What does the fuel crisis tell us about Brexit?

We have learned a lot about what Brexit means since the days of “Brexit means Brexit. A key consequence of Brexit has been to put pressure on supply chains and make the UK more vulnerable when it comes to dealing with shocks.  Covid has also caused huge supply chain issues across the globe.  The combination of these two huge shocks has resulted in much more acute disruption here in the UK, especially compared to our European neighbours.

I think the current petrol crisis is a good example to understand the approach of the government to managing the country under Brexit.

Why is there a fuel crisis?

The current fuel crisis is being driven by a lack of HGV drivers in the UK. 
This has structural roots across Europe before any of the recent crises, but Brexit and the pandemic have made it worse as follows:

Structural issue
HGV driver is simply an unattractive job.  Regulation is poor and poorly enforced so pay and working conditions are awful.  Few people are entering the profession and the aging driver population is retiring and not being replaced.

Pandemic issue
An interruption to testing of HVG drivers means even fewer new drivers and accelerates the decline in drivers across the EU.

Brexit issues
1. EU drivers working in the UK leave due to visa issues. 
2. Previously in times of a surge in demand, extra drivers come from the EU, but now they cannot due to visa issues.

Trigger: 
The trigger has been a sudden, general awareness that fuel supply is close to breaking point after BP announced that they could not supply all of their petrol stations.  This implies that, even operating at full capacity, we cannot supply the current demand.  This sparks a rational desire to stockpile, which cannot be quickly met by increasing supply as the system is already failing to meet demand.

It is the combination of these factors which creates a major crisis. 


How long will this fuel crisis last?

Some key numbers

High Demand for petrol

8,000 – Number of petrol stations in the UK

4,000 – Daily tanker deliveries to petrol stations

13,000 – Number of tankers of fuel needed to add ¼ of a tank of fuel to every car in the country to meet an estimate of stockpiling demand.

Any extra supply?

We were already on the margin of being unable to supply petrol stations before.  After all, that is what caused the “panic” buying – although why is it “panic” when it is rational?  This would mean that at the moment some people have more fuel than they normally have, and others have less than they normally have.  Anecdotally this feels quite accurate.  The way this system gets back in balance is very slow with a combination of long queues and higher prices reducing the amount of driving and making stockpiling more expensive so only the people that are highly motivated get the fuel.


Government action

I think the extra visas, coming next month, will have very little impact on the fuel crisis but may help to reduce the risks around Christmas supply disasters.

The government has also excitedly announced the recruitment of 150 army tanker drivers.  If they each do 3 deliveries each a day, it would take them a month to supply the extra fuel needed.  My guess is that it would be quicker than that, as perhaps my estimate of the average car having ¼ more fuel is too high, perhaps people driving less will help and perhaps if fuel starts to be delivered, the desire to stockpile will reduce. 

Brexit

The fuel crisis is important in itself but it also tells us a lot about the UK’s vulnerability to supply chain problems and our approach to dealing with them.

Supporters of Brexit point to the non-Brexit causes above but ignore that we would not be having this crisis without the Brexit factor.  After all, no-one in the single market has this problem, including N Ireland. 

It is also worth noting that these types of Brexit issues are not unanticipated or unintended.  In fact, this can be seen as one of the main points of Brexit- to stop EU labour working in the UK. 

Isolationist

The approach is clearly for the UK to sort it out itself and not use EU drivers as before.  This is clearly consistent with Brexit and can be seen as one of the main objectives.  A small number of visas for a limited period is a clear intent not to go back to the previous way of managing supply issues. 

Laissez Faire

A “left-wing Brexit” and the “laissez-faire” approach of the government seek to resolve the issue of more drivers in different ways.

A “left-wing Brexit” sees the removal of low-wage labour as an opportunity to increase the pay and conditions of HGV drivers.  Increased regulation leads to better working conditions such as bathrooms and rest breaks.  Unionisation of the drivers leads to higher wages.  State intervention leads to apprenticeships and training programs. 

A “laissez-faire” Brexit leaves it all to the market, the government has no role.  The industry is allowed to remain fragmented with faith in “market forces” to solve all problems.  They might argue that the market leads to the same outcome as the interventionist approach, as the reduced supply of EU workers leads to wages rising and conditions improving for UK drivers.  Unfortunately, all evidence is that this is a libertarian fairy tale and that without regulation, market failures are commonplace.  Or even without market failures, we might have outcomes we do not like.  For example, the current shortage of fuel has a very simple economic answer.  Higher prices.  Petrol stations should simply increase the price of fuel until demand reduces.  As any first-year economics undergrad is taught, rationing is not efficient.  The extra profits can also be used to pay for more drivers and so the outcome is one where there is more supply and higher prices. 

What happens next?

Since I cannot find an answer to the question of how much extra fuel is being delivered at the moment, I cannot give a sensible guess as to when this crisis ends.

What I am more confident of is that supply chain crises are an important part of the Brexit plan.  Gove would call them “speedbumps”.  We should expect to see more of them.

Trump – Biden what to watch for tonight

Here are the possible outcomes tonight

  1. Biden big win (70%)
  2. Biden moderate to narrow win (20%)
  3. Trump narrow win (10%)

Below is the election forecast from Nate Silver’s 538 website. He helpfully produces a snake of all of the States in order of the current polling – deep red for Trump and deep blue for Biden.

The tipping point state is Pennsylvania and polls show Biden ahead not only there but in many more states than he needs to simply win. This is why the most likely outcome is a big win for Biden.

Some simplifying observations:

  • For Biden to win he needs to win the Rust Belt i.e. Pennsylvania, Michigan, Wisconsin
  • For Trump to win he needs some of the Rust Belt but also ALL of the Sun Belt i.e. Texas, Georgia, N Carolina, Florida, Arizona
  • If Biden picks up some of the Sun Belt then he is heading for a big win.

By coincidence these States also split neatly in these categories by how they are processing votes. See below for a nice summary from the FT.

We will know the results tonight from the Sun Belt but the Rust Belt may be less clear, especially if it is close.

Drawing it together:

  • If Biden wins some of the Sun Belt – then we know he has won big and the delay in the Rust Belt does not matter
  • If Trump wins all the Sun Belt – then the election looks closer than the polls suggested. It’s likely the Rust Belt will also be closer meaning that we will genuinely have to wait until all the Mail-in ballots are counted. Even if Biden is still the winner this will be enough for Trump to contest the election and we may have prolonged chaos and conflict.

What to watch for

Florida will release results around 8pm ET / 1am UK time. If Biden is a clear winner then I think it is all over. If Trump wins then it could be a long night/week/month.

Brexit – what is Boris’ next U-turn?

If there is one behaviour which has characterised Boris as Prime Minister, is the frequency of U-turns. The major one last year was giving in to the EU on Ireland so he could get a Withdrawal Agreement passed. This year they have mainly been on Covid and exams for schools but I am now wondering what his Brexit U-Turn could look like.


Current Brexit situation

Without an agreement on the terms of a trading relationship, we will have a no-deal Brexit at the end of this year. This is not as serious as a no-deal Brexit would have been last year because now we have the Withdrawal Agreement. While we would not have trade agreements with the EU or any of the countries with whom we trade under EU’s trade agreements, we would also not be a rogue state reneging on our international obligations and agreements.


Pervious Brexit negotiations

The UK is acting like there can be a last-minute deal and the way to get there is brinksmanship. This was the case last year with the Withdrawal Agreement which the EU had already drafted. Talks were taken to the brink requiring either the EU to back down, the UK to back down or we go over the cliff edge. In this instance it was the UK that caved in, agreeing to a border in the Irish Sea and some commitment to EU’s level playing field rules in any future trade agreement. The EU had a draft we could sign, and Boris eventually signed it claiming victory and that the EU backed down.


Can the UK just cave-in again?

One path that many think likely is that Boris takes negotiations to the brink, then at the last-minute U-turns, agrees with the EU’s position, signs an agreement and claims victory.

But there is a serious problem with this idea. In contrast to the Withdrawal Agreement, there is nothing to agree to. There is no such draft of a trade agreement and there is not going to be one. The negotiations are the method by which the draft can be written, and these are not happening.

Why are talks making no progress?

The sticking point is the level playing field rules.

The UK signed up to them in principle in the political declaration of the Withdrawal Agreement but is now saying that they did not really mean it. The EU takes the declaration seriously and has based its negotiating position with it as a starting point.

Another way to think about this is that the UK and EU want to have very different types of agreement. The EU wants an overall governance structure into which all the detailed issues can be placed and resolved. The UK wants piecemeal agreements with much less overall governance or enforcement structure.

What deals are possible?

The table below lays out how I think the EU sees the options:

screenshot_2

  • Status quo is the one they want to negotiate. Zero tariffs, zero impediments to trade (such as regulatory and standards barriers) with a full level-playing field agreement.
  • No Deal is another simple option on the table, without level-playing field agreement, and the UK operates as a 3rd party country under WTO rules.
  • Canada-style agreement with some level-playing field provisions and some reduction in tariffs and barriers to trade is another option. The EU’s position is, given the geographical proximity of the UK, the level-playing field provisions would need to be more stringent that they are with Canada. The process of negotiating such a mixed deal is very complicated with many technical issues and perhaps even more complex political ones. For example, the Canada deal negotiations with the EU started in 2009 and are only recently being finally ratified. This timeframe is common for this type of deals as we saw with the Trans-Pacific Partnership deal which started in 2008, was agreed in 2015 and then Trump withdrew the US before it was implemented.

What does the UK appear to want?

The UK’s position appears to be zero tariff, zero impediments to trade and zero level-playing field.
(The ‘have cake and eat it’ option)
This is not something the EU is willing to entertain which is why the negotiations are stuck.

Which way will Boris jump?

If Boris is going to do another U-turn and agree to the EU’s framework then he needs to do it soon. This is not something that can be drafted and ratified in December. By all accounts Boris is not focusing on this issue and in this regard no-deal looks the most likely outcome.

3 paths forward for the economy

The pandemic is affecting the entire world, but we are seeing very different approaches to dealing with it in different countries. I have identified 3 broad strategies each of which will have very different outcomes in terms of the economic outlook. In this post I am not looking to evaluate the approaches from an ethical or public health perspective, but purely on what the likely economic results will be.

Path 1 – Control the Virus e.g. New Zealand

This is the approach I have been advocating and which I spoke about on my recent IAN talk. Please click below if you are interested in watching.

https://us02web.zoom.us/rec/play/vcUpIuyqq243GdPA4QSDB_NwW460f_2s2yJN_adfzh7kBiECN1ahb7QRYObZgJqcT5PkXmHALrgTT-6W?autoplay=true&startTime=1589914624000

This approach has been very successful at controlling the virus in some countries such as New Zealand, Norway, Singapore, China and Australia. All of these countries now have low levels of infection and can look at a material reopening of their economies. Other countries have been trying to play catch up, are past the peak in their infections and are maintaining lockdowns until the level of infections comes to a low level. This group of countries includes Canada and most of the EU.

This has not been an easy path to follow and for it to be successful it does not only take the good public policy but also it critically requires huge public support for measures which involve massive changes in behaviour. The countries that have been successful have given clear and detailed public health messages which have been adhered to due to high levels of public support and trust in the country’s government and institutions.

The economic impact of COVID has been very severe but these countries are the most likely to hope to experience COVID as being economically similar to a natural disaster and see a sharp rebound in economic activity. Bernanke, ex-Chairman of the Federal Reserve in the US, likened COVID to a snowstorm. In a snowstorm, we halt much of the economic activity but once the snow melts, we can go back to how we were before.

Waiting until the level of infection is very low has two big economic benefits

  1. The number of people infected is low, which means that anyone you interact with is highly unlikely to have the virus and so all the allowed activities are in effect very safe. This means people are confident to go back to work and do the allowed activities as you reopen.
  2. There is room to experiment with the reopening and how it impacts R0. If the impact is larger than you expected for an activity, then you have time to reverse the policy as the absolute number of infections remains very low. There is no danger of the virus getting out of control quickly.

With COVID the world will not be the same as before, but it may be possible to reopen large parts of the economy while keeping the rate of transmission and level of infections low.

Path 2 – Herd Immunity e.g. Sweden

I have used Sweden as my example but at the moment, to be honest, it is my only one and is a global outlier. It is the only country I know which has chosen to follow this path with high public approval and consent which makes all the difference to the potential economic outcome.

The choice to manage the spread of the virus with the longer-term goal of herd immunity is clearly possible. The economy is not shocked by the strict lockdowns and only a milder form of restriction is made to slow rather than to reduce the virus. Sweden has high levels of public support with 70% of the population supporting its government’s approach. With public trust and support the economy continues to function with a far milder slowdown in economic activity.

The data from the antibodies tests in Stockholm last week were broadly in line with my expectations but completely shocking to the Swedish authorities. With only 7.3% of Stockholm residents testing positive for the antibodies we can imply a mortality rate of 1.5-2.0%. This is slightly higher than the results from New York, France, Spain and the UK which all suggested 1.0-1.5% but I would suggest is within a margin of error given the relatively small sample size.

From outside Sweden we might think that this result would lead to a change in policy and a dramatic fall in public support but so far this does not seem to be the case at all. This implies that Sweden is uniquely happy to follow this route and I cannot say that the economic outcome should be poor. Whether it is better or worse economically than the path chosen by other countries such as Norway is not clear yet, but I see no reason to think it materially better or worse.

While I said that Sweden is my only example of herd immunity with broad public support it is not my only example of a country pursuing this strategy. A good example is Brazil where the government under Bolsonaro has deemed COVID to be “a little flu” and will not pursue any public health measures. But the population is not supportive of this plan which will lead to severe economic disruption. Without consent the population is afraid and so its behaviours change, both on the supply side as people do not want to go to dangerous workplaces, and on the demand side as a lack of confidence leads to a decline in spending and investment.

It is important to note that from a public health perspective Path 2 is the default strategy. Anything less than a strongly concerted effort to control the virus will make it continue to spread and grow. But going down this path with consent like Sweden has a very different economic outcome to doing it without consent.

Path 3 – Neither of the above e.g. UK, US

This occurs when there is a major divide between those who want to follow the two paths above. A majority of the population would prefer to take Path 1 and control the virus but a significant minority, including the government, prefer Path 2 to reopen the economy even if the virus is not controlled. This is the situation in the US and increasingly clearly also in the UK.

For both the US and the UK we went into lockdown late, made the lockdown not very strict and are moving to ease restrictions before the level of infection is low and declining. There has been some attempt to control the virus, but it has been half-hearted and thus ineffective.

Trump gets pretty uniformly panned in the UK for his approach but in a way, it has a certain brutal honesty to it. He does not really pretend that he cares about public health, he is very clear that he cares about the economy. He does not argue that it is safe to reopen, he argues that the economy comes first. The US public has a majority in favour of controlling the virus but has a significant minority that strongly prefers Path 2. Those people are also Trump’s support base and so politically it should not be surprising that he is pursuing a policy path which they support even if a majority of the broader country do not. Trump has never really been a President who wanted to govern for everyone, he governs for his base and his interests. It remains to be seen if he can generate widespread support for his approach.

The UK political landscape is somewhat different. We have a clear majority in favour of following Path 1 but again a significant minority who prefer Path 2. Looking at the opinion polls I do not see the strong divide in the country we had with Brexit. 73% of the UK population wants clear advice with detailed guidance, not the muddling appeal to “common sense” that we are getting. It is true that Conservative voters, Leave voters and older people are more likely to want to reopen earlier but there is a majority in all categories for a focus on public health and caution on reopening. But importantly the relatively small minority who are very keen on a rapid reopening are the small subset who are the type of people who are members of the Conservative Party and also the type of people who are Conservative MPs and in government.

https://docs.cdn.yougov.com/oygox62yaw/YouGov%20Covid%20Lockdown%20Results%20May%202020.pdf

I am sure there are many in the UK government who passionately want to follow Path 1, perhaps after his ICU experience that even includes Boris Johnson. But we also have Dominic Cummings who showed what he thought of the “Stay at Home” slogan by travelling 250 miles to Durham, and Rishi Sunak who is arguing for a swift reopening.

The effect of a split in government and a lack of clear direction is that the default strategy of letting the virus run away again becomes the effective policy. This is in effect the same policy that Trump has adopted but confusingly the rhetoric is entirely the opposite. When Trump argues for reopening, he talks about individual liberty and the economy. When the UK government argues for school reopening it does not say what everyone knows i.e. it is an economic priority. Instead, Gove tells us it is “safe”, and Williamson uses emotional blackmail on teachers to tell them their pupils need them. This contradiction between rhetoric and reality leads to further erosion of public trust.

To follow Path 1 the government needed to build a consensus in early March for measures which the public initially did not think we needed. It could still attempt to use the majority support for prioritising public health now to try again to make more effective policy. Instead, it is using the rhetoric of public health to sell the policies of reopening. Even now the slogan is

“Stay Alert – Control the Virus – Save Lives”

This is a slogan for Path 1. But all the policies are moving towards Path 2. I do not think this has a good outcome. The result will not be the economic recovery they hope for as without trust and security our confidence is so impaired that no recovery is possible.

If we combine the rhetoric of a government focused on controlling the virus, with the actions of a government that will not do so, I expect to see both a rising infection rate and also a misfiring economy. In this case, perhaps the government will admit its mistakes and refocus on being effective in controlling COVID. Or perhaps they will claim they have done everything they can, that controlling the virus was not possible as people did not “Stay Alert”, and we should move down Path 2.

Which of those sounds more in character for this government?