We’re heading for a full-blown energy crisis

It is nearly half a century since the UK had a real, full-blown energy crisis, as the soaraway oil price gave us power blackouts and the misery of the three-day week. Much has changed since 1974, but it seems we now have to learn the importance of energy security all over again. This time it’s the price of natural gas that has triggered the crisis and, like last time, all ways out are long and hard. Just as Edward Heath called an election then to ask “Who’s running the country?” and received the answer: “Not you any more”, the consequences for the current government could be particularly painful.

As always with energy, the numbers are very large. The full cost of “socialising” the coming rise in domestic fuel prices is around £20bn. For comparison, the cost of the much-hyped boost to the NHS is set at £12bn.

This moment has been a long time coming, postponed by the delusion that getting rid of oil and gas and arrival at the sunlit uplands of net carbon neutral would cause so little pain that we would hardly feel it. The Climate Change Act, waved through parliament in 2007 almost unanimously, set the course along which the pollyannas at the Climate Change Commission have been pushing us. When Ed Milliband as Energy Secretary encouraged us down this primrose path, he disguised the real cost of renewable energy by adding it to fuel bills, perhaps in the hope we wouldn’t notice (we didn’t). Today the array of hidden green subsidies adds around £170 to the average bill.

If nothing is done in mitigation, it’s likely that the next two quarterly “price caps” would add about £700 to that bill. Those well below average income might have to choose between food and warmth, truly a cost-of-living crisis. Scrapping the 5 per cent VAT on fuel would not help these people. As it is, the price surge means that money which would otherwise be spent on goods bearing VAT at 20 per cent is needed to pay the heating bill.

Expanding the Warm Home Discount scheme is surely inevitable, but there’s a nasty surprise here too. The subsidy is recouped by adding it to the cost paid by the rest of us, so the more it is extended, the greater the rise in everyone else’s bills.

While gas is the misery of the moment, the oil price is also rising again. Western oil companies are under constant pressure to stop being oil companies, and their response has been to sell off assets to privately owned buyers that the green mob finds hard to reach. Unlike the oil companies, these buyers are essentially short-term, exploiting the assets and taking the money. As western production falls, the market power of producers like Russia, Iran and Saudi Arabia will increase along with the price.

Just as chancellor Tony Barber discovered nearly 50 years ago, there is no easy way out of the misery of a fuel crisis. In his case, a four-fold rise in the price of oil in a few months was an external shock that few saw coming. Today’s crisis is home-grown. Successive governments have imposed targets for electric cars and home insulation, while monstering oil and gas and pondering over whether nuclear is part of the problem or the solution, without the slightest idea of how, or even whether, they can be achieved.

Unless and until there is something resembling a convincing strategy which recognises that we will need oil and gas for many decades before we reach the fabled land of carbon neutrality, the question that Edward Heath posed all those years ago is likely to get the same dusty answer.

Unsure of Shell

Us long-suffering shareholders in Royal Dutch Shell were given some information by the company last week. A reiteration of the share buy-back programme and the intention to pay 20-30 per cent of cash flow to shareholders accompanied lots of stuff about the fourth quarter, including such gems as “Cash flow from operations excluding working capital is expected to have significant outflows from variation margin impacts.”

Who knew? If the oil analysts understood this, it caused them no surprises and the share price barely twitched. We have some more important dates coming up, including publication of the consensus guesses from those analysts (27 January), the arrival of single Shell plc (31 January) and the fourth-quarter numbers on 3 February.

Nobody could accuse the company of lack of operational disclosure, but it is hard to see what last week’s announcement contributed to investors’ understanding of this widely-owned business. The buy-backs, we’re told, will go on “at pace”, that current favourite word for dynamic CEOs, which generally means “whether it makes financial sense or not”.

This is fine for the increasing band of holders who want out of oil at almost any price, but in the long term, it’s the dividends that matter. In Shell’s interminable statements, the dividend barely gets a mention. Shell used to have a stodgy, predictable policy – effectively, that the payout would not go down and would occasionally be raised.

That lasted over half a century until April 2020, when the oil price bizarrely went negative, the board panicked and slashed the quarterly payout from 47c to 16c. Two gear changes later, it’s 24c, growing at 4 per cent a year, but who knows what Feb 3 will bring? Some idea of a proper policy from new chairman Sir Andrew Mackenzie would be appreciated. It might even help the battered share price.

Causing trouble again

Terry Smith is not an easy man to like, but as one of the world’s finest stockpickers, the legion of fans with £29bn of their money in his care can live with that. This week he has been making trouble, challenging the smug world of ESG by suggesting that the Unilever board might have let the whole thing go to their collective head.

He hit a nerve. After many years when the company seemed to have found the way to grow profits and social responsibility together, the shares have had a miserable time lately, lagging competitors like Nestle and Procter and Gamble. Unilever shareholders had stopped the Dutch power grab, allowing the business to be unified in London, but the languishing share price exposes the real cost of trying so hard to be good. Mr Smith’s Fundsmith is one of Unilever’s biggest holders. He is not selling out yet, but this might help the board remember whose capital it is they are using for their good causes.