I have closely followed the recent upsurge in energy costs that characterized the end of 2021. According to global reports, coal, gas, and electricity prices rose to decade-high levels in the final months of the year, and projections were that the energy shortfall would continue well into 2022.

The International Energy Association reports that gas prices are at a record, with costs as of 3rd quarter 2021 at ten times the price a year ago.

In addition, coal prices increased 5x compared to 2020 prices, and natural gas prices tripled in October 2021 to their highest levels since 2008.

Many factors have been fingered as culprits for the energy squeeze, but one that seems to be thrown in now and then is the effect of reduced investment in fossil fuels and capital transfer to fledgling green energy projects.

Right off the bat, I would like to emphasize that investment in green energy is not the cause of the energy crisis. Moreover, as both the International Monetary Fund and the IEA clarify, blaming the clean energy transition for the situation is “inaccurate and misleading.”

Instead, there are various factors involved, not least of which are the 2014 and 2020 commodity price collapses and the resurgence of energy demand after a COVID-induced hiatus. I will briefly outline some of these causes and how we can expect things to evolve.

Why are energy prices so high?

While it seems like the energy crisis hit out of nowhere, there are longstanding reasons for the situation, and they mainly stem from the collapse of oil prices in 2014.

At the start of the 2010s, strong growth in the price of commodities created an oil industry boom, with prices sitting around $100 per barrel. The boom encouraged greater investment in the sector, significantly increasing supply. Similarly, developments in energy efficiency reduced worldwide demand, thereby creating an oil glut. However, major oil-selling countries failed to respond by lowering supply, and as a result, oil prices fell by 70% from 2014 to 2016.

One implication of this collapse was that investors lost appetite for new fossil fuel investment. Second, abundant oil also created a natural gas glut, making gas cheaper and a viable alternative for coal. Due to this, gas-fired plants gained ground, and the electricity systems worldwide began to rely more on gas instead of coal.

By the time COVID came around, the pause in fossil fuel investments was already several years old, and as Bloomberg reports, supply was already falling behind demand. COVID-19 tanked energy production globally due to lockdowns, the rampaging pandemic, and health regulations. While demand rebounded faster and stronger than expected, supply quickly fell further behind due to unexpected outages, a sizable maintenance backlog, and supply chain inefficiencies. Households and power plants began to compete for limited gas supply, which helped increase prices even more.

Currently, OPEC and Russia seem unwilling to intervene and help stabilize prices with increased supply. At the same time, the EU and other countries in the Northern Hemisphere have all but depleted their reserves in response to unseasonal weather, thereby leaving them unable to ease the supply hardships within their territories.

That said, I should note that climate policy is not exactly blameless in the overall operation of forces leading to this crisis. For example, increasingly stringent emissions targets in Europe, North America, and China have contributed to policies favoring gas (which is cleaner) over coal. But in the general scheme of things, climate policy has had a negligible effect on the crisis.

What will the new year bring?

The causes behind the current energy crisis are myriad, so it’s uncertain how things will develop within 2022. While major oil producers will likely open up their stores and help provide stability at some point during the year, other factors such as maintenance difficulties and destructive weather events are less certain.

I believe one potential solution could be to increase investment in renewable energy sources to help make the global system less vulnerable to wild swings in commodity prices. With decentralized energy production and renewable sources enjoying more production capacity, the world can recover from these commodity cycles quicker and suffer less damage as a result.

As the world looks to bounce back from the 2020 COVID-induced slump, inflation is playing a larger role than anticipated in global economies. A slower than expected economic recovery, a flagging labor market, and supply chain disruptions have created concerning inflationary conditions, affecting middle-class families globally.

For instance, the UN Food and Agriculture Organization reports that food prices rose for the third straight month in October 2021, climbing to their highest levels since 2011.

Likewise, in Europe, annual inflation was reported at 5% in December 2021, with energy costs driving higher figures at a rate of 26.5%. The higher cost of energy is in turn pushing up the prices of necessaries, from heating to transportation, food, and gas.

While inflation is a global concern, data shows that middle-class families are feeling the pinch of rising prices more. Here’s why I think that might also be bad for the global economy.

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Inflation has hit the middle class hard

As a general rule, inflation impacts individuals and families by reducing their spending power. However, the trend is usually tougher on lower-income families because they have less money to spend than the upper-middle class and the rich. For instance, the IMF found that people who identify themselves as poor are 10.5% more likely to name inflation as a major concern than those who identify as rich.

According to the Penn Wharton Budget Model, low and middle-income families spent 7% more in 2021 on the same products they purchased in 2020 and 2019. On average, they spent $3,500 more on the same products as they did two years earlier.

Similarly, the World Economic Forum states that one survey of 20,000 respondents from 30 countries found that at least half reported higher healthcare, clothing, housing, and entertainment costs. Seven out of ten people said that they expected the price of food, gas, public transport, and groceries to increase even further.

According to Reuters, Argentina reported the highest inflation rates, with prices rising to 54% as of October 2021. While countries such as China and Japan have reported the least inflation figures (at 1.5% and 0.1%, respectively), the general trend paints a troubling picture overall.

Food prices are more than 6% higher than in 2020, and gas prices jumped to 58% at the end of 2021, forcing these families to devote more of their budget to necessaries. In many cases, the inflationary trend is forcing middle-class families to explore cheaper alternatives to everyday staples, according to NBC. More people with incomes ranging between $50,000 to $100,000 are looking for deals in stores that traditionally serve rural and low-income shoppers.

Why this is bad for the economy

The middle class is a vital driver of business within the global economy – they sit at both ends of the table as business and consumer.

I see one reason for this as their overwhelming representation in the ownership of SMEs, which constitute the vast majority of businesses worldwide. Without a strong and financially stable middle class, more businesses will likely suffer cash flow issues and struggle to keep shelves stocked or services going.

As consumers, inflation takes more money from middle-class households in return for fewer goods. Therefore, they suffer reduced purchasing capacity and are ill-equipped to provide the demand that helps businesses arrest cash flow concerns. In effect, each phenomenon reinforces the other and produces a risk that all players will be caught in a vicious cycle.

Eventually, the economy bears the brunt of middle-class woes. Research shows that higher middle-class incomes presage better economic growth overall. Likewise, an ailing middle class is bad news for the economy, as high inflation levels leave them with less money to save, invest, or spend.

Unfortunately, it’s not certain how long this inflationary trend will continue or what might be done to arrest the trend. Seeing as the root causes are numerous, it is more likely that countries will provide whatever support they can through subsidies and stimulus payments while looking to the market to correct itself in due course.

The electric revolution in European skies could take just a few years. Judging by the speed at which things are moving, particularly in Scandinavia, the first to see the dawn of zero-emission aircraft will be passengers in the far north, where a number of experimental initiatives are taking shape to get small battery-powered aircraft into the air: models that have already attracted the interest of regional carriers.

The type of demand for air transport is specific to northern Europe, with almost half of the operators covering a distance of less than 200 kilometres and often carrying fewer than 10 passengers.

Short-haul routes are not economically viable for carriers, except when they are generously subsidised by the state to provide a public service to the community; the advent of electric aviation would open new frontiers to and from provincial airports. But not only that. Although it too is beginning with trials of small aircraft, the aim of the partnership between Wright Electric and the British low-cost carrier EasyJet is to produce 186-seat electric aircraft by the end of the decade. Interest in battery-powered aviation is also growing in southern Europe: in Spain, Volotea and Air Nostrum are partners in a project to convert turboprop Cessna Caravans into electric-powered aircraft, an operation they hope will be co-financed by the Madrid government, as well as the EU Next Generation funds. It’s not just about developing the aircraft of tomorrow. The advent of electric aviation in the next five years will also require strong ground support and the creation of the necessary infrastructure to recharge the batteries after landing.

US Trade Representative Katherine Tai announced that “these extraordinary times and circumstances call for extraordinary measures.

It is reported that 10-15 billion vaccine doses are needed to stop the spread of the virus; by April 2021, there had only been 1.2 billion doses produced worldwide.

The way I see it, US’s stance is circumstantial and in a way symbolic; the WTO negotiations could last for months curtailing to have an immediate impact in ending this present health crisis. Nevertheless, I believe this is very big news.

With this declaration US administration is following India and South Africa, which in early October 2020 issued a proposal for temporary suspension of IP rules in the context of Covid-19. In this regard, EU Commission President Ursula von der Leyen also said she was “ready to discuss any proposal that would tackle the crisis in an effective and pragmatic way.”  WHO Director-General Tedros Adhanom Ghebreyesus and UN Secretary-General Antonio Guterres were overjoyed with the news and congratulated the US on this historic decision.

Not surprisingly, the pharmaceutical industry took the White House’s decision very badly. They argue that developing countries lack the skills and resources to manufacture COVID vaccines based on new technologies. They also say that it will undermine the pandemic response, risk-taking and innovation in vaccine research. In my view, one thing is clear; this waiver, if can be applied timely on WHO scale, will deprive the big pharma of monopoly profits during this pandemic.

The big pharma prefers the donation of vaccines to patent infringement. There, however, promises have not been kept so far. The COVAX Facility, the global pooled procurement mechanism formulated by WHO for COVID-19 vaccines, was supposed to distribute two billion doses by the end of 2021 to the poorest countries, has not received enough deliveries, being able to provide only 53 million doses so far. Despite this largest vaccination campaign in history, one in four people in developed countries have been vaccinated to date, while in low-income countries it is one in 500. Can we give a better example of inequality?

On the flipside of the coin, there are also geopolitical concerns. Thus far, China and Russia exported their vaccines in quantity and have engaged in significant technology and knowledge transfer, forging partnerships around the world, and helping to speed up the global vaccination effort. This has been clearly an act of benevolent power to the world. The US and the EU are surely taking this perspective into account as well.

In today’s world, I think it is nearly impossible to think outside of the box of Big Data. Generous and benevolent they all seem, these programs will help to gather huge amounts of valuable medical information and records in less developed countries, where privacy and data protection regulations are much more lax compared to developed countries.

By far not all the lessons of the 2008 financial crisis have been learned. And those that have been learned have not necessarily been applied. Nevertheless, one of them – drawn and applied – will certainly have been of great help in the current crisis.

BIS, aka central bank of central banks, says that the banks have served as a “reliable first line of defense” and that “backed by swift action by the authorities, banks helped to limit economic stress at the beginning of the pandemic”.

I must stress the fact that the starting point of 2008 crisis is very different than the actual one. Back then, the crisis came from a freewheeling financial sector, overwhelmed by bets on sub-prime mortgages, which have proved to be much more dangerous than expected. Poorly capitalised, many banks that had considered risk management as a trivial activity found themselves on the brink of collapse, with some having to seek state support. In the actual case, the crisis did not initiate from the financial sector and it affects entire global economy.

FINMA independent supervisor of the Swiss financial market, has published its annual Risk Monitor. This report specifies the most important risks that supervised institutions are currently encountering and portrays the focus of FINMA’s supervisory activity.

In mid-2020, Swiss banks held claims on foreign companies totalling USD 78.1 billion (CHF 72 billion), according to figures from the Bank for International Settlements.

According to Swiss National Bank statistics 75% of these loans are held by two biggest banks, Credit Suisse and UBS. Coupled with bankruptcies and international fraud in the first half of the year that Swiss banks faced in commodity trade finance segment, I believe it is safe to say that FINMA will be monitoring the activities of the banks ever more closely.