russia. But with the conflict, Europe has already taken some steps to move away from Russian energy.

For now, they’ve shelved the permits for Nord Stream 2, the gas pipeline going from Russia to Germany.

They are also planning to cut gas imports by two-thirds this year, and Europe has penned a deal with the US to boost US liquified natural gas imports into Europe.

Europe is also looking to gain energy independence from Russian fossil fuels ‘well before 2030’, and this will be a boost for green energy.

It’s starting to dawn on Europe now that renewable energy is more than about it being good for the planet — it’s about energy security and lower energy costs.

It’s prompted EU climate policy chief Frans Timmermans to tweet:

‘And it’s time we tackle our own vulnerabilities. Let’s now dash into renewables at lightening speed. Our own, clean, cheap, endless energy. The faster we move, the sooner we reduce dependency on others, the stronger we stand together.’

Europe is now planning to triple its renewable energy capacity by 2030. Germany has moved up its target of getting 100% of energy from renewables from ‘well before 2040’ to 2035.

And while the US and Australia are not as dependent as Europe on Russian energy, consumers are still feeling high energy prices.

Energy security is now a priority. And of course, this brings big opportunities for investing in the green energy transition.

Until next week,

Selva Freigedo,
For Money Morning

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.