The energy markets are overheated. Fuel prices are breaking records and electricity and gas bills are skyrocketing. This is a major downer for households and companies just now that the corona crisis seems to be over. Or is this precisely the price that society has to pay for this. Five questions.
1. Why 'suddenly' these high fuel prices?
The direct cause lies with the end of the corona crisis. Now that measures have been relaxed in many countries, economic activities are increasing again. Roads are filling up and the industry is working overtime. However, this is only one side of the story. Oil production is also failing. During the corona crisis, demand for oil fell sharply and many drilling platforms scaled down their capacity. And that capacity will not simply return. With the rise of renewable fuels, refineries have been investing less in new production capacity in recent years.
The price for a barrel of Brent oil has now risen to almost $80 per barrel. This is considerably higher than we have been used to in recent years. At the same time, oil moved above $2011 a barrel almost non-stop between 2014 and 100, so it could go much higher. The recommended retail price for a liter of petrol in our country has now passed the €2 mark, something that has never happened before. You now pay €1,65 for a liter of diesel along the highway. Petrol and diesel prices are – in historical perspective – relatively higher than oil prices. This has to do with the weak euro against the dollar. This makes the import of oil (which is often traded in dollars) more expensive and this is passed on to end users.
2. Will petrol and diesel become even more expensive?
Many analysts believe that the end of price increases is not yet in sight. The authoritative American investment bank Goldman Sachs expects the oil price to rise further to $90 towards the end of this year. In that case, refueling at the pump becomes even more expensive. Autumn has only just begun in the Northern Hemisphere and winter is just around the corner. In that respect, rising energy prices come at an inconvenient time. The upward momentum in the market will therefore not change any time soon, although according to many analysts there is indeed speculation in the price. The colder the winter, the more demand for oil, as history shows.
At the same time, it is likely that refineries will pump more oil now that prices are remunerative. The oil market is now eagerly awaiting the OPEC+ cartel consultations that will take place next week. Then the oil cartel will discuss whether to increase the current production of 400.000 barrels per day. Analysts do not immediately expect OPEC+ to do this. This is because the delta variant of the coronavirus is not yet under control in many countries and this could slow down the demand for oil. A lot will also depend on China. The Asian country indicated this week that it wanted to increase oil supplies to be better prepared for a possible energy crisis.
3. Is there a correlation between oil and high gas and electricity prices?
That is a question that economists have been considering for years. At times it is there, but not always. The fundamentals of the markets are different and the dynamics are therefore different. Just like the rising oil price, high gas and electricity prices are a result of the improving economy. The price of the Dutch TTF future, the most important reference contract for natural gas in Europe, reached the limit of €1 per megawatt hour on Friday, October 100. This is five times higher than in 2020. The fact that oil, gas and electricity prices are now peaking together is mainly a result of the large energy demand that has arisen and not so much that the markets are pulling each other up.
4. Can overheated energy markets lead to social escalations?
Yes, that is possible, but it is not (yet) necessarily likely. If high prices for electricity, gas and oil last longer, we will be heading for an energy crisis. That hurts the wallet and affects corporate profits. The situation can derail if panic arises about security of supply. For the time being, the security of energy supply in the Netherlands (and the surrounding countries on the mainland) is not at risk.
Regardless of escalations, a new energy crisis is lurking. The purchasing power of consumers will then decline considerably and that is not the only thing. Oil weighs heavily in many inflation baskets. If inflation rises, it is likely that central banks such as the ECB and the FED will increase interest rates faster than planned, with all the consequences that entails. It is also possible that the manufacturing industry, confronted with high energy prices, will scale back production, potentially creating gaps in the supply chain of many sectors. We already see this happening in the fertilizer industry. This makes the current situation economically exciting and complex.
5. Are governments taking measures?
Many governments are considering taking measures. We must make a distinction between being able to and wanting to do so. Because whether there is political support to temporarily reduce excise duties on fuel or VAT on energy remains to be seen - in view of climate change. The crisis is also interpreted by some parties as an incentive to move more quickly away from the use of fossil fuels.
The measures differ per country. The French government announced on Friday, October 1, that it wants to freeze gas and energy prices for six months. There is also a political motive here, as there will be new elections in April next year. The British government is considering providing emergency loans to energy companies at risk of going bankrupt. In the Netherlands, Minister Blok (Economic Affairs) wants to keep the option open to extract a limited amount of gas from Groningen for a short period. However, this is more of an emergency provision that will not have a dampening effect on gas prices. Many Member States are calling for European consultation, as the problem transcends national borders.