Our darkest hour?

Can it get any worse? Well, of course it can. The Bank of England’s Monetary Policy Committee is almost honour-bound to raise interest rates next week to restore its damaged credibility and to show that it is not just the City branch of the Treasury. Further rises in Bank Rate, perhaps past 3 per cent, are widely anticipated, as the market considers the daunting task of raising another £100bn for fuel subsidies on top of a deficit which already looked a stretch. It will require determination to reassure foreign investors, and imagination to encourage the buyers in.

The answer to a crisis of similar magnitude in the last century was War Loan, a fund-raising of a size that dwarfed everything else in the market. Co-incidentally, the yield on long-dated UK securities is today close to the 3 and a half per cent that War Loan was reset at in 1932, and an appeal to patriotic duty with launch of a bond as a memorial to Queen Elizabeth might surprise us all. National Savings is a (rare) example of a well-functioning government department, and in the past we have seen the power of tax-free retail offers to raise serious money.

An Elizabeth Bond might also prove to be a better investment than War Loan. The first few days of the Truss administration have wrong-footed the pessimists. Actual answers at Prime Minister’s Questions! Gas and oil are not the enemy after all! An understanding that fossil fuels will provide the key to the UK’s energy independence is surely long overdue, and we do not have the luxury of leaving onshore gas prospects unexploited.

Inflation is going to get more unpleasant, as it eats into pricing psychology, but it could be worse. The Bank of England was “on the cusp” of raising its forecast to “just over 13 per cent” according to Capital Economics, who now expect a peak of 11.5 per cent, down from their earlier estimate of 14.5 per cent. They also see a rapid fall next year.

The tidal wave of rising prices sweeping through the West is the cost of kicking the world’s Russian energy habit. We shall all be poorer after it has passed through, but the habit will be kicked, regardless of the outcome of the war in Ukraine, and we will not make the same mistake again. The pain will not be evenly shared, as labour groups compete to minimise their losses, through strikes, pay claims and job moves, but if this administration can deliver decent services where the last one hardly bothered, prospects could improve faster than we think.

The Shell man’s burden

Ben van Buerden is the man who broke Shell’s dividend. He may not prefer to be remembered this way, but he was in charge when the company had an attack of the corporate vapours after the oil price went negative in March 2020. The following month the board decided that a dividend that had only gone up for more than half a century had to be slashed.

At that moment, it is true that the company stared into the abyss, with vast debts and zero cash flow, but it was van Buerden who had left Shell so vulnerable. He had been CEO for a little over a year when the company paid £52bn in cash for BG Group in 2015. Perhaps he saw an echo of BP’s transformational purchases in the US decades earlier, and there was undoubtably a strategic logic to the purchase. But the offer was so generous that BG shares stayed well below the agreed price until right before the deal became unconditional, as traders could hardly believe the terms wouldn’t be cut.

Justifying his shareholders’ generosity, van Buerden explained that the purchase would ensure the continuity of the Shell dividend. Instead, the debt increased the risk to the payout, and the moment of madness in the oil market was reflected in the hasty decisions from the boardroom. Since the payout was “reset” in 2020, the quarterly payout has been raised, cautiously, to a little more than half the pre-panic level.

Of course, the world has changed out of all recognition since then. Any executive who had planned for Russia’s invasion of Ukraine would have lost his job long before the war started, and today Shell is literally making more money than it knows what to do with. Nevertheless, by destroying half a century of reliably growing payouts to shareholders, Shell will never be rated quite so highly again. This is van Buerden’s lasting legacy.

What is BHP for?

Mining is a curious business. It takes years from finding something worth digging to bringing the stuff to market, to be sold at a price which bears almost no relationship to the cost of extraction. If high enough, it can be fabulously profitable. Last year, rising prices allowed BHP, the world’s biggest miner, to give away $36bn to its shareholders. That sum included the shares in Woodside acquired from selling its oil and gas interests, but still.

This year looks rather different. The price of iron ore, one of BHP’s key minerals, has fallen from $160 to under $100 a tonne, a classic symptom of impending world recession. BHP’s management has seen these swings and roundabouts before, and even after the inevitable cost inflation, reckons it will only cost $19 to dig out each tonne of ore this year. What they have not seen before are resolutions for the forthcoming annual meeting designed to put the global warming bite on the business.

Here’s one: “Shareholders request that our company proactively advocate for Australian policy settings that are consistent with the Paris Agreement’s objective of limiting global warming to 1.5°C.” As well as iron ore, BHP is a major coal miner, the hated fuel which is preventing the west’s energy crisis from being even worse, and where prices have soared. The resolution implies that BHP’s management should be pushing for policies which would damage the prospects for the company.

Not that the 100-plus shareholders who have tabled the resolution will care. Their stake in the company is infinitesimal (it may even be infinitesimal for some of them) and it is the capital of others that is at risk. They are inviting the turkeys to vote for Christmas, and the resolutions deserve to fail.