World Economy
The Ghost of Stagflation Haunts the World

The rise in energy prices last year, exacerbated by military activity in Ukraine and the sanctions war of the so-called "collective West" against Russia, brought the world back to the 1970s, when stagflation raged, first inside the UK and subsequently throughout the global economy.

“As we look at the global GDP ... it's hard right now to see how we avoid a recession,” World Bank President David Malpass said at an event hosted by the US Chamber of Commerce in late May. "The idea of energy prices doubling is enough to trigger a recession by itself." A week before, on the sidelines of the G7 finance ministers’ conference, US Secretary of the Treasury Janet Yellen acknowledged that "higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world."

Stagflation is an impossible state of the economy from the point of view of classical economic theory, as it combines a sharp rise in prices with a slowdown in GDP growth. The term was reportedly coined by Ian Macleod, a conservative politician who was never an economist, but was fond of poetry, and was known as an avid bridge player and an excellent speaker. Before coming up with the notion, he had served as the Minister of Health under Churchill and Minister of Labour under Eden, as well as Secretary of State for the Colonies under Macmillan. In 1965, as Shadow Chancellor of the Exchequer, he declared in a House of Commons speech: “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other side, but both of them together. We have sort of ‘stagflation’ situation." However, the term gained real world fame after the death of MacLeod in the mid-70s, when developed economies faced an Arab embargo on oil supplies due to the supply of weapons to Israel during the Yom Kippur War between Israel and a coalition of Arab states led by Egypt and Syria.

Then, due to the cessation of supplies of Arab oil to the United States, Japan, Canada and Western Europe, OPEC production decreased by 25%, oil prices on the world market immediately jumped fourfold. Importing countries experienced an acute shortage of fuel and were forced to introduce various austerity measures,  ranging from rationed distribution to the introduction of speed limits for road transport. Although the embargo was lifted after 5 months, oil prices continued to rise throughout the 70s, making another powerful breakthrough (2.5 times) at the end of the decade after the Islamic revolution in Iran. Thus, the nominal price of oil rose by an order of magnitude during the 1970s, creating a new
Economic Statecraft
Russian Gas Exports to Europe: In the Eye of the Storm
Vitaly Yermakov
Amid hostilities in Ukraine and the avalanche of the European economic sanctions against Russia, Russian gas has been flowing to Europe, including the transit via Ukraine, without interruption. For now, it looks like Russia-Europe gas trade has been in the eye of the storm (an area of calm weather at the centre of a strong cyclone).

Expert Opinions



What is happening now is very reminiscent of the events of 50 years ago. It is true that the embargo on Russian energy resources is being introduced by consumers providing military assistance to the government of Ukraine. By the way, one of the consequences of the oil crises of the 1970s was the introduction of large gas pipelines linking the Soviet Union with Western Europe, which were intended to reduce the latter’s dependence on Arab oil. At the same time, projects for the construction of LNG terminals in the Arctic were on the agenda to organise the supply of Soviet liquefied gas to the United States with the same goal - to increase the security of the energy supply through the diversification of suppliers. True, detente in Soviet-American relations ended before it really began, and already in the early 1980s, the Reagan administration fought fiercely against the construction of the Urengoy-Pomary-Uzhgorod gas pipeline, or as it was called in the American media and official documents, the Siberian Gas Pipeline to deliver large volumes of gas from Western Siberia to Germany, France, Italy and Austria. In general, history, as you know, tends to repeat itself.

There are also, however, striking differences. The fact is that energy prices began to rally long before the conflict in Donbass entered the hot phase and the bombing of Moscow with sanctions packages from Brussels and Washington. In the fourth quarter of 2020, Brent oil cost a little more than $44 per barrel, and during the last quarter of 2021 it was almost $80. The growth of quotations amounted to 80%. Accordingly, the price of a gallon of petrol in the US increased by 89% - from $1.25 to $2.36 (EIA data for the price of Regular FOB gasoline in New York Bay). Also, the spot price of gas at the American Henry Hub increased by 89% to $172 per thousand cubic meters ($4.77 per million British thermal units), although this index has not shown any correlation with the price of oil and gasoline for many years. All this pales in comparison to what happened to energy prices in Europe over the past year. The average price of gas at the spot (Dutch hub TTF) in the fourth quarter of 2021 was $1,160 per thousand cubic meters. That is 6 times or 607% more than in October-December 2020.

Imported thermal coal delivered to the ports of north-western Europe rose in price by 2.5 times or by 241% - from $66 to $160 per tonne. The price of electricity (spot one day ahead in base load), for example, in the UK jumped almost 4.5 times or 439% - from 50 to 222 pounds per MWh. On the face of this is not just inflation of energy resources, but hyperinflation. Moreover, the impact of the Ukrainian crisis on energy prices was very moderate. In the first quarter of 2022, prices for oil, gasoline and imported coal continued to rise in Europe. Brent crude has averaged over $100 (up 26% Q4 2021), U.S. gasoline is up 19% and coal in Europe is up 41% on the back of an embargo by the EU, though it has been delayed until August. However, gas did not rise in price in the first quarter neither in the US nor in Europe, and electricity in the UK even slightly fell in price (by 4%). At the same time, compared to the same period last year, the growth dynamics were preserved. In the United States, since April, gas price increases have picked up sharply on the back of slow production growth, depleted storage facilities, and strong demand from LNG plants, which produce mostly Europe-bound gas. As a result, in April, gas at HH in the US cost 2.5 times more than a year ago, and in May - 2.7 times more.

Given that US spot prices are directly linked to prices for power plants, industrial consumers, and commercial consumers (i.e., the entire market, except for individual buyers, which account for only 17% of the 780 billion cubic meters of total demand), a two- to three-fold increase in prices for gas have placed a heavy burden on the entire national economy. This is despite the fact that Washington has been a net exporter of natural gas for a couple of years now. The US has promised to provide for the whole world, including Europe, but it was unable to maintain a comfortable level for itself in a difficult moment. Of course, the situation there is better than in Europe, where gas prices were already 2-3 times higher and even jumped 5-6-fold. However, the EU market after Brexit is 90% dependent on imports, and for them such a rise in prices is another reason to promote the rejection of hydrocarbons “at any cost”.
As a result, in March inflation in the United States reached a 41-year high of 8.5%, in the UK it reached 7%, which has not been seen for 30 years, and in the European Union in April it was 7.5% on average  (a year ago it was 1 .6%). Moreover, 5 countries out of 27 posted double-digit inflation; the absolute leader, Estonia, saw prices increase 19%.

The economies of Europe and the United States suffered from all of these woes before the aggravation of the situation in Ukraine. The introduction of a complete embargo on Russian energy resources is still a long way off, but difficulties with logistics, as well as the production of related products, such as mineral fertilizers, are already beginning to appear and will intensify for the foreseeable future, accelerating inflation, fuelling fears of energy shortages and provoking a slowdown in economic growth.

Gas for Rubles: Buy It If You Can. An Expert Discussion
05.04.2022
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.