There is a substantial difference between gas supply and gas demand in Europe. The shortage in supply is not due to any physical shortage of gas as a natural resource but rather because European countries have decided to support attempts of the United States to weaken Russia by imposing sanctions on the import of Russian gas.
In capitalist economies changes in the price of a product are used to bring the supply of a product into line with the demand for a product. Gas prices in Europe have therefore increased dramatically.
Using price to bring supply and demand into equilibrium always favours those with money since they can afford to pay the higher prices. They simply save a little less than they used to. However in the case of gas, and indeed energy in general, there is a problem. Gas is a product that people need to cook and keep themselves warm. If the price of gas increases to levels that mean that large numbers of families cannot afford to cook and keep themselves warm, there will be social unrest.
In the short term, the political parties will need to devise policies that guarantee that everyone has a basic amount of energy but that, at the same time, encourage people to reduce their energy consumption since, for political reasons, there is less gas to be consumed.
A way to do this might be to introduce a tranche pricing system for gas which ensured that you had the basic amount to cook and stay warm. An estimate could be made of the minimum amount of gas that a person would need to cook and keep themselves warm. Ofgem calculates that 8,000 kWh per annum represents low energy consumption. This amount of gas would be made available at a low price that everyone could afford. A second tranche of gas could be made available at a higher price. So, if you consumed 12,000 kWh per annum, the additional 4,000 kWh consumed would be charged at a higher price. A third tranche at an even higher price. And so on. If those with high incomes chose to heat large houses to a high temperature then they would be paying significantly more per kWh than those consuming the more limited amounts of gas.
In contrast with such a rationing scheme the two candidates for Tory leadership favour price as the main tool to ration the consumption of gas. Those with high incomes will therefore continue to consume large amounts of gas. Those on low incomes will struggle. Sunak and Truss propose to help those struggling to meet their basic energy needs by providing them with financial handouts. The funding of these financial handouts is what divides Sunak and Truss.
Sunak supports increasing taxes to match the increased government expenditure. Funding it by increased borrowing increases the national debt which is assumed to be a bad thing. Sunak argues that all additional government expenditure should be funded by increased taxation. One such tax would be a short term tax on the energy companies making windfall profits. Truss says that taxes should be reduced and claims this would lead to a growth in economic activity which would generate sufficient additional tax revenue to cover the costs of the financial handouts that those on low incomes will need to buy their basic energy needs. It appears that enough members of the Tory party believe her to guarantee her victory against Sunak.
The entire structure of the Tory leadership debate is false. It pretends that the economics of a currency creating government is the same as that of a household. A household has to borrow if its expenditure is greater than its income. A currency creating government can always spend more than it chooses to levy in taxation. Sometimes that makes sense, sometimes it doesn’t. During Covid it made sense to spend a lot more than was levied in taxation. So national debt went up. But national debt is really just money the government owes to the Bank of England, which is 100% owned by the government. So it’s not really debt. Real debt is when you owe money and non-payment means the creditor can seize your assets. The Bank of England is never going to seize the assets of the government!
The important point about the current leadership debate in the Tory party is that it reinforces the pretence that governments are financially constrained and cannot therefore do things they would otherwise wish to do. Helping low income households pay for their energy bills will eventually be used as an excuse for cutting NHS spending. Crocodile tears will be shed.
Labour have come up with an alternative solution to the energy crisis. They are not going to let price bring demand for energy into line with supply of energy. Labour would refuse to let Ofgem increase the energy price cap. Consumers would see no increase in the price of the energy they consumed. This creates a problem for the energy retailers like British Gas, Bulb, E.ON etc since they will have to buy the products, gas & electricity, that they supply to the retail consumer at much higher price than they are allowed to sell them at.
The retail companies will quickly go bankrupt unless the government makes up the difference between the price at which they buy and sell. Labour would propose to do this in two ways. Firstly a windfall profits tax would be brought in and the revenue from that tax would be paid to the retail companies. Secondly a £400 payment that Sunak had proposed to give every retail customer to help them with their energy bills would be cancelled and an equivalent sum would be paid to the energy retail companies.
It’s good that Labour’s plan limits the role of price in determining who has access to energy. But it ignores the fact that, for political reasons, there is a shortage of oil and gas for sale in the world. The UK will have consumed a certain amount of gas in 2021. It would appear from Labour’s plan that we should be able to consume the same amount at the same price in 2022-2023. How can that be if there is less gas available to be bought in the world? Labour’s proposals fail to take account of the fact that people must consume less gas in 2022-2033. It would run into resource problems if implemented in its current form.
But, of course, it is more likely that Truss will be Prime Minister this winter. If she retains her policy of minimal support for those on low incomes expect it to get very hot politically this winter.