The majority of popular riots are caused by the decline in purchasing power when the income of the population does not increase at the same rate as the cost of living. And in the current difficult context that we are experiencing, a new factor is now worsening this trend: the weight of the ecological transition.
Some historical facts
The French Revolution of 1789 has economic origins. The gabelle (tax on salt) was already crushing the population in some regions at that time. But it was above all the liberalization of the grain trade in 1763 and then in 1787 that was at the origin of the popular uprising. This measure greatly increased the price of bread and therefore starved part of the population. What caused the fall of the monarchy in France.
In Germany after the First World War, it was hyperinflation and the collapse of the mark that played an important role in the victory of the Nazi Party in the 1932 German elections. China’s inflation rate in 1989 was 18 percent, the year of the Tiananmen Square protests.
In 2007 and 2008, West Africa was the scene of numerous riots protesting against hunger and the increase in the cost of gasoline. The Arab Spring of 2011 was a revolt against declining purchasing power and autocratic regimes. In 2019, the Yellow Vests movement in France was born following the increase in the price of gasoline.
Origins and consequences of these crises
After each economic crisis, the prices of raw materials rise sharply. Because the supply stops increasing for a few years, for lack of investment or a shortage of manpower. While demand for its part often rebounds faster than expected.
Take the price of Brent oil for example. After the crisis of 2000 – 2002, the price increased considerably until mid-2008. Then collapsed before rebounding strongly until 2011. Closer to home, since the low point of March 2020, the price of oil has been rising. It has returned almost to the pre-Covid crisis level:
Regarding prices at the pump, the latest statistics are as follows: as of May 17, 2021, the price of a gallon of gasoline in the United States is $ 3.12, an increase of 60% in one year. In France, where taxes represent more than 60% of the price at the pump, the price of Unleaded 95 is € 1.53 per liter or + 26% over one year.
As a reminder, in 2019, the “yellow vests” crisis erupted at a price of € 1.60 per liter. In Mauritius, where the price of fuel does not fluctuate according to the world price but is controlled via the State Trading Corporation, a liter of gasoline now costs Rs. 48.40, following a 10% increase last month, the first increase since the June 2019 drop. The highest price was Rs. 52.25 in 2013 and 2014.
We can observe the same situation at the agricultural level with the respective prices of wheat and soybeans:
Ecological transition, a necessary but fatal evil for purchasing power
But what is new this time is the political diktat that is the ecological transition, born of the climate emergency:
- electricity must become clean and no longer use fossil fuels
- cars should no longer have a heat engine but an electric motor. With a transition period where the hybrid will be tolerated…
So why is oil rising, despite the announced abolition of thermal engine vehicles?
First, because demand is not going to fall, because of growing demand from emerging countries. In 2019, 48% of the demand for oil (100 million barrels/day) came from OECD countries and 52% from non-OECD (emerging) countries. For 2026, forecasts from the International Energy Agency show an average consumption of 104 million barrels/day, split 44% OECD and 56% non-OECD.
Secondly, because the reduction in shale gas production and the pressure exerted on oil companies (which include heavy financial penalties) to produce “clean” electricity instead of continuing to invest in oil production results in a continued decline in investment. And therefore necessarily to a predictable reduction in production capacities, while demand is not falling!
And at the same time, batteries in electric cars need more and more lithium and copper, among other things. Here is the result :
Global X Lithium & Battery Tech ETF:
Global X Copper Miners ETF:
Political management at the foot of the wall
The politicians have therefore achieved the double feat, under the guise of ecological transition, of:
- explode the demand for the many materials needed for battery production
- while raising the price of oil in parallel
Financial markets are moved by the rise in inflation beyond 4% in the United States? We believe that the situation is indeed very worrying from an economic point of view but above all from a political point of view:
1. The increase in almost all raw materials, especially food and oil, will have a strong impact on the purchasing power of populations. Electric cars, which are more expensive to produce than combustion engine vehicles, will remain so for some time
2. It is likely that Governments will increase direct and indirect taxes, in an attempt to stem the spiral of debt generated by negative growth in 2020 and even in 2021 for countries dependent on tourism, such as Mauritius.
3. All this in a global context of general mistrust against politicians. Except for Jacinda Ardern (in New Zealand) and Xi Jinping (in China), there are very few heads of state whose citizens consider that they have handled the Covid crisis well.
Our conclusion on the ecological transition?
The expected sharp drop in the purchasing power of the populations will have major political repercussions on this ecological transition fund carried out at a forced march.
By fabricating an energy crisis in addition to the cyclical rise in agricultural commodities and the inevitable increase in taxes, we have here the perfect ingredients for massive political protest movements.
From the point of view of investments, choices are made today in terms of sectors of activity than by region, because all the big companies on the planet are multinationals and sell their products all over the world. Growth in China will continue to be a major profit driver for all the major groups in this decade, regardless of the location of their parent company.
And we take this opportunity to remind you of our working methods.
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