The great hubris that lay behind the Great Moderation and Reset

Synopsis: Faulty assumptions of rosy economic scenarios have resulted in an energy crisis.

Introduction

Post-covid, there has been talk of a great reset. It has many elements. Important among them is green growth, an effort to decarbonize the world and attain net zero carbon dioxide emissions.

For instance, The International Energy Agency (IEA), in a road-map published in May 2021, called to eliminate the use of fossil fuels by 2050.

Unfortunately, it will negatively impact oil-importing economies. Because, the Great Reset has resulted in global fuel shortages and soaring energy prices.

How the ‘Great reset’ is impacting global fossil fuel supply ?

European governments are now desperate to bring down natural gas and coal at any cost. The EU’s own climate policy requires the purchase of carbon permits, whose prices have doubled since the start of the year, heaping more pressure on the cost to consumers.

Pension funds in Norway dropped hydrocarbon fuel companies from their portfolios.

In case of China, strict probe over entire country had deterred coal producers from overproduction to avoid a potential follow-on anti-corruption investigation. Further China enacted a new criminal law amendment that criminalizes those individuals held accountable for mining-related accidents. Ahead of the CCP’s 100th anniversary this year, a large number of coal mines across China were shut down to avoid deadly accidents.

Non-OPEC oil supply has fallen by over 2 mm barrels per day from its 2019 peak and [their] oil supply growth will turn negative as we progress through this decade. This will result in a structural gap between supply and demand.

How rising price of fossil fuel will impact India?

Inflationary effect and its impact on monetary policy: Recent rise in fuel price has made the Reserve Bank of India think hard about withdrawing its accommodative stance. Higher oil prices are both inflationary and contractionary.

Demand supply mismatch: India faces the issues of coal shortage and power generation has come under stress.

What should India do?

Oil producing countries like Mexico routinely hedge their price risk with derivatives. India should also adopt the same practice.

Our governance structures and procedures must change to make this happen. If oil prices keep climbing in the winter months, two things must happen.

– The appropriateness of our current exchange-rate policies must be re-examined.

– And India’s fiscal and monetary policy stances must be re-calibrated for the former to address growth and the latter, overheating.

Note: An overheating economy is an economy that is expanding at an unsustainable rate.

Source: This post is based on the article “The great hubris that lay behind the Great Moderation and Reset” published in “Live Mint” on 12th October 2021.