Populism on oil prices doesn’t help

This week, opposition leader Dr Simon Busuttil chimed in with a proposal by the Small Businesses Chamber (GRTU) for an additional reduction of 30% in electricity prices or businesses – over and above the 25% reduction already effected by the government – to reflect current international oil prices.

Busuttil is evidently keen to restore the PN’s reputation as a ‘pro-business party’: a reputation that was in a sense usurped by Joseph Muscat’s Labour, which – when still in opposition – had made very similar arguments to the ones Busuttil now echoes. Politically this makes sense, as the loss of this reputation had a considerable impact on the PN’s electoral fortunes. However, there are a number of inherent dangers in this approach. 

Having previously defended his own government’s energy pricing policy – admittedly, at a time when the international price of oil was much higher – there is a risk that Busuttil may come across as contradicting his earlier position.

Busuttil’s demands today immediately contrast with his immediate predecessor’s insistence on higher energy prices. According to former Prime Minister Lawrence Gonzi, higher tariffs were necessary to eliminate subsidies to Enemalta; arguing that the money saved on subsidies could be better spent on health and education. Additionally, Gonzi also presented the higher rates as incentives for reducing waste, conserving energy and facilitating the shift to renewable energy.

From this perspective, Muscat’s electoral pledge can be seen as somewhat populist; pandering to complaints by businesses that the higher cost reduced the scope for economic growth. The prospect of lower electricity and water bills translated into popular support for Labour; but at the same time Muscat also cemented a reputation for irresponsibility – encouraging wastage for the sake of electoral gain.

Though less immediately popular, Busuttil’s earlier position can by the same token be described as representing the more sober, politically responsible approach. Moreover, until fairly recently the Nationalist Party argued vociferously that lower rates were not only unwise but technically ‘impossible’… with former finance minister Tonio Fenech even arguing that Labour’s energy policy was the stuff of Alice in Wonderland.

This fact endows his new position with the aura of inconsistency. One cannot realistically make the switch from a position in favour of higher rates, to one arguing for rates to be further slashed by an additional 30% – over and above an already-made reduction of 25% – without giving the impression of a complete volte-face.

Furthermore, until only a few months ago the opposition argued that Muscat’s populism threatened Enemalta’s long-term viability. How, then, can the same opposition now argue for further reductions that can only threaten the energy provider further?

Besides, it is debatable in the extreme whether any profits to Enemalta should automatically translate into reductions for businesses. Even if he paid a high electoral price for it, Gonzi had a valid point: energy prices are an effective deterrent against waste. If both parties now engage in a price war to reduce that deterrent by as much as possible, they will only send out the message that both are willing to encourage excessive consumption for their own electoral advantage.

Given that the present government has already reduced commercial bills substantially, there is no immediate impetus to justify further (and even greater) reductions at this stage. One can understand the GRTU’s request – representing as it does the interests of small companies –the GRTU is not saddled with responsibility for the economic well-being of the country as a whole. In the present scenario, with complaints about Enemalta’s rates having subsided, it makes no sense to endanger Enemalta’s financial situation through further reductions.

Moreover there is an intrinsic flaw in Busuttil’s argument, just as there was when the same argument was made by Joseph Muscat in opposition. Lower prices may indeed reflect present market realities, but there is no guarantee that these realities will remain in place in future. International oil prices are notoriously volatile, and can easily spike again depending on various factors outside any country’s control. What would happen if rates are slashed by a further 30% today, only for the price of oil to once again shoot up to previous, much higher levels? 

Such constant tinkering with the price mechanism can only seriously destabilise the economy. Ironically, Busuttil’s insistence on such radical fluctuations can also be interpreted as a lack of sobriety and responsibility on his part as opposition leader: which is precisely the criticism his own party had levelled against Labour when in government.

Separately, there may be serious environmental ramifications to any such decision. It is already hugely debatable that the government should have reduced the price of water by 5%, at a time when water is underpriced and extracted at great environmental cost. Even if unpopular, the responsible position from an environmental point of view would be to adjust water prices to properly reflect the environmental impact of water production.

Ultimately, such populism on energy issues risks degenerating into a race for the bottom, with parties trying to outdo each other in terms of socially irresponsible generosity. Surely it would make more sense to leave energy prices as they are and reinvest the surplus generated by Enemalta to fund society’s needs in health, education and other areas.