706: UK Energy Prices and Impact on The Economy and Property - "it's the economy stupid"
10-20-2024
PropertyInvesting.net team
It’s time to give an update on UK property with the macro-economic landscape as a back-drop. Recall all our Special Reports that describe how important oil/energy prices are for property investors. Just to remind you of the reasons.
Energy prices are probably the single most important factor that shapes the prosperity of a national economy. High oil, gas and electricity prices lead to:
• Higher inflation
• Lower GDP growth
• Lower manufacturing competitiveness from the higher cost structure
• Lower employment
• Lower wages
• Higher interest rates
• A weaker currency
• More poverty, homelessness and worsening health through lower standards of living and lack of access to heat and dry homes
All of the above are just basic economics, but it seems to be missed by the new Labour government. They don’t look at numbers, or they don’t care about them. They are all career politicians that have never worked in the private sector before. Most haven’t even worked in the public sector/civil service. They don’t understand that all public sector funds are derived from private sector taxes.
Without a healthy thriving private sector – there is no money for spending on the health service, roads or any other services or infra-structure. So when Labour increase North Sea taxes – they drive private sector investment down, put people out of work, increase their own social security costs and increase energy prices – this then kills off industries that rely on oil, gas and electricity as the feedstock for “making things”. All industry needs cheap energy. We then have to shut down these uncompetitive factories/plants and import from China, USA and mainland Europe. Killing of our oil industry with windfall taxes – when the oil price crash from $100 to $75/bbl – then putting the tax rate up from 75% to 78% and likely stopping any tax allowances – is exactly the wrong thing to do to stimulate the economy. It will kill off almost all UK manufacturing as electricity, gas and oil prices skyrocket. This will in our view definitely happen in the next few years.
Did you know that UK electricity prices are the highest in Europe? They are 60% higher than Germany and France. They are also higher than Ireland that does not have any significant oil and gas production. Higher even than Sweden which has zero oil and gas production - a very cold country. It’s also worth mentioning that the USA has gas and electricity prices that are between 3 and 5 times lower than the UK – yes, you heard it here first, we are serious! No-one talks about this in the UK. We just put up with it it seems – our miserable energy policies, rafts of environmental and other regulations and high North Sea oil/gas taxes have helped cause this long term crisis.
We have failed miserably to translate our oil and gas wealth from the period 1980 to present into tangible long term benefits for manufacturers and our people – its frankly disgraceful. We did exactly the opposite of Norway that invested heavily in low cost Hydro-electric plants, stimulated their oil and gas exports and electrified their vehicle fleet - 90% of new cars are electric feeding of ultra-low priced hydro. Meanwhile Finland has low cost electric from the latest super efficient nuclear power plants. Energy bills for flat's in Helsinki are £20 a month so we are told!
Did you know the UK has the most unstable North Sea tax regime in the world – it’s changed about 6 times in the last 8 years – this is unheard of in other country anywhere in the world.
Successive Chancellors have tinkered, increased, tampered and killed off any hope of stability and reduced uncertainty. No-one in the oil sector is able to actually describe what the fiscal regime is – since Labour got into power on 4 June they have not said what the depreciation schedule actually is. The energy sector has to wait until 30 October to find out! Many are packing their bags. The North Sea is already on life support – because the so called “temporary windfall tax” that Sunak put on oil companies was kept long term despite oil prices dropping from $100/bbl to $75/bbl. Then Labour came in and rather than reducing this draconian 75% tax take, they actually increased it to 78%. Then they said there were going to start tampering with the tax allowance – no-one knows what they will be! You couldn’t make it up if you tried! It's just that the Energy Sector doesn’t seem to have any friends – no-one is speaking up for fear of being cancelled by woke Labour and their supporters – or worse still – blamed for climate change or every storm that hits the UK! Aberdeen and the Oil Industry is under siege from London and the woke left leaning globalist climate change agenda. And they are just about to pull the plug on 30 October – regrettably its going to be ugly. Many companies will up sticks and relocate overseas. Close down in the North Sea.
Is it any wonder our industry is suffering. And energy prices will double in the next few years because of high costs of solar, wind and draconian punitive fiscal terms slapped on the North Sea oil companies as Labour use their woke narrative on climate change. Make no mistake, this will lead to energy poverty, more homelessness and more people out on the streets with no roof over their heads. It will also reduce energy security and make it beholden to oil and gas imports from our often unfriendly neighbours.
As you all know, we have always highlighted the importance of oil/gas/electric prices to property investment. If energy prices are high, productivity will be lower, employment lower, wages lower, interest rates higher and hence property prices will be lower. Borrowing will be more difficult. Inward funds to lend in UK property will dry up.
A little known fact is – since 2007 – our per capita GDP has not really risen – its flat lined - we have fallen way behind neighbouring countries in GDP per capita wealth. This is probably because of:
• High energy prices – lower levels manufacturing
• Aging population
• Low fertility rates of indigenous British citizens
• Brain drain – 500,000 highly skilled wealth mobile people leave every year
• Immigration – 1,300,000 lower skilled poorer people come to Britain each year mainly from developing nations – many have jobs in the “gig economy” – very few have “higher paid corporate jobs”
• Brexit – large parts of the financial sector moved to Paris, Amsterdam, Frankfurt and Dublin. Post Brexit deals never materialised. Companies suffered in silence.
• Not being able to attract top companies like Amazon, Tesla, Meta to invest in the UK
• High North Sea taxes killing of oil-gas “manufacturing” income
• Workers – working from home
• Increasing levels of public sector jobs and a shrinking private sector
• Lack of support for innovation-technology - an example is attacks on the cryptocurrency industry and punitive laws/regulations
We would not advise anyone in the UK to focus on property at the moment – after all - property prices have risen so high that most younger people can’t afford them and the UK has a huge and rising debt level – both personal, private, government and within the property sector – both residential and commercial. It’s risky because if inflation is not tamed in the next few months – after a few rate cuts - interest rates might have to rise up sharply but this time like they did in the late 1980s both in the USA and UK. No one can remember when rates shot up to 15% and the UK currency collapsed – just before the North Sea oil revenues saved us by 1990!
The key concern – downside – is that the Labour government and Bank of England are fooling themselves that inflation has been tamed. The UK cost structure is so bad – we frankly don’t think the UK will ever recover from the inflationary shock of 2021. All of Labour’s spending plans will directly lead to inflation – especially as we export so little, import so much and create so little. Our economy will slide – everyone can see it – when you visit places like Middlesborough and Dundee. More and more town centres and city centres are being winnowed out – boarded up shops, commercial property derelict, no new factories and the industrialising of our countryside by wind and solar farms just to rub salt into wounds – whilst energy prices skyrocket.
If you have a property portfolio – be very careful of your debt levels – because if you are struggling with rates at 5% and we see some cuts, there is an ugly scenario that inflation runs wild again by end 2025 and rates have to skyrocket to both defend the currency as well as kill off the inflationary spiral. This is far more likely to happen in the UK than the USA because we have a weak Labour government that are frankly rather clueless – they will increase taxes, increase spending, increase public sector wages, increase wind-solar causing increasing electricity/energy prices – and this will kill off any manufacturing left, kill off the North Sea energy sector and reduce per capita GDP and productivity – it looks very bleak based on what we have seen in the first 100 days.
Our prediction is the Labour policies will drive away investors, non-dom high earners and innovation – that will lead to a bigger underclass and eventually higher unemployment, a weaker currency and higher inflation – and very importantly for property investors – higher interest rates therefore leading to stagnant or declining house prices in real terms. Frankly – if you are not “out” by now – its best to "get out" as soon as possible or at least sell down a large proportion of your portfolio – before the rafts of new rules and legislations coming into force that pander to all tenants demands whilst locking up landlords for not following the new regulations.
Labour have no intension of helping the small property investor – that are just trying to provide a good service whilst creating a private pension pot. Labour will view Landlords as worse than the Bankers and on par with Oil Workers. They will blame Landlords. There will be no support for Landlords – period. They will increase the pubic sector authorities – that will then introduce a raft of new rules, regulation, laws and requirements that make operating as a private buy-to-let landlord almost impossible – just surviving will be the order of the day – and keeping out of jail. Its just not worth the worry and stress any more regrettably – Labour will take what vestiges of fun we had out of the property business – it will just be firefighting Labour's tax/egulations. housing authorities, planning departments and tenants – from all sides! Sorry we cant be more optimistic – we just though we should give a good dose of realism.
This brings us onto the question – what is a good investment at the moment – for all global investors and particularly UK investors?
Regrettably – in the UK, we know of no UK companies worth investing in – taxes are too high, energy prices are two high and their prospects will surely be fairly miserable compared with their competition in the USA. Hence our strong steer is “don’t make an investment unless it is in a US or global company – they pays profits in dollars”. Avoid UK property, UK stocks and shares and exposure to the deteriorating UK pound. Our next Special Report will be upbeat – and clearly spell out some investment that we believe will rise in value 10 fold in the next 5 years! Look out for it in the next few days.