Cheap energy is the new cheap labour. The EU’s switch to expensive renewables is in deep trouble.
The price of oil keeps on falling; the shale gas boom has reduced the price of natural gas in the US to a third of that in France; Germany has appealed to Sweden for its support in expanding two coal mines; and the EU’s effort to switch to clean energy is troubled. For companies wondering where to locate, the world has turned upside down.
Cheap energy is the new cheap labour. For two decades, the biggest driving force in industrial globalisation was the gap in the price of labour between the developed world and China. That induced many industries – textiles, electronics and others – to shift production from high-cost factories in the US and Europe to places where people would work for a fraction of the cost.
Now, as the wage arbitrage between the north and south narrows, the energy gap is widening. Wage rates adjusted for productivity in China have risen to more than half the level in the US, according to Boston Consulting Group. Meanwhile, energy prices have been falling and the Opec oil-producing countries have failed to halt the decline.
Some fortunate countries, especially the US, are gaining from both of these trends at once.
Although cheap fuel theoretically helps every energy-dependent country, the gains are distributed unevenly. The big beneficiary, thanks to shale natural gas, is the US. Not only is it helped by companies bringing manufacturing home but it is also an oasis of cheap gas. That is luring energy-intensive industries such as chemicals, petrochemicals, aluminium and steel.
Europe made the wrong bet. In the long run, making fossil fuels more expensive by subsidising renewables and charging for carbon emissions could bring the EU a steady supply of clean, cheap energy. At the moment, it is nullifying the benefits of lower energy prices and giving European companies an incentive to relocate.
“There are no energy-intensive investments taking place in Europe now,” says Dieter Helm, professor of energy policy at the University of Oxford. “Why would you locate a new investment in a place with both high labour costs and high energy costs, many of which are self-inflicted?” […]
In the long run, there are real risks for countries that impose high costs on themselves while their competitors enjoy low ones. If everyone from the US to China adopted the approach together, it would not matter. But in a world of cheap gas and coal, it does.
It is a hard challenge – the US is lucky to have large, accessible shale gas reserves. But Europe must start by realising that the comparative advantage of cheap labour is giving way to that of cheap energy. Turning a blind eye to that fact will not work.