MANY OF THE GOVERNMENT MEASURES TO COMBAT ENERGY INFLATION FALL INTO THE ‘DEFICIT OF THOUGHT’ CATEGORY.


Many of the government measures to combat energy inflation fall into the ‘deficit of thought’ category. For example ‘windfall taxes’ on energy producers and providers ignore a simple point, that the ‘obscene profits’ being posted by oil producers, contrasts with colossal losses in the first year of the pandemic, for which they did not seek or receive any form of bail-out (in contrast to many services industries). Given that many of the supply problems in the oil and gas sector owe much to the fact that upstream investment averaged just $400 Bln per annum in the 2017-2021 period, in contrast to $750 Bln in the 2011-2016 period, with the 2014/15 price crash and ESG pressures being key contributors. By extension a windfall tax will only further discourage such investment, thereby exacerbating an already acute supply problem. Meanwhile cutting fuel duties and taxes (in effect providing a subsidy) has some merit, but it does negate central bank efforts to curb demand and bring it into better balance with supply. But it will likely result in either reduced spending in other areas, (such as social), and/or result in renewed upward price pressures as and when such temporary tax cuts are reversed, creating a headwind for any recovery.


Last, but not least the proposed cap on Russian oil prices, or indeed any other attempt to impose price caps in general has almost always resulted in the same thing: producers reduce output and indeed investment, thereby creating even greater upward pressure on prices. All such short-term measures could serve to increase price volatility, thereby making corporate business and project planning even more difficult, given the lack of visibility on costs.


Be that as it may, it is fair to say that markets have weathered the numerous shocks from a much faster and aggressive pace of central bank rate hikes, and the poor performance of bonds, credit and equities in H1 2022 rather well, above all, evidenced by the lack of any persistent spike in the VIX volatility index above the key 40% level. It suggests that while central banks have been caught on the backfoot by the persistent inflationary pressures, many investors and fund managers were well prepared for it: ‘keeping their powder dry’ during H1, both via strategic hedging and retaining relatively high cash allocations. At the start of H2 2022 flows would appear to suggest that despite a sharp increase in perceived recession risks


15 | ADMISI - The Ghost In The Machine | Q2 Edition 2022


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