While natural gas prices have receded over the past couple of days, levels above 500 dollars a barrel oil equivalent towards the end of August seemed like the clearest confirmation we could have had. No wonder search terms like "energy crisis" or "Energiekrise" (German) both spiked at the end of August, according to Google Trends.
It's not that stock markets are unperturbed, but I've seen many commentators expressing their astonishment that stock prices haven't fallen further, given the energy crisis and the many warnings of recession.
Well, for one, earnings estimates for the next 12 months in European indices like EURO STOXX or STOXX Europe 600 were actually raised in August, as they have been for most of the year. It hardly needs explaining that Norwegian estimates are up even more, given the sharply rising energy prices, but European indices are not that energy intensive. They do, however, have a large share of their revenues from outside Europe. Either way, when you combine falling stock prices with higher estimates, you get a lot lower current pricing.
A lot of research has been produced on the blow to the global economy from the oil price shock in 1973 (rising 400%) and also in 1979 (doubling). I've seen a few references to that decade in the past couple of weeks, sometimes as an argument that such earnings estimates are way too optimistic.
Do note, then, that the global economy has become much less energy intensive. If you scale the level of global energy intensity to 100 in 1972, it is now at 60. For Europe, it is below 47 and for the US below 37. Emerging markets and China in particular have seen a somewhat different development, but the world has clearly become more efficient in using energy to produce income.
In economic models, sharply rising energy prices deliver a negative shock to the economy, meaning that they may significantly reduce growth. So far, however, the impact of the present energy shock is nowhere near 1972 levels, given that energy is a smaller part of the economy and that overall price increases have been less dramatic.
Such reflections may bring little solace to Europe if the coming winter turns out to be severe. The obvious problem is that you can't easily transport the required amounts of natural gas or electricity. There is a very real risk that energy may have to be rationed, posing practical problems for households and perhaps leading to factories or other activities shutting down.
If this leads you to sniff arguments for bottom-up securities selection, be my guest. My main mission, however, is simply to put the present crisis into perspective. I like numbers. If they happen to tell me that this is nowhere near the size of 1973 oil price shock, or that many companies are posed to weather this surprisingly well, I take the liberty of telling you so. If this runs counter to what you're reading in your daily feed, it's all the more fun.
Finn Øystein Bergh
Chief Economist & Strategist
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