Economic Energy Cancer: In Europe, the cancer has metastasized. It will spread globally.

• Author: Verleger, Jr., Philip K.

A parallel exists between economic crises and two health causes of human mortality: cancer and heart attacks. Both afflictions kill. However, how fast one dies from their onset can be very different.

Lehman Brothers' collapse in 2008 was the equivalent of the global financial system having a heart attack. A depression of unimaginable consequences might have followed absent the quick response of the U.S. Treasury, Congress, the Federal Reserve, and the European Central Bank. The relief efforts led by Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson staved off many of the most serious impacts.

Energy crises, in contrast, are more like cancer. Most cancers kill if left untreated. Death occurs slowly, though, in the majority of cases as the disease metastasizes through the body.

The current energy crisis is metastasizing through the world economy, bringing economic disaster to country after country. Sri Lanka's economy has collapsed as the nation cannot obtain needed oil or natural gas. The lights are going out in Pakistan because one-quarter of the country's generating capacity requires liquefied natural gas, a fuel that is now beyond the reach of Pakistani buyers because Europeans have bid prices to record levels in their effort to replace Russian gas. Ultimately, the financial consequence of this crisis is fatal absent radical intervention.

In France, factory owners are planning to replace gasor electric-fired furnaces with oil-burning ones. They are doing so because France's nuclear power output, which usually provides 70 percent of the nation's power, is down drastically due to half of the aging plants being taken offline to repair corrosion. Aluminum smelters, which seldom shut down because they take months to restart, are closing in the United States as electricity prices, pushed higher by European demand for natural gas, make operating uneconomic. Germany will likely ration natural gas to consumers and industry this winter as Russian supplies dry up. In the United Kingdom, officials fear blackouts next winter due to power plant shutdowns, and 43 percent of British consumers believe they won't be able to pay energy bills. Japan also faces blackouts this summer and perhaps next winter because most of its nuclear power plants were taken offline after the 2011 Fukushima earthquake and tsunami and have not returned to service.

The energy shortages have begun to cause political disruptions. In early July, the lack of natural gas, gasoline, and diesel fuel in Sri Lanka led to demonstrations that forced the president and prime minister to flee. The Economist has identified several other emerging market nations where the limited supplies of LNG and fuel threaten political unrest, including Turkey, Peru, Tunisia, and Uganda.

The instances of power and fuel rationing, extraordinarily high energy prices, and political upheavals are the first symptoms of a serious economic crisis. One need only look to the early 1920s when Germany's inflation and struggle to pay war reparations helped plunge the global economy into a depression that lasted until World War II began.

Yet the economists looking ahead at the World Bank and many other organizations and forecasting firms seem oblivious to the situation. The World Bank economists updated their econometric analysis of today's situation in the June 2022 Global Economic Prospects. In a section titled "Russia's Invasion of Ukraine, Implications for Energy Markets and Activity," they consulted their models to predict the impact of Russia's aggression. In preparing the projection, they reviewed at least one hundred of the various econometric studies published on energy shocks, asking the following questions:

* How does the latest energy price shock compare with previous major shocks?

* What are the lessons from previous energy price shocks?

* What are the likely implications of the current energy price shock for global activity?

Citing many econometric studies, the economists offer a bland commentary. Looking back to 1979, they explain how prohibitions on building oil-fired power plants...