The global energy crisis, which is especially deep in Europe, will have a profound impact on events in the coming cold months in the Northern hemisphere’s winter. It can lead to unrest as people have to decide to eat or heat and could bring governments down.
It is now at the cutting edge of capitalism’s manifold crises as the “Age of Disorder” deepens. In the inter imperialist conflict at play in the war in Ukraine, which drives the crisis itself, gas and oil are now powerful weapons, as the “energy war” takes center stage in the considerations of both sides.
Originally published on internationalsocialist.net // 4 October 2022
The world economy is teetering towards a new downturn, with the energy crisis exposing the weak underbelly of decadent 2020s capitalism. The impact of Putin’s squeeze on energy exports to Europe has been estimated to be worth over 5% of Italian GDP this year, and 3.3% in Germany.
Far further from the battlefront, China’s economy is entering its worst moment for decades, and energy is a major problem, not primarily due to the war in Ukraine but as a consequence of climate breakdown, another important part of capitalism’s perfect storm of crises. Drought has reduced the Yangtze river to its lowest level since 1856 and with 90% of China’s electricity supply requiring huge amounts of water, industrial blackouts are beginning to become a reality.
The global capitalist elites, governments and journalists speak of the energy crisis as some unavoidable “act of god”, beyond their control. They shrug, “who could have foreseen the actions of the mad dictator in Moscow? We now just have to adapt”. But nothing could be further from the truth.
This crisis is man made, a clear product of decades of capitalist policy both West and East. It is a symptom of decaying capitalist rule, and the insurmountable contradictions of a system based on short-term private profit and nationalism, incapable of planning and cooperation. Overturning capitalism and imperialism and putting in place a new regime of international democratic socialism has never been more urgent.
Energy wars: Fighting to keep the lights on
After months of vastly diminished supplies, and intermittent closures, Russia shut down the ‘Nord Stream 1’ pipeline completely, on the same day that G7 leaders announced a planned initiative (which has still not been implemented) aimed at capping prices on Russian oil exports.
While Gazprom, the Russian state gas company, gave technical reasons for the stoppage (an oil leak), within days Russian state officials, and eventually Putin himself came clean that this was yet another act of warfare, just like the unprecedented economic sanctions imposed by Western countries on Russia since the invasion of Ukraine began.
While Russia still supplies Europe with gas via other pipelines, the indefinite closure of Nord Stream 1 is a major turning point, confirming that Western Europe is headed for a deep crisis this winter.
As Putin broadens the aggressive policies of Russian imperialism, the same fate beckons for Ukraine itself. The Zaporizhia nuclear power plant has been in the headlines recently, mainly due to the very real concerns about a potential disaster as Europe’s biggest nuclear power station finds itself in the middle of a warzone with accusations of shelling made by both sides.
Less discussed, however, is the importance of events in Zaporizhia for Ukraine’s energy supply. The plant provides over 20% of the country’s electricity and is the sole source of heating for an entire geographical region. However events unfold over the coming months, the plant returning as a reliable power source for Ukraine is essentially ruled out. Following recent setbacks on the battlefield, Russia has also targeted other parts of Ukraine’s energy infrastructure, leading to blackouts.
European powers have greeted the news of Nord Stream 1’s closure with brave statements that all will be well. German chancellor, Olaf Scholtz, responded saying “Even if it’s tight, we’ll get through winter”. French President Macron warned of the need to make “sacrifices” but that French people have to “accept paying the price of liberty”. On his farewell trip to Kyiv, Boris Johnson reminded UK citizens that “while people are paying energy bills, people in Ukraine are paying with blood.”
But the tough talk belies real concerns. Even before Nord Stream 1 was shut off, EU states have already imposed “voluntary” reductions in power usage of 15% and there have already been reports of German factories stopping production entirely due to prices.
The rulers of the world’s oldest and supposedly sophisticated capitalist states have been reduced to the role of would-be rain dancers, crossing their fingers and praying to the sky gods for a mild winter, to help them weather the storm.
This can also heat up national tensions in several places. Scotland is rich in oil as are the kurdish regions in Iran, Iraq, Turkey and Syria. Divisions will also be sharpened within the EU if there is real shortage of gas. The empty words of “solidarity” were quickly forgotten during the pandemic when there was a shortage in masks and PPE. The same can occur around energy and further strengthen the centrifugal trends within the EU.
A sledgehammer to the world economy
The impact of the energy crisis on the world economy cannot be overstated. The coming global recession is the latest in a chain of deep crises which arise from long term trends and inherent contradictions which no capitalist policy response has overcome. The world economy is again on the brink.
Compared with the 1970s when oil price shocks in 1974 and 1979 triggered severe global recessions, the current crisis is much worse, particularly in Europe, where predicted hits to GDP are at roughly double the level seen in the 70s in several countries (including Italy and Greece).
Gas is the main driver of this. Were the current state of the gas market to be replicated in the oil sector, prices per barrel would be well over $1,000. Bear in mind that the historic record for oil prices is $147!
The energy crisis is the main driver of runaway inflation, which is capitalist economists’ most pressing concern internationally. Energy is, of course, a crucial part of the budget of all businesses, most especially heavy industry, with manufacturing alone accounting for over one third of global energy consumption. It is therefore a driver of inflation across vast sectors of the economy, from raw material extraction and processing, through to goods and commercial services. Of course, this is multiplied by naked profiteering speculation, as bosses see a green light to raise prices across the board to make a quick buck.
Nevertheless, the energy crisis poses real problems for the capitalists. Perhaps the biggest danger is its potential to trigger a debt crisis. Finnish finance minister has remarked that in the present situation there exists “the ingredients for a kind of a Lehman Brothers of the energy industry.” How could it be that, despite bumper profits, energy companies are facing defaults? The answer lies in the lunacy of the stock markets and financial speculation.
While customers will soon pay massively increased bills, in the meantime, major energy companies are expected to cough up security deposits (‘margin calls’) in the derivatives market. In order to manage risk, big energy players take out financial instruments that are essentially bets against rising prices.
Then, if prices fall, the company has insured itself (or ‘hedged’) against what it would otherwise lose in profits. Right now, meteoric rises in prices make this bet far more costly. Banks are demanding an estimated total of $1.5 trillion in deposits, leaving even the most profitable companies facing bankruptcy. The repercussions could be devestating.
Particularly when we take into account consumer and business defaults on unpayable bills. In April, households in Britain had already accumulated £2.1 billion in energy debt, a figure that will certainly grow with bigger bills in autumn and winter.
Small and medium sized businesses that close down (70% of British pubs say they will not last the winter due to energy bills) means a significant portion of energy companies’ expected streams of revenue will evaporate. Sweden’s Finance Minister pointed out “the risks for contagion to other parts of the financial system.”
Truss, Von Der Leyen and the end of neoliberalism
Pressure has been exerted on governments to intervene. Despite Liz Truss’ Thatcherite nostalgia (in July she stated that Britain “became great through its embrace of free trade, free enterprise and free markets”) her response to the current energy crisis is a tacit admission of the outstanding failure of “market forces.”
The new PM, however, enters the scene of history at the end of the neoliberal era, not its beginning. Faced with the current crisis, she ditched her free market fundamentalism and announced a colossal £150 billion relief package, dwarfing any measures introduced over the course of the pandemic.
Likewise, Ursula Von Der Leyen has unveiled plans to raise €140 billion from windfall taxes on low-cost electricity producers and fossil fuel companies whose profits have soared alongside skyrocketing prices. That sounds like a lot, but is small compared to record profits: Shell for example, made €11.5 billion in the second quarter of this year alone!
At the same time we have dozens of millions of people in Europe suffering from “energy poverty”, many of those being older women and single mothers. Another question is whether the €140 billion will ever be really paid or instead be greatly diminished due to “creative bookkeeping”. This can only be avoided if the company books are opened and checked by representatives of workers’ and the labor movement, making sure that no money is hidden.
“In these times, profits must be shared and channeled to those who need it most”, Von Der Leyan declared in a speech to the European Parliament.
As we have explained before, the ruling classes across the world have not torn up the neoliberal rulebook for altruistic reasons. Such is the severity of the crisis that these measures are required to stave off economic and social catastrophe. The potential for working class misery to boil over into mass revolt is a key consideration in the strategic calculations of the bourgeoisie. Thus, state intervention into the economy is not carried out in the interests of workers, but to prop up a deeply unstable capitalist system.
Bailouts are bonanzas for energy companies
And, looking closer at these packages, it becomes clear which class interests they serve. Unlike her European counterparts, the hard-nosed Truss has ruled out windfall taxes to help fund the bailout. Her plan also sees the richest families stand to receive twice as much in support. In Finland the government will hand over €10 billion to struggling power companies, in Sweden, €23.4 billion and in Germany, a staggering €67 billion.
Even taking into account limited windfall taxes which have been implemented in Europe, these bailouts are an overall bonanza for energy companies. As usual, the capitalists have not let a good crisis go to waste. Contrast this to the fact that, in June, the number of households facing energy poverty in the EU28 had risen by more than 50%, or that three-quarters of households in the UK risk being pushed into fuel poverty by January 2023.
Current crisis: Legacy of capitalist energy policy
This becomes all the more difficult to swallow considering that the very same companies being bailed out have played a substantial role in getting us into this mess. Indeed, the roots of the current crisis go far deeper than the war in Ukraine and lie in capitalism’s relentless and chaotic drive for profit.
Neoliberal policies that liberalised the market and privatized state companies saw energy firms rake in obscene profits for decades. In particular, the policy of ‘marginal pricing’, whereby all energy prices are set by the most expensive type of fuel, has guaranteed massive profits for the private energy sector. Although gas provided less than half of electricity in the UK over the last few years it has set costs 84% of the time: in reality, a form of cartelization.
In their pursuit of profit all of these private companies have a strong interest in pushing up energy consumption even further. They are in direct contradiction to every idea of reducing the use of energy or changing how it’s produced.
In such a scenario, what motivation is there for energy companies to reinvest those profits into the development of renewable energy? Why take the risk when throwing their earnings into financial speculation is a much safer bet? Why rock the boat when stock buybacks continue to line the pockets of shareholders?
Scramble for alternative energy
The war, however, with its consequent acceleration of deglobalization, has exposed the inherent fragility of this arrangement. As the ruling classes across Europe seek to sever their economies’ dependence on Russian gas, so begins a scramble for alternative energy sources that threaten to drive us further towards catastrophe.
Liz Truss is eager to step up domestic oil and gas production and restart the environmentally destructive process of fracking; European politicians are seeking out deals with the brutal oil-rich dictatorships of Qatar, Saudi Arabia and UAE; and, barely a decade after the Fukushima disaster, Japan has announced plans to further develop its nuclear energy capacity.
This is a huge market for over accumulated capital desperately looking for new fields to invest in. The existing nuclear power stations need to be renewed, and new ones built, projects whose potential risks would be overlooked to secure potentially massive profits. This is what lies behind the aggressive lobbying of the nuclear industry pushing an EU decision to label it as “climate friendly”.
On the other hand, some see a silver lining to the crisis, hoping it will speed up the transition to renewables. In the context of growing inter-imperialist conflict and economic decoupling, an article in the Financial Times pointed out some of the geopolitical benefits of clean energy, noting it’s not only about “reducing pollution or hitting net zero emissions targets; it is also about making countries more secure.”
The above makes clear that while big business and capitalist governments will invest in green energy, we can be under no illusions that they will do so in the interests of humanity and the planet. Yes, steps can be taken to reduce CO2 emissions and somewhat limit dependence on fossil fuels, but the scale of action required to avert climate catastrophe is not possible on the basis of the current system, even less so in an era of sharpening imperialist rivalries, nationalism and war.
Already we have seen mass revolts kick off against chronic shortages and staggering price hikes in Panama, Ecuador, Peru and, of course, Sri Lanka, where a revolutionary movement brought down the rotten regime. Across Europe, mass anger against the cost-of-living crisis has already expressed itself in protests, industrial action and the launching of new campaigns. The stage has been set for a winter of discontent.
On top of the important demands of price freezes, lowering of bills, scrapping of VAT and cancellation of energy debt, the working class and poor need to arm themselves with a program that takes aim at capitalism as the source of the crisis. That would mean taking the energy sector out of the hands of the polluting profiteers and bringing it into democratic public ownership, alongside the other commanding heights of the economy, including the banks and financial institutions.
This vastly differs from Germany’s recent nationalisation of failing gas-importing giant, Uniper, a desperate intervention in the interests of German capitalism, not ordinary people. Also, French energy giant EDF shows that it is not enough if companies are state owned if the state is a bourgeois one fulfilling the needs of the capitalist class.
In contrast, on the basis of the working class and oppressed controlling society’s wealth and resources, a radical plan to move away from fossil fuels could be developed, providing retraining of energy sector workers where necessary and well-paid unionized jobs. Cheap, clean energy could be provided for all according to need and further research and investment into wind, solar and other forms of green energy could pave the way for rapid transition to zero carbon emissions.
Crucially, this struggle must be coordinated on an international level and it must be armed with a socialist program. At the beginning of September 70,000 protested in Prague against rising prices and the sanctions, an event organised and used by the far right to push their agenda. The workers movement must not leave the issue of the energy and cost of living crisis to be exploited by the forces of reaction but develop an independent and class program.
This must not be silent in a false policy of national unity but link questions of energy with the climate crisis and explain about the need for a democratically run and organised energy sector, as a key part of a socialist planned economy.