Commerzbank: Tragedy without cleansing the crisis in electricity prices – The causes of high energy costs

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An additional factor plays an important role: the structural transition to green energy. Of course, the bill will be paid by consumers…

Greek tragedy is reminiscent of the current increase in the prices of electricity , heating and fuel, according to Commerzbank , which, in its analysis, refers to the main reasons for the inconspicuous increase in energy costs.
More specifically, according to the German bank, oil and gas prices have literally exploded.
Fatally, this situation will give a further boost to the already high inflation rates, while the blow to growth within the euro area will be great – and not only that.
This situation poses a number of dilemmas for both central banks and governments.
So the situation, according to the German bank, is as follows:
So far this year, energy prices have only one direction, upwards.
The price of oil has risen by more than 60% since the beginning of the year.
The jump in the price of gas is even more dramatic…
In Europe it has more than doubled.

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However, what exactly is happening is still unclear…
On the one hand, there seems to be a dynamic in the energy markets, as in other markets.
Following the recession caused by the coronavirus in the world economy, it was estimated that there would be a sharp recovery.
On the other hand , however, the consequences of the consequent explosion of demand were not taken into account.
Energy demand grew faster than expected.
The supply could not be increased correspondingly, again, quite quickly, for various reasons.

The drama in the gas market

The supply shock has had dramatic consequences for gas.
The drop in demand last year led to a significant reduction in mining.
It is reasonable, then, that the market is now facing a rather inelastic supply – because there has been inefficiency in gas production in Norway and the Netherlands.
In this regard, it is worth noting that the Americans have significantly increased exports of liquefied natural gas, but can not make stronger increases, due to the limited capacity of liquefaction plants.
Also, the winter in Britain, which turned out to be heavier than expected, increased consumption in the country.
This, combined with the reduction in wind energy production, required increased use of gas-fired power stations.
In Europe, this has led to depletion of gas reserves, which were well below normal just before the start of the winter season.

Coal and the example of China

And, of course, everything is interrelated: Coal is also becoming more expensive …
In electricity generation, gas and coal are substitutes.
Therefore, a massive increase in the price of gas initially makes coal more attractive.
However, growing demand is leading – again – to higher prices.
In China, by far the most important consumer of coal, there are also some specific factors.
For political reasons, the Chinese government has reduced Australian coal imports – Australia was the Dragon Country’s second largest supplier of coal.
In addition, strict measures have been taken to protect the environment while at the same time there are great difficulties in domestic mining.
This leads to difficulties in the supply of power plants.
As electricity prices are set administratively in China, the rise in coal prices has caused financial problems for suppliers.
In addition, electricity prices for industry have been reduced by 25% since 2018 to boost their competitiveness.
Utilities have little incentive to supply the industry with more electricity, which can lead to production cuts.
At the same time, the authorities approved an increase of about 20% and ordered an increase in coal production.
However, the cost to industry is likely to make it more difficult for Chinese exporters.
In this context, China could fatally export, in addition to products, inflation.

There is no oil…

The oil market also suffers …
Unplanned production disruptions, for example in the Gulf of Mexico, meant that supply fell short of rapid normalization of demand.
In addition, OPEC + has so far refused to adequately increase production, while US oil producers – unlike a few years ago – did not react immediately to rising prices as production expanded.
The result is a “deficit” in the oil market, which is likely to be offset over the next year.
In any case, the prices are so high and it will be some time before the situation normalizes.
Deep down, an additional long-term factor plays an important role: structural-transitional change in the energy sector accelerated by policy decisions.
Of course, the bill will be paid by consumers.
In the euro area, rising costs for electricity, heating and fuel reduced household purchasing power by 1.5% in the first eight months of the year.
Weights, of course, vary considerably from country to country.
Prices for non-energy goods are also likely to rise as companies pass on costs.
On the other hand, some electricity and gas traders who have entered into long-term delivery commitments with price guarantees may face problems.
For them, higher market prices reduce their profits.

Stagnant inflation ?

The depletion of purchasing power will not leave private consumption untouched in developed countries.
According to Commerzbank, even if households finance part of the additional costs by resorting to savings accumulated from the lockdown period, consumption is likely to lose momentum in the coming quarters.
At the same time, the rate of inflation could turn out to be higher than expected.
The European Commission presented proposals on Wednesday on how to cover the additional burdens.
Governments in Spain, France, Italy and Greece have already announced that they will help low-income households pay their energy bills.
However, this will create new holes in national budgets.
The dilemmas facing central banks are also great, with the ECB not considering a policy change at the moment.

Source: https://www.bankingnews.gr/

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