The jump in natural gas prices made headlines this week, amid fears of an economic slowdown.
What is behind the jump in prices? A variety of reasons can be found: last winter depleted European reserves, weak winds led to a disappointing supply of renewable energy, growing demand for gas in Asia led to global competition for liquefied natural gas, Russia is not increasing production for its own reasons, and more and more. And of course, we are in the midst of a recovery from a global epidemic like no other in a century, and still disrupting the global supply chain.
The expected surprise
That is, there is a kind of “perfect storm” here in which a series of factors unite into a powerful extreme event. Or, to choose a different metaphor, in “Black Swan,” the term coined in 2007 by his financier and thinker Nassim Taleb, to describe a dramatic event that no one could have predicted.
The term black swan became popular after the financial crisis, made headlines with the outbreak of the corona plague last year, and recently returned to use in the UK following the energy crisis and fears of fuel shortages that led to huge queues at petrol stations in the kingdom. But these are not necessarily unexpected events: in the book The Black Swan itself, Taleb mentioned extreme scenarios such as a crisis in the global and linked financial system, or the growing danger of an epidemic in the global world. There have also been quite a few warnings in the UK about the vulnerability of the local energy market in recent years.
That is, these are not necessarily black swans, but perhaps “white swans” and completely predictable. Although, as Taleb explained at a conference earlier this year, what seems entirely predictable to one may come as a surprise to another. My black swan is your white swan.
Either way, this is an opportunity to return once again to Taleb’s general lesson: it is desirable to develop resilience that will allow us to deal with extreme events. Emergency reservoirs, excess capacity, more equity, insurance for a rainy day. Anything that will allow us to deal with the extreme scenario that is to come.
The lesson forgotten
Taleb’s lesson sharpened after the financial crisis, and again at the beginning of the plague. Decision.makers around the world spoke last year about the need to strengthen the global health care system and supply chains, and increase resilience. Here in “Globes” we also wrote about it.
The problem is that developing resilience takes time and it is advisable to do it in the good years, not the bad years. After all, one of the reasons mentioned for the current energy shortage in Europe is the desire to fill the reservoirs for the winter, which further limits the availability of gas, and only currently exacerbates the situation. Liquid gas facilities are not being built so quickly, and if another spoken example is required, chip plants will not be built from one day to the next.
Part of the story is the market structure itself. Financial Times commentator Isabella Kaminska points to similarities between Northern Rock Bank, which collapsed in 2008, and the British competitive energy market: the bank relied on short.term financing and long.term loans, and energy marketers pledged stable prices but relied on supply. Volatile. The lessons learned about the need for safety cushions in the financial system will not be applied in the energy market.
Energy market veteran Leonard Hyman and William Tilis raise a similar point and go further: it makes no sense to have a host of energy marketers in the UK, a method designed in the spirit of Thatcher and not proven. And there were those who pointed to the liberalization of the energy market in Europe, which was intended to reduce dependence on long.term contracts with Russia, but in retrospect the entry of more fragility into the system.
As my colleague Amiram Barkat explained this week in the “Submarine” podcast, these specific examples are not necessarily relevant to Israel. We have our own gas reserves, and in the case of the IEC for example, also long.term contracts. If there is a lesson here, it is to diversify our energy sources.
As Kaminska points out, beyond the specific British story, there is a more general trend here, of relying on vulnerable supply chains. And in our context, too, the need to take into account extreme scenarios, which nowadays no longer seem so extreme, is being sharpened when reforms are being planned here. If resilience is difficult to develop in retrospect, one should think carefully before introducing fragility into the system.
For example, take into account warnings such as those of members of the Faculty of Agriculture of the Hebrew University in a public letter published in August. Prof. Eyal Kimchi, a faculty member and vice president of the Shoresh Institute for Socio.Economic Research, explains that agricultural reform, which will give great weight to imports from countries such as Jordan, Egypt and Turkey, involves risks not only related to political relations with these countries, but also more sensitive. For climate change. “
From energy to agriculture
Is the analogy between the energy market and the agricultural market at all relevant? Prof. Kimchi explains in a conversation with Globes that there is room for comparison. “When there are no problems you say ‘save two pennies’, and when there is a shortage, the problems pop up. All forecasts say you will have a growing gas supply, and we will move to renewable energies anyway, so why sign long term contracts. Whereas when there is a crisis Like insurance against price fluctuations. “
“In agriculture,” he continues, “there are no long.term contracts. You can sign contracts, but there is no way to make sure they are fulfilled, and they can be problematic in terms of quantity and price.”
The fate of the reform of agriculture is still under discussion, and Kimchi testifies that he “prefers to be a prophet of rage and deception.” He warns that it is dangerous to look at agriculture through the “hole of the divorce”, and is especially afraid of sweeping reforms. In his view, “one should proceed with caution,” examine each branch of growth individually, and perhaps begin the pilot pilot on one growth, instead of regretting in retrospect. He mentions, for dessert, that there are risks involved here that we do not have at all. “The agricultural market,” says Kimchi, “is not a market controlled by producers or marketers. The weather dominates this market, so it needs to be looked at carefully.”