It Never Rains But it Pours: How Energy Crisis, Brexit & COVID May Backfire on UK This Christmas

The European energy crisis has taken its toll on the UK: the Bank of England warned last week that surging energy bills would push already soaring inflation above 4 percent this winter. The problem stems from a spike in demand for gas ahead of the cold weather. Will the BoJo government manage to successfully tackle the energy crisis by Christmas?

The unusually cold winter of 2020-2021 left European gas storage levels at their lowest for at least a decade, triggering a fierce race for hydrocarbons. At the same time, Asia is stepping up demand for natural gas as the continent witnesses an economic rebound after COVID lockdowns. As a result, wholesale gas prices in the UK have soared by a whopping 250 percent since the beginning of this year, including a 70 percent hike in August, according to the Oil & Gas UK (OGUK) trade association.

Skyrocketing gas prices have already knocked several British energy suppliers out of business and prompted concerns of potential food shortages in British supermarkets ahead of Christmas. However, UK Prime Minister Boris Johnson asserted to Sky News last week that Britain's energy crisis is a "short-term problem" and that he does not think there will be disruption to food supplies during the winter holidays.

Christmas Food Shortages Appear to Be Very Real

The emerging energy crisis has exerted further pressure on the already struggling British economy, which has been shattered by Brexit and COVID, says John Giles, division director at Promar International, one of the leading agri food research and consulting companies in the UK.

"What we're hearing about is that there will be shortages of products in stores, particularly in the build-up to Christmas," Giles says. "And for most food companies in the UK, they’ve probably made more profit in the last two or three months of the year than they do for the rest of the year. So this is a critical time for the food industry."

There's a range of products which might disappear from the shelves, according to the researcher, particularly meat. A dramatic rise in the cost of CO2 has especially hurt meat processors, who use the gas in the slaughter of pigs and poultry, as well as in packaging meat and dairy. However, given that fish, fruit, and vegetables also need some sort of modified atmosphere packaging, soaring gas prices may also affect such producers, Giles underscores.

In addition, some products like instant coffee, milk powders, French fries, and bread, which are "inherently more energy intensive than others," could also be "at some degree of vulnerability," according to him.

🚨🚨BREAKING🚨🚨 UK natural gas wholesale price has settled at 189.65 pence per therm, the highest ever closing price (we have a higher intra-day price last week, but this is the highest closing price). That's ~$26 per mBtu, or an eye-watering $150 per barrel of oil equivalent pic.twitter.com/KgAAEsFLbL

— Javier Blas (@JavierBlas) September 20, 2021

This situation is exacerbated by the problem of labour availability due to Brexit and the pandemic, Giles highlights. There is now a shortage of over 100,000 lorry drivers in the UK, compared to a pre-pandemic total of about 600,000, according to a Road Haulage Association survey.

"As one food company said to me the other day, 'John, I haven't got people to pick the fruits and vegetables I need. I haven't got the drivers that I need to move them around the country.' And the weather's not been particularly great in the UK either. So if you put these things, there's a bit of a perfect storm going on, really. And I think the build up to Christmas will be a very challenging time for UK food companies," adds Giles.

UK govt to issue 5,000 visas to lorry drivers and 5,500 to poultry workers, to help companies overcome the staff shortage: https://t.co/pZ99TLIWPl

— Ritika Gupta (@RitikaGuptaTV) September 25, 2021

To complicate matters further, people on low incomes or social benefits might be put in a situation where they have to choose between heating or eating this winter, according to the researcher.

"Dare I say it, this combination of factors of food prices going up because of shortages and also heating costs going up, will create a bit of a dilemma for many hundreds of thousands of people, if not millions. So this has come at a pretty bad time for many," emphasises Dr Steven McCabe, associate professor at the Institute of Design and Economic Acceleration, Birmingham City University.

Factors Behind Britain's Energy Crisis

There's a combination of factors behind the recent gas crisis "one of which primarily is that the UK has worked on a ‘just-in-time’ approach to its energy supply," suggests McCabe. "Normally the advisable level of storage would be about 25 percent. Apparently, we’re down to two percent, as a result of the fact that we had a pretty cold winter last time."

At the same time, the UK's high dependence on external energy supplies has also contributed to the problem, according to Marc Ostwald, global strategist at ADM Investor Services.

After being a net exporter of energy for the last 25 years, the UK became a net importer in 2004. Typically, the country imports roughly 40 percent of its gas from abroad. However, in just the first three months of this year Britain imported 56 percent of its gas supply, according to OGUK. The House of Commons' October 2018 report projected that the UK's dependence on imported energy will continue to increase.

Over 22 million British households were connected to the gas grid, according to the UK government. In 2020, 38 percent of the country's gas demand was used for domestic heating, 29 percent for electricity generation, and 11 percent for industrial and commercial use.

Most of the discussion around unprecedented gas price spikes in the UK focuses on electricity. But more gas is burned to heat homes than to generate electricity. Failure to improve energy efficiency of the leaky housing stock massively exacerbates the impacts. pic.twitter.com/j0S4tJ3kJJ

— Jan Rosenow (@janrosenow) September 20, 2021

Yet another factor is that the UK – along with other European states – is moving towards renewables to fight climate change. In order to reach net-zero emissions of carbon dioxide and other greenhouse gases, Britain has largely switched from coal to wind energy. Ostwald notes that coal-fired stations now account for just 1.6 percent. However, Britons had a pretty poor summer in terms of wind power in 2021, so the UK is now set to restart some of its coal stations to account for this energy shortage, the strategist says.

"If you're really dependent and the UK has an enormous amount of capacity in terms of supplying wind energy, but the wind just isn’t blowing – it's one of those things," Ostwald underscores. "It serves as a very strong reminder to all those countries which are now virtue-signalling on moving to renewables, getting rid of hydrocarbons, that the current structures that they have in place are very, very deficient. This is years, if not decades of underinvestment."

It appears that the only way out right now is to import more natural gas, McCabe believes, but this may further deregulate the energy market since EU member states are likely to step up purchases of hydrocarbons too, sending gas prices even higher. Under the present circumstances the EU has a clear advantage because it has greater purchasing power and can regulate energy supplies as a bloc, the professor remarks.

"So, of course, being independent, which at times has been having lots of advantages, is certainly in this case demonstrating that it has disadvantages when you're not part of that bigger grouping of people," McCabe concludes.