Reuters Econ World: Lessons from the energy shock

By Mark John

March 25 (Reuters) - A question to start: At what point will rising fuel costs encourage you to spend less time in the shower?

The surge in energy prices triggered by the Iran war is already beginning to be felt by households around the world - and calls are growing for governments to do something about it.

The problem is that, after having spent big to prop up the economy during COVID-19 and then being forced to deal with the 2022 fuel crisis sparked by Russia's invasion of Ukraine, most are not in a position to afford it.

That prompts two other, possibly more vital, questions: How do governments make sure that any further support goes first to those who need it? And isn't the big takeaway that we should be faster in weaning our economies off their fossil fuel habits?

Spain has proposed 5 billion euros of measures including a cut in value-added tax on electricity bills, cuts to fuel prices and a fuel subsidy for farming and transport sectors - money Prime Minister Pedro Sanchez said he would have preferred to spend elsewhere. Japan is also looking at subsidies to keep prices down.

Elsewhere, price caps are in focus: South Korea is going ahead with a cap on domestic fuel prices for the first time in nearly 30 years, while France says fuel distributors have agreed caps there and Portugal is going for electricity price caps.

The other approach is simply to open the oil taps wider. International Energy Agency (IEA) countries agreed a couple of weeks ago to release a record 400 million barrels of oil from strategic stockpiles, with the United States contributing the bulk.

Politicians say they have no choice but to take such measures, even if at some point they all carry a cost - either for the public purse or company margins.

They can also lead to perverse outcomes.

Britain's finance minister Rachel Reeves said this week the tens of billions of pounds spent in 2022 on a package to limit energy bills for all benefited the top 10% wealthiest households most because of their high energy usage.

In the name of economic fairness, she argued, the government would this time target "those who need it most".

And then there is the question of sustainability.

Some countries, particularly in Asia, are encouraging people to use less fuel: South Korea has launched a public campaign asking people to cut shower time and Singapore is urging households and businesses to switch to energy-efficient appliances and set the temperature higher on their air conditioners.

So would consumers in Europe and America respond to such behavioural nudges? Debatable.

In Europe - which has long portrayed itself as a leader in the green transition - those arguing that the Iran war shows the dangers of fossil fuel dependency are struggling to be heard.

In fact, some countries even want the European Union to weaken climate policies to provide short-term relief.

Italy and the Czech Republic have called for the bloc's carbon market - a mechanism to put a price on fossil fuel pollution - to be suspended or weakened. And German Economy and Energy Minister Katherina Reiche has reportedly said the EU should relax its overall net-zero target.

Beyond the headlines, the current energy shock can be framed as a dilemma of the "just transition": how do we move to a system that in the long term would be much more sustainable while not hurting the most vulnerable in the process?

What do you think? Where does the balance lie?

THE HEADLINES

• Exclusive: Trump's approval hits new 36% low, Reuters/Ipsos poll finds

• US expected to send thousands more soldiers to Middle East, sources say

• Meta ordered to pay $375 million in New Mexico trial over child exploitation, user safety claims

• Exclusive: US ramps up fuel exports to Cuba's private sector

THE CHART

Airline carriers like Emirates and Etihad are the lifeblood of the economy in Gulf states. Flights cratered during the first days of the Iran war but are slowly picking back up.

For more on how the Gulf is coping with conflict, check out this episode of the Econ World podcast.

THE PODCAST

“It's a protected market right now but a lot of people think that that's not going to last and just like how Honda and Nissan and Toyota came into this market 50 years ago and really disrupted things, I think a lot of people see that as a potential in the U.S .” Reuters U.S. Autos Editor Mike Colias on why cheap Chinese EVs may soon enter the U.S. car market, on the latest episode of Reuters Econ World podcast. On this week's show, Carmel and Mike Colias explore whether the ongoing energy shock could push car buyers towards EVs. Listen here.

THE REAL WORLD

• Germany: The German army is working to accelerate wartime decision-making through artificial intelligence tools

• Myanmar: The Iran war is threatening fuel and fertiliser supplies in Myanmar, where a quarter of the population struggle to find food

• North Korea: Belarusian President Alexander Lukashenko began his first visit to North Korea on Wednesday for talks that will cement ties between two close allies of Russia's Vladimir Putin

THE WEEK AHEAD

• March 26: U.S. initial jobless claims

• April 2: U.S. trade deficit (February)

• April 3: U.S. employment report (March)