The banking and energy sectors face a new and volatile threat at the dawn of the decade
by Andrew Davis
Covid-19 has left our immediate future wrapped in more uncertainty than most of us have ever experienced. But this much is sure: the 2020s will be a very different decade to the one we were anticipating as 2019 came to an end. Of course, we now know that
even in the final days of the old decade, the first cases of this new disease were surfacing in China. But we had no clue then what extraordinary times lay just around the corner.
Ironically, as the new decade beckoned, two long-awaited landmarks were approaching that seemed to signal the end of one era and the beginning of the next. In both cases, the changes pointed to a 'new normal' that looked set to last for years.
In reality, it was over within a few weeks.
At the end of August 2019, the final deadline arrived for claims for misselling of payment protection insurance (PPI) policies that went on from 1990 to 2010. With most claims being settled within eight weeks, the flood of compensation paid to UK consumers
by the nation's banks had slowed to a trickle by the end of October 2019, soon to dry up entirely.
A watershed moment
And what a flood it was: between January 2011 and August 2019, banks handed at least £36.8bn to British households; the peak coming
in 2012 when almost £6.3bn was paid out. Even as recently as 2018, more than £4.4bn found its way into consumers' bank accounts. Some of these windfalls were saved, but many were pumped back into the economy to fund new cars, holidays
and home improvements.
The end of almost ten years of multibillion-pound handouts to British households was a keenly anticipated moment of release for the UK's banks. PPI payouts, and the cost of processing them in their millions, had been a drain on their profits for
almost a decade. The end of this nightmare seemed to mark the final closing of the post-crisis story for the banks, heralding a return to better times.
Within three months, they were plunged into a new world of pain as the economic shutdown raised the prospect of a wave of defaults that are likely to weaken their balance sheets and slice into their profits. Share prices have tumbled and dividends, of
course, have been suspended once again under pressure from the regulators, as they were after the 2008 to 2009 financial crisis. So much for the new normal.
The world we emerge into will be very different from the one we thought we were living in
Just as the final PPI claims were being processed, another watershed moment arrived – in September 2019, for the first time since records began 70 years ago, the US exported more oil than it imported. Securing supplies of energy to fuel the world's
biggest economy had been an abiding concern of US administrations for decades. Now, finally, that job was done. Rising production of shale oil – up three million barrels a day over the past three years – meant that US output had overtaken
that of Russia and Saudi Arabia and brought the US the energy independence it had craved.
Progress over the past few years towards this moment was critical in allowing the US to adopt a much more assertive attitude towards its enemies and allies alike. If it no longer had to rely on others for its energy, it was therefore much less likely
to risk its armed forces in regions such as the Middle East. This effectively reset the US's relationship with everyone else and left China in the position the US used to occupy – a major economy heavily dependent on imported energy. As
such, it was a critical plank on which the Trump administration built its 'America first' policy.But the US scarcely had time to savour its landmark achievement before Covid-19 rendered it largely irrelevant. Amid an unprecedented collapse
in demand for oil caused by the global lockdown, the price of US crude crashed – it is now so low that most US producers are operating at a loss and many oil sector businesses are expected to go bankrupt. The major problem facing the US today
is where to store all the unwanted oil being pumped from its wells – so much so that in late April 2020, for the first time ever, the benchmark price for US crude briefly turned negative. It remains at severely depressed levels that spell continuing
pain for the US oil sector.
Although no one can say how long it will take, we will eventually emerge from the Covid-19 crisis. But the world we emerge into will be very different from the one we thought we were living in just a few months ago. And like everyone else, the banking
and energy sectors have been taught a painful lesson about the power of events and how they can overwhelm seemingly sensible assumptions about our direction of travel.
This article was originally published in the June 2020 flipbook edition of The Review.
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