Jeremy Warner's Outlook: If this is what a non crisis can do, think what would happen if things got really serious

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The Independent Online

Peace may have temporarily broken out between Russia and Ukraine, enabling Gazprom to resume gas supplies to the rest of Europe. But as events have shown, energy markets have a continued power to shock, and there must now be a big question mark about the UK's ability to cope if things ever got really serious.

Will it be a dose of the Siberian winter we have been warned to expect, or another Buncefield? Or perhaps it will be another act of God such as Katrina, which drives up prices and diverts reserves away from these shores?

Whatever the eventuality, the British government's ability to respond to any short-term crisis in supply looks about as poor as its long-term strategic thinking on such issues.

Having been warned repeatedly about the UK's impending gas crisis, the Department for Trade and Industry is only now bothering to find out how many users are on contracts which allow supplies to be interrupted.

And having been told for years that if nothing is done the UK will eventually become dependent on gas for 70 per cent of its energy, 90 per cent of which will need to be imported, the Government is only now waking up to the need to provide security and diversity of supply through a new programme of nuclear build.

As things stand, very little of our gas comes from Russia, so the crisis in the Ukraine did not affect the UK directly as much as others - except in so far as it has pushed up gas prices. But it is a timely reminder of why Britain would be very unwise to become overly dependent on imported gas.

With prices apparently at the mercy of the Kremlin's whim - much more effective, this one, than the cold war nuclear deterrent - high energy users are finding it more profitable to close their production lines and sell their gas back to the grid. Meanwhile, the smallest hiccup in supplies, or even the rumour of a threat to them, seems to be enough to prompt panic buying by the public. If petrol pumps can be made to run dry just for this, think what would happen if there was a real crisis.

Yet ministers seem content to rely on the industry to run and finance Britain's strategic reserve of oil products and the markets to guarantee that we do not run short of energy. For most circumstances, this might seem the right approach, yet other rules apply when it comes to something as vital as energy supply, which is the lifeblood of a developed economy. if the Government cannot be relied on even to ensure that the lights remain on, you have to wonder what the point of it is at all. Never mind nuclear, the energy review needs to revisit the whole issue of the strategic reserve.

Is the Fed right to be so sanguine?

Economic expansions don't die of old age, Larry Summers, the former US Treasury Secretary, used to say; they get murdered by the Federal Reserve when it moves into tightening mode.

The Fed has been sharpening its knives for more than a year now with 13 separate interest rate rises. The idea is not to kill off growth entirely, but rather to slow it to a more benign, sustainable rate. The process has been likened by Alan Greenspan, chairman of the Fed (until the end of this month), to applying the brakes of a car. Too violent an application of the foot peddle, and the vehicle may skid out of control and crash.

What's the prognosis this time around? The recent inversion of the yield curve, with two-year rates moving higher than the yield on 10-year bonds, suggests the brakes have already been applied too hard. According to Merrill Lynch, there have been eight Fed tightening cycles in the past three decades, of which five saw the yield curve invert.

Of those five, the economy fell into recession or deep slowdown every time. Given the inversion, is it really possible to believe the present tightening will be like the three cycles where there was just a gentle slowdown?

Minutes of the Fed's last decision to raise rates published yesterday suggest few nerves on the open markets committee just yet. It was agreed that policy should no longer be characterised as "accommodative" and that the number of further additional tightenings required would probably not be large. But with growth expected to remain strong for at least another two years, nobody yet appears in any mood to start cutting. Is the Committee right to be so sanguine? We'd better hope so, for the public finances, not just in the US, but virtually the world over, are in no fit state to weather a serious downturn.

Google's ever-expanding horizons

Do Google's ambitions know no bounds? According to an article in the Los Angeles Times, Google's co-founder, Larry Page, is about to announce plans for a new, Google sponsored PC and operating system that would retail at just $200 a pop.

First search, then e-mail, video, book publishing and "free" telephony: now, apparently, Google wants to take on Bill Gates in his own backyard with a product that might eventually make the ubiquitous Windows operating system obsolete. The whole story was being massively downplayed by Google yesterday. Yes, Mr Page is giving the keynote address to the Consumer Electronics show in Las Vegas on Friday, but he'll be making no such announcement. There's nothing imminent.

Yet there is plainly something afoot. How ambitious it is remains to be seen.

The first thing to note is that there is nothing particularly new about the $200 desktop. They've been available in the US through Wal-Mart and elsewhere for some little while now. The low price is achieved by shunning Windows and instead relying on software from others, including Lindows, which uses the "open source" Linux operating system. This is perfectly adequate, possibly even preferable, for techies, but most users would not find it as user friendly as Windows XP or Apple's OS.

Little is yet known about Google's plans, other than that it has been working on a cheaply priced "box" to sell at affordable prices in developing economies for some while now. Strip out the Windows operating system and ancillary software, and it should be easily possible to produce something workable at less that $200 a go.

The project also promises fulfilment of one of the holy grails of the internet age where applications are accessed remotely from centralised servers, thereby dispensing with the need for a complex operating system with supporting software on every desktop. Lack of bandwidth has hampered such development in the past, but increasingly rapid broadband take-up now makes it possible. So is this Google's plan?

Whatever it is, it cannot be good news for Microsoft. Long gone are the days when Bill Gates could have strangled the new upstart at birth, rather in the way he did Netscape. Microsoft was late into the search engine game, and it made the mistake of using someone else's technology when in a half hearted way it eventually decided there might be a business in search afterall.

Yet Google is now too big and popular for Microsoft to catch and subsume. Despite the launch of Microsoft's own proprietary search engine, MSN Search - which is arguably as good - Google has continued to extend its lead. Rightly or wrongly, Microsoft is seen as old and unfashionable. For the time being, Google is still viewed as lean and cool.

How the young turks fare if they park their tanks directly on Microsoft's lawn is anyone's guess. There may be something to be said for bating the Microsoft bear just for the sake of it. The commercial rationale is harder to see and if the creation of a Google desktop requires the establishment of a hugely costly infrastructure of technical and customer support, then it is even harder. Something is afoot, no doubt. But the Google founders would be unwise to go head to head with the mighty Microsoft just yet.

j.warner@independent.co.uk

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