by Peter Franklin
Monday, 12
September 2022
Analysis
07:30

Is the energy crisis just a panic?

Markets may be over-reacting to changes in gas prices
by Peter Franklin

Do the stunning gains made by the Ukrainian armed forces over the last few days mean that peace is nearer than we’ve dared hope? Or will a desperate Vladimir Putin escalate the conflict? At this stage it’s still anyone’s guess, but some of those guesses have consequences — for instance, on the cost of heating our homes.

You may surprised to learn that the movement in gas prices in recent weeks has been sharply downwards. Just take a look at the following chart tweeted out by the German financial journalist, Holger Zschaepitz:

The extreme spike in gas prices we’ve seen since the invasion of Ukraine appears to be subsiding. Zschaepitz declares that the “Kremlin strategy of weaponizing energy [is] falling flat”. European demand for gas is already down significantly on previous years. Alternative sources of supply are making themselves felt. As for Putin imposing further restrictions on the supply of Russian gas, current export levels are so low that he’s hasn’t got that much more room for manoeuvre. We’ll see this week how the markets react to the rapidly changing war situation, but Putin may have come close to doing his worst — at least in terms of gas prices.

Of course, even if this is his worst, it’s quite bad enough. The energy crisis is real and a free marketeer like Liz Truss wouldn’t be getting ready to spend £150 billion on a price freeze if she had any other choice.

And yet we still need to ask whether the energy markets are over-reacting. While the long-term increase in prices does reflect real world conditions, there’s no ignoring the series of insane price spikes that punctuates the trend. These look like evidence of panic on the part of energy buyers and speculative frenzy by sellers and traders. 

Such convulsions go well beyond the normal up-and-downs of a properly functioning market. For millions of households and businesses the resulting instability is unmanageable.

In normal circumstances the market does what it’s meant to do — i.e. send price signals to even out imbalances in supply and demand. But when this mechanism goes crazy it does more harm than good. There’s a useful analogy that can be made with the body’s immune system. Most of time, we couldn’t do without it. However, there are life-threatening conditions, such as sepsis, in which the immune response massively over-reacts to infection — to the extent of damaging the body’s own tissues and organs. A particular kind of over-reaction, called a cytokine storm, is thought to explain why so many young adults died during the Spanish Flu epidemic. 

When an immune system goes haywire, medical intervention is required to save the patient. Similarly when vital markets go haywire, the only way forward is state intervention. As a matter of urgency, western governments need to coordinate a more effective response to energy market meltdowns. As in a banking crisis, chaotic trading should be suspended. Governments should also form a buyers’ cartel to secure necessary supplies at non-insane prices. 

Obviously, this would be an emergency measure only — the economic equivalent of declaring martial law. Furthermore, it would come with its own major costs and consequences. But don’t forget that right now western governments are planning to spend hundreds of billions on subsiding prices. This too is a massive, and very expensive, market intervention.

So we’re already in the field of extreme medicine. Rather than being forced into action as a last-ditch measure, governments need to develop a wider range of possible interventions. There is no cost-free response here, but that is precisely why we need a least-worst option. 

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polidori redux
polidori redux
15 days ago

I find it amusing that so many commentators still ignore the elephant in the room. The root cause of our energy crises is Net Zero.
The consequence of elite delusion is elite destruction

Nick Collin
Nick Collin
15 days ago

I tend to agree that the current energy “crisis” is a panic but not with the solution of more state intervention. All my instincts say that the malfunctioning of the market is mainly due to meddling by governments (price caps, green levies/subsidies, sanctions, etc) exacerbated by a media which is out of control and by its very nature thrives on crisis and panic. I’d say the same about Covid, Net Zero, the NHS, – just about everything which is currently going wrong with our world. If we could just let the free market and private enterprise do its magic I think we’d be in much better shape.

William Foster
William Foster
15 days ago
Reply to  Nick Collin

Broadly agree but let’s just drop the “malfunctioning” pretence. Also, I will always take the opportunity to point out the one thing ‘free market’ is not, is free, in either sense. There is a need to curb private enterprise. For example, where there is the risk that a corporation may be more powerful or influential than of the nation state (or trade club nations subscribe to). However the legalised bribery referred to as ‘lobbying’ enables further corruption and the use of tools designed to protect us to be weaponised against us.

Chris Milburn
Chris Milburn
15 days ago

The author suggests that world governments should just collude to fix prices. That sounds like a great idea. I can’t see how it would possibly set a dangerous precedent.

Henry Haslam
Henry Haslam
15 days ago

There are two issues, here. One is the world price of gas. Market forces may lead to a reduction of the price. It is also possible, though, that producing nations may reduce supply in order to maintain the new price.
The other is that much of our energy comes from domestic suppliers. Do we have to allow Russia to dictate the price at which these suppliers sell to domestic customers? Does the energy market have to operate by marginal-cost pricing? Is there are team of civil servants and other working hard to see how we can get round this?

Dougie Undersub
Dougie Undersub
14 days ago
Reply to  Henry Haslam

Quite so. The UK energy market is anything but free. It is a complex and bureaucratic system designed by civil servants and mismanaged by quangocrats. Kwarteng is allegedly a genius but the fact that he presided over this broken system for three years without apparently seeking to change it in any way makes me somewhat sceptical.
I hope his tenure in No. 11 proves me wrong.

laurence scaduto
laurence scaduto
15 days ago

Of course, the bottom line is that consumers are going to spend a lot more money and that money is going to wind up in someone’s pocket.
In a “free market”, panic increases profits. Nice work, if you can get it.

Jon Hawksley
Jon Hawksley
15 days ago

“In normal circumstances the market does what it’s meant to do — i.e. send price signals to even out imbalances in supply and demand. But when this mechanism goes crazy it does more harm than good.”
I certainly agree with this – the way the gas market price is determined and what it is used for have created enormous opportunities for proiteering that I have yet to see fully identified and quantified.
“a free marketeer like Liz Truss wouldn’t be getting ready to spend £150 billion on a price freeze if she had any other choice”
This I do not agree with. She simply has not taken a wide enough viewpoint. In times of war and profiteering you do not impose windfall profit taxes but you do impose price controls. Putting all UK sources of energy for heating and producing electricity back to prices a year ago would stop profiteering. A stategy would then be needed for the UKs reliance on imports. Profits on the exports of UK oil and gas could subsidise oil and gas imports which would then leave a need to deal with the sizeably imports from Norway. With them we can plead for more reasonable prices and agree to deferred terms over say 20 years. It could reduce the need for any government borrowing to a fraction of £150 billion.
What is most important is not to be ignorant of the realities in the market place and the abuse that can take place because the mechanisms did not anticipate this scenario.

Nicky Samengo-Turner
Nicky Samengo-Turner
15 days ago

Capital markets and the use of derivatives, with the ultimate ” dumb counterparty” of unconditional demand, with no counterparty pricing power makes the killings on the Somme look like a minor incident…

Aaron James
Aaron James
15 days ago

Prices are set at the margins, they say. Supply missing demand by a small amount can have amazing effects.

I do not see supply increasing fast, although can given time, so it will have to be demand decreasing.

Energy use always can be lineally correlated with wealth.

solution, be less well off. This seems to be Liz’s plan, coupled with redistribution and inflation.