Do the United States and Europe have different economic trajectories? Energy cost is key

American and European citizens are complaining about high energy prices to the point of having political consequences and even civil unrest. There is no doubt that there is a growing impact on supply chains – including rising transport costs, but also in manufacturing, which relies on heaps of fossil fuels and other forms of energy. ‘energy. Ever since mankind first harnessed the power of fire, fuel prices have affected everything. They are certainly responsible for the lion’s share of the current rise in inflation across the world. It’s tempting to think we’re all in the same boat.

But make no mistake, these two giants of the global economy may be on very different economic trajectories, and the key is energy prices. In short, the United States has secure access to cheap energy, unlike Europe.

Right now, a gallon of gasoline in the United States revolves around $4 per gallon (US)compared to just under $7 per gallon in the UK (assuming the UK is in Europe for the duration of this article) and up to $8 in northern European countries such as Denmark . Household electricity costs in Europe, wherever they come from, present an even greater disparity. The domestic cost of a kilowatt-hour (kWh) in the United States is currently just over $0.16 and $0.32 in Spain. A New York Times reporter living in Belgium remarked during a october 24th podcast that his heating bill had tripled over the past year.

While the cost of natural gas in Europe has temporarily fallen – mainly due to a loophole in the sanctions that allow the import of (frozen) liquefied natural gas (LNG) from Russia – the outlook for Europe is bleak. Led by Germany, which approved the ill-advised Nordstream I and II projects that made it extremely dependent on Russia for an affordable supply of natural gas, European nations have essentially given up on the idea of ​​being independent. in terms of energy. Hydroelectric and wind projects simply do not meet their energy needs, and most countries abandoned nuclear power plant over a decade ago.

Read more: The hidden corner of the energy market — Russian LNG

The United States, on the other hand, is energy-rich, almost to the point of independence. Not only does it have a full domestic supply of natural gas (albeit obtained through environmentally questionable means such as fracking); it also imports the majority of its gasoline from nowhere near politically dubious allies such as Russia or even the Middle East. In 2021, Canada supplied 51% of total gross oil imports from the United States and 62% of gross crude oil imports. Next come Mexico at 8%, Russia at 8% and Saudi Arabia at 5%. More importantly, the United States is home to a huge capacity for refining crude oil into petroleum. In fact, the United States was a total oil country net exporter in 2020 and 2021, according to the US Energy Information Administration. This gives it additional leverage in the global energy market.

It is therefore perhaps unsurprising that historian Tom Holland argued during a recent episode of The rest is history podcast about the precipitous fall of the short-lived British Prime Minister Liz Truss, that Europe and the United States could be on the verge of separating, economically, in a dramatic way. He explained that when the world economy became centered on oil rather than coal, the whole situation changed.

Oil overtook coal to become the world’s largest energy source in 1964, with oil-rich countries such as Saudi Arabia becoming the power brokers. But, apart from a few hiccups, international oil markets have been relatively calm so far, masking weakness in Europe. In addition, natural gas is now a major source of energy, and Russia – quickly becoming a commercial pariah – is still the king of this resource.

Holland’s co-host Dominic Sandbrook speculated that Western Europe would be “even more at the receiving end of globalization than in the 1970s and 1980s, and that British communities who are become very dependent on foreign investment or cheap manufacturing abroad… are going to have to face quite harsh winters with increasingly expensive energy.

“Essentially, it’s more expensive for Europeans to make things,” Holland said, “because our energy is more expensive than it is for Russia or the United States. And we’re definitely back in this situation now.

This observation should send shivers down the spine of industry executives who rely on European manufacturing and have even doubled it since rising labor costs in Asia and political wrangling with the China have multiplied. Already, volkswagen announced in September that it was exploring ways to help its vast network of suppliers in Europe counter a shortage of natural gas, including making more parts locally and moving manufacturing capacity. At the same time, Mercedes-Benz said it was working to identify Germany-based suppliers who would be at risk in a gas rationing scenario and was in talks with them to move production to locations outside of Germany. But the risk doesn’t just come from rationing: it comes from cost, plain and simple.

“Is there a risk now, not just for Britain, but for the whole of Europe, that we are going through a process of deindustrialisation fueled by the brutal fact that we have less cheap energy what, say, Americans do?” asked Holland.

“The United States is in a good position, because it is energy rich and its energy is cheap. Ours is very expensive,” Holland continued. “Conventionally, we like to think that the whole West is in the same boat, that what happens in America is fundamentally mirrored in Europe. But… America and Europe can follow radically different parables. If you have cheap energy… then your economy will grow. If you don’t, it will decline.

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