UK Energy Risk – Lessons from the Straits of Hormuz and Messina

Energy shocks surprise us not just instantly but with their longer-term consequences. The oil hikes of the 1970s led to mistaken projections of a nuclear-powered future. Few predicted the extent of the economic resurgence of China in the 1990s and its implications for ‘King Coal’. Germany’s Energiewende (energy transition) was supposed to beat a path away from fossil fuels, not increase the nation’s dependence on Russian gas. And so on. 

The latest Gulf crisis is an untimely reminder of the interdependencies and feedback loops in today’s global energy market. Small segments of the market’s architecture hide large tipping-points. Waves in the Strait of Hormuz quickly hit home. 

That much, while appreciated in theory, still seems to bewilder us in practice, a reflection of our apparent inability to see the big picture or to learn from longer-term experience. Shockingly, by some measures, the Strait of Hormuz is more important to the global oil market today than it was in the 1970s.

Our myopia and amnesia are worse than being idly remiss; they are positively dangerous in the hands of politicians looking for quick fixes and easy votes.

The canonical articulation involves the fiction that we can magic away energy market risks with home-grown stability and government intervention. This view is half-blind and an example of selective memory failure, at best. The UK coal miner’s strike of the 1980s reminds us that promoting domestic energy solutions can lead to supply shocks that are every bit as threatening  and damaging as foreign ones. 

A more honest assessment is that UK energy security of supply boils down to making difficult tradeoffs in a complex global economic system where we have limited influence or foresight.

In that broad context, one thing stands out – risk is everywhere. 

Today’s fossil-fuel system implies heightened risk at transport nodes in the topology (the Strait of Hormuz, for example). A renewable system leads to greater risks embedded in nature itself (so-called Dunkelflaute – when little or no energy can be generated with wind and solar power – being an obvious case in point). Each system brings its own technical and environmental challenges. 

Contracts negotiated through markets, with all their volatility and imperfections, remain the best institutional arrangement that has evolved to plot a consistent way forward in these circumstances.  While higher prices naturally reduce energy use, heavy users of raw materials will want to plan and fix their costs in advance. 

At least that encourages incentives to discover sustainable solutions to old problems. And, for a technology-rich country like the UK, it holds out opportunities. Risk, in itself, is no bad thing.

So, how can we keep a commitment to markets while addressing the challenges posed when markets are particularly volatile? This brings me neatly to another stretch of water that proved difficult to navigate in past times – the Strait of Messina. 

Before passing through the treacherous passage, jealously guarded by the monsters Scylla and Charybdis, Odysseus first had to steer his crew past the Sirens and their luring music. He took the extraordinary step of plugging his crew’s ears with wax and binding himself to the ship’s mast.

A maniacal strategy by a captain?

No.

Odysseus was able to hear the Sirens´ luring music but his bonds prevented him from steering the ship to its doom. His crew, unable to hear his pleas to be freed, ignored him. 

It worked – Odysseus had divided a complex risk problem into three parts:

• A diagnosis, consisting of a contextual comprehension of the tradeoffs in the situation (the desire to hear the Sirens’ song, but also knowing the potentially fatal implications). 
• A guiding long-term principle to keep the ship afloat (avoid the ‘noise’).
• A set of short-term actions (deafening his crew and binding himself to the mast).

So, how might UK energy policy learn from the myth?

I suggest the following:

• A diagnosis that pays attention to the context – we have been here before. Price reactions to supply shocks, domestic or foreign, are themselves a part of the solution. Beyond that, we have little to help us, apart from ensuring a well-diversified energy system.
• A principle that crowds out ‘noise’ – keeping the economy on a course to longer-term policy and environmental objectives. These are well-articulated and legislated. They include a gradual transition to a low-carbon and affordable energy system.
• In terms of coherent actions, we have well-tried welfare interventions that can alleviate any immediate hardship in society. Meanwhile, we can surely get on with creating a more credible strategic energy reserve in the North Sea, using both fossil fuels and renewables.

Apart from that – keep calm and carry on, a maxim relevant in even darker geopolitical scenarios. 

The biggest risk we face in UK energy is to be distracted by noise. Political cacophony is bad for our ears, the energy market, and the broader economy. 

Further Reading: 

* Richard Rumelt: Good Strategy Bad Strategy. Profile Books 2017.

* Regulatory Policy Institute Insights Team: Securonomics – slogan and substance. Available at www.rpieurope.org.