How Texas is making your electricity more expensive🤠🛢️
Issue 041 - WTF is going on with the Economy?!
Photo by Thomas Park on Unsplash
Hey and welcome to issue #041 of WTF is going on with the Economy?! Abroaden’s weekly economics newsletter for people living and working abroad.
You might be asking yourself? “Yo, why is there a picture of a couple of tacos in an economics newsletter?” Here’s why: For one, it’s lunchtime. Second, it’s Tuesday, aka “Taco Tuesday.” Third, we’re writing about Texas, the birthplace of Tex-Mex. Also, everyone loves tacos. Enjoy your lunch!
US Treasuries Are Up📈🇺🇸
Depending on who you ask, American government debt is making a comeback of sorts. Last week, the interest rate paid on American treasury bills hit their highest level since the pandemic started making a quick ascent from its recent lows.
US government debt is one of the safest investments in the world. Investors worldwide use it as the base of their funds and portfolios. When interest rates (or "yields" as it's called) go up, investors get more return from the core of their portfolio.
However, quickly increasing interest rates aren't all good news. The economy is cyclical and investors trying to time the market tend to follow specific patterns. As interest rates go up, more investors will take money out of their stock investments and put them into government debt. In turn, the stock market (and thus the funds that trade against the stock market) lose value.
Normally, this shift between rates and the market is gradual, making it easier for everyone to digest. If rates move up too quickly, though, it could cause outsized problems, threatening market stability.
There's already growing consensus that the stock market is in a bubble. If that were to burst now, it could hinder the global economy as it recovers from the pandemic.
The UK Comeback🇬🇧🥊
Thanks in no small part to the country's ambitious vaccination campaign, British stock markets are currently outperforming many of their global peers. With international investors flocking to UK stocks, the GBP is also gaining ground against the EUR and USD.
If you'll remember (and I don't know how you could forget), the UK is also dealing with the economic fallout from Brexit. By getting strong returns now, the British economy can soften the blow from both the pandemic and their new relationship with Europe.
It probably couldn't come any sooner, though. As we learned last week, the UK is in its worst recession in three centuries. The British economy can use all the help it can get.
Texas Energy Massacre 🤢⚡
Last week, the United States went through an unprecedented cold snap, bringing record cold across the continental US.
Texas got hit particularly hard.
Unaccustomed to cold weather, the states' energy infrastructure collapsed, leaving millions without electricity, heating, and water. The political ramifications aside, the incident provides a case-study on how energy markets work.
Energy, especially electricity, is notoriously hard to price. It's practically impossible to generate electricity in advance as we don't (yet) have a way to store it for future use. Therefore, the "spot" price for electricity changes daily, if not hourly, depending on how much we use and when we use it, as well as how much supply is available.
Last week, when millions lost their power, the laws of supply and demand snapped into action. Electricity demand skyrocketed as people needed it for their heating. Meanwhile, the power grid mostly failed, removing much-need supply.
The result? What little available electricity became exorbitantly expensive, costing lucky users hundreds a day to keep on the lights.
If that wasn't enough, the natural gas infrastructure in the state also failed. Texas has long been one of the world's biggest oil and natural gas producers. As fracking boomed over the past decade, the energy markets got flooded with these powerful commodities, sending prices plummeting. Despite this boom, infrastructure for storage and transporting these products didn't keep up, creating bottlenecks across distribution networks.
When last week's weather disaster hit, these weaknesses became a liability. Natural gas either couldn't flow to the right places at the right time. Worse, much of the supply remained stuck in the ground due to frozen pumps.
Once again, the economic laws of supply and demand got to work. Energy markets worldwide felt the effects of the Texan freeze, with their much-needed output suddenly off the market.
Some global energy traders then got to work, finding opportunities to move the markets. In short, commodities like natural gas and oil trade around the world. These exchanges help keep prices efficient while matching supply (i.e., oil and gas) with demand (i.e., consumers needing heating and power).
While the commodities markets function all the time, they usually don't face such extreme disruption. Last week's weather system was a massive exception to these rules, creating huge price swings. When the dust settled, some trading companies reaped hefty profits for their efforts to bring the markets back to normal.
Energy markets are fundamental for us, even if we don't see them daily. What happened in Texas is a giant reminder of why we should never take them for granted.
Early Vaccine Success💉🙌
It's been around two months since a handful of countries began their vaccination campaign. Now, it's becoming clear that the vaccines are working as intended. Israel -- leading the world in jabs/100 people -- is easing its lockdown restrictions. Just yesterday, British Prime Minister Johnson laid out his plans to return to normality by the beginning of summer.
These model roadmaps say a lot about our immediate economic future. First, the endgame is getting closer to focus. Companies in all sorts of badly-hit sectors like hospitality and tourism can start planning the rest of the year. One of the biggest problems during the pandemic is that planning is impossible. If you're in the services sector (aka you own a taco restaurant), the pandemic has been brutal due to yo-yo restrictions. By providing a final restart, businesses can start purchasing and planning for the post-pandemic recovery.
Second, policymakers can use these cases as a guideline to (slowly) end unemployment and furlough programs. By planning, governments can help soften the blow while giving everyone much-needed clarity about how the rest of the year will play out.