The Green Transition: Crisis in the Middle East
Weekly analysis of the shift towards a new economy.
Dear Readers,
Happy Friday from the Spotlight on Policy team. As ever, you can find our policy coverage on our section of the New Statesman site.
You will have noticed the depressing news continuing to stream out of the Middle East. In the early hours of this morning, Israel retaliated against Iran’s missile strikes earlier in the week – which were themselves in retaliation for Israel bombing the Iranian consulate in Damascus … and so it continues.
In the middle of this dangerous cycle of violence, you could be forgiven for relegating green industrial policy to the “save for later” section of your tabs bar. But this torrent of bad news has huge implications for energy flows and trade – more on that in our analysis below.
We’ve also got an exclusive piece from Chris Skidmore, the former MP and chair of the independent UK Climate Change Committee, who dramatically stepped down from parliament in protest over the government’s policy on drilling for more North Sea oil.
Let’s get right into it.
Crisis in the Middle East: What does it mean for the energy transition?
A smaller-than-expected drop in the UK’s inflation rate disappointed some this week. Markets had predicted a fall to 3.1 per cent, but what we actually got was 3.2 per cent. The Bank of England’s governor Andrew Bailey shrugged it off, saying the decrease was “broadly in line” with the estimates of Threadneedle Street, and hailed a “loosening of the labour market” (translation: higher rates of unemployment, an integral part of its efforts to bring price rises down).
But all of the progress made since 2022 could be under threat if the crisis unfolding in the Middle East continues to gather pace. When inflation reached a peak of 11 per cent two years ago, much was made of a so-called “wage-price spiral”. In fact, higher wages weren’t driving the bulk of the inflationary pressures (in real terms, median salaries were actually getting lower). By the Bank of England’s own admission, much of the era’s price hikes were caused by disruption to labour markets during the pandemic, broken supply chains from lockdown-related policies and, crucially, the enormous rise in energy costs when Russia invaded Ukraine (until then, Moscow was one of Europe’s biggest direct energy providers). Remember when Liz Truss – the small-government, libertarian Thatcherite – promised £150bn towards freezing our energy bills as the price of natural gas soared? That gigantic level of discretionary spending, as much as any planned tax cut, was what gave bond markets the jitters and eventually led to her downfall.
Should a regional war between Israel and Iran develop, the messy divorce between Berlin, Europe and Gazprom (Putin’s state-owned gas giant) could look like a cakewalk in comparison.
This week, the International Monetary Fund (IMF) warned in its Global Financial Stability report that “Geopolitical developments in the Middle East and North Africa” were “an area of concern”. “An escalation of current conflicts could trigger a repricing of emerging market sovereign risk, resulting in tighter financing conditions, as markets reassess potential default risk amid heightened uncertainties.” That means the IMF is concerned about the conflict increasing the potential for debt default in developing economies – a worrying prospect that would put upward pressure on borrowing rates.
A broader conflict could also, according to the IMF’s director of research Pierre-Olivier Gourinchas, result in “higher energy prices [that] would trigger a response from central banks [to] tighten interest rates in order to secure inflation coming back to target, and that would weigh down on activity”. In other words, just as central bankers congratulate themselves for navigating a “soft landing” of lower inflation without provoking a prolonged recession, another energy shock could put any progress they have made into reverse.
Talk of $100 barrels of oil reached the market this week, even though oil prices thankfully remain stable for now. Traders have already priced in increased shipping costs due to ongoing fighting involving Houthi rebels in the Strait of Hormuz. But, said one consultant, “any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range”. The price of gold, seen as a haven for investors at times of instability, reached a record high.
All of this will only add to the narrative that in our current chaotic geopolitical era, achieving energy security is key to securing growth and resilience. The Tories, for their part, loudly proclaim that they want to improve energy independence by drilling more in the North Sea, while Labour says its green energy plans will leave us less exposed to the increasingly regular global shocks.
But an era of persistently high inflation (and thus high interest rates) also leaves us with a conundrum: any big spending measures to upgrade our grid, increase our energy production capacity or invest in green technologies will come with a bigger price tag. The days of negative real interest rates are over. In the 2010s, George Osborne not-so-sensibly decided to drastically reduce capital investment even as the markets were practically begging us to borrow. Imagine if we had spent that decade of cheap money upgrading our public sector infrastructure, such as our transport systems, energy grid, leaky council housing and hospitals. The decision not to was, according to Rachel Reeves’ recent Mais lecture, “an act of historic negligence. Not just wrong in the short-term, macroeconomic sense, but also a failure to grasp a unique opportunity to undertake much-needed investment in our productive capacity.”
In a recent report, the US investment bank JP Morgan highlighted the negative effect the geopolitical climate was having on the energy transition. “Interest rates are much higher,” said the report’s author Christyan Malek. “Government debt is significantly greater and the geopolitical landscape is structurally different. The $3tn to $4tn [the net zero transition] will cost each year come in a different macro environment.”
Now, in the UK, the government is spending nearly 10 per cent of its revenues – that’s your taxes – on debt interest payments, and the mounting domestic problems in our unstable world are getting much harder to solve.
In Brief
The Conservatives no longer conserve: The former Conservative MP and chair of the Climate Change Committee Chris Skidmore has written an exclusive piece for Spotlight. Skidmore dramatically resigned, triggering a by-election in his Kingswood constituency earlier this year, with the contest won by Labour’s Damien Egan.
The former Tory minister, who signed the UK’s net zero pledges into law, is sounding suspiciously Starmerite when he talks of “a long-term, mission-orientated approach”, and the possibility of a “manufacturing and regeneration revolution in the UK, if only we provided the certainty, the clarity, the consistency and continuity of policy direction that is lacking”.
In what appears a ringing endorsement of an Inflation Reduction Act-style approach to net zero, in which we would “crowd in” private investment via big, green government spending measures – a strategy Skidmore’s former colleague Jeremy Hunt has condemned, don’t forget – he writes: “Time is slipping away. So too is that investment, and with it the growth that we are instead witnessing across the Atlantic. Just last week, new figures revealed the scale of the prize that a green industrial revolution can bring in the US: for every $1 so far invested in green industry, $5.47 has been invested by the private sector. Solar investment is up 50 per cent in a single year; battery investment up 114 per cent.”
***For more on how our advertising services can support your organisation, please visit our page on Spotlight Marketing Solutions or contact us at client.solutions@newstatesman.co.uk***
The Green Transition is produced by Spotlight, the New Statesman's online policy section and print supplement. Spotlight reports on policy for the people who shape it and the business leaders it affects. Explore our in-depth reporting and analysis here.
Thank you for reading.
Please send any news or comments to: jonathan.ball@newstatesman.co.uk