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Lex Letter from London: throwing petrol on the flames of shortage fears

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Dear readers,

The UK’s energy markets have gone bonkers. Long queues at petrol stations this week grabbed the attention of Brits. After a BBC journalist stood in front of a petrol station to report on the crisis, his visage went viral on social media. His name: Phil McCann. It’s hard to know whether to laugh or sigh.

A UK Conservative government keen to break from Europe, partly due to its free movement of workers, now frets that voters are not free to drive to work. Their fuel tanks have run dry. Scenes of motorists, hitting their car horns as they awaited turns at the petrol pumps, led evening news broadcasts.

Yet patience, rather than petrol, is the only commodity in short supply. Over the weekend, drivers rushed to grab what petrol they could, emptying out up to 85 per cent of petrol stations by Sunday evening. Demand for fuel overwhelmed delivery schedules, not refinery output. Amusingly, the government announced plans to bring in foreign drivers, on temporary visas, as well as to get the military involved.

But it is not about Broken Britain or even Brexit Britain, just post-pandemic teething problems. One oil company, BP, did initially have a problem with petrol deliveries from its distributor Hoyer. Yet, despite horror stories about a lack of drivers following Brexit, other large petrol hauliers such as XPO Logistics told the Financial Times they had plenty of drivers. One reason might be industry-leading pay for this speciality.

By Tuesday, the Petrol Retailers Association was saying that a survey of its members revealed 37 per cent of filling stations were out of fuel. That may not sound great, but it is an improvement from the weekend. Meanwhile, there is no shortage of toilet paper and other panic-buyer target goods on supermarket shelves.

Panic buying of petrol reflects broader fears of shortages amid rising gas prices and supply chain breakdowns. A country that could boast generating nearly 42 per cent of its electricity from renewable sources in the first quarter of this year, this month found itself scrabbling to restart coal power plants it has left.

In these times, nuclear power looks a more attractive option, though building more of these reactors is a lengthy and expensive process. Meanwhile, natural gas, much maligned for its global warming threat, has become a precious commodity.

Coal and nuclear have been elbowed out of the grid by renewables in recent years. Natural gas has been a handy backstop to fuel electric generation. While Lex has cheered on green energy, starting up gas-fired electric generators and keeping them running is easier than relying on intermittent renewable sources such as solar and wind power. Indeed, wind farm generators have complained about below-average wind speeds for most of this year.

This summer’s surge in natural gas has continued into the autumn. Normally, one could pin the blame on seasonally high demand for liquefied natural gas in Asia, or a lack of supply from Russia, which provides the EU with 41 per cent of its gas, or a lack of gas in storage throughout Europe. This time fingers are pointed at all of them.

Another factor is government intervention. Certain variable power and gas tariffs have been capped to control energy inflation. Also, past UK governments sought to encourage more price competition among retail electricity and gas suppliers. And it worked. Over the past seven years, large suppliers have lost about 30 per cent of their market share to smaller and midsized providers.

But smaller suppliers, backed by equally tiny balance sheets, which offer cheap fixed energy tariffs can get caught out when wholesale prices surge. As spot power prices have soared, sometimes well over £1,000 per megawatt-hour in recent weeks (£40 is more typical), that is exactly what occurred. No surprise then that the number of retail suppliers has dropped over the years as some sell up to rivals, or just go bust.

There may be some good news from the recent pandemonium. Market forces that whipsaw energy prices can also help accelerate the transition away from fossil fuels. Surging natural gas and crude oil prices can only encourage the economic production of other sources of energy to come, such as hydrogen.

May the rest of your week go well.

Alan Livsey
Lex Research Editor

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