Why are energy prices in Europe and the United States going in the opposite direction in recent weeks – in America they are falling, while in some EU members the price of energy has doubled in the last two months?
In the US, they warn that it is too early to celebrate because energy prices are prone to unpredictable and strong changes, but it is obvious that oil prices on the American market have fallen by 30 percent in the last two months. According to the key American benchmark, crude oil is now below 90 dollars per barrel, and the black forecasts of experts, according to which oil will reach more than 200 dollars per barrel, are beginning to seem like intimidation, writes Jutarnji list.
In terms of energy prices, America is currently benefiting from a series of global news (slowing down the Chinese economy, lowering interest rates in China…) that speak of a reduction in demand for the key energy source, and it is clear that, unlike the EU, it is much less dependent on the import of Russian gas and oil. This has caused the price of gasoline at stations in the United States to fall below $4 a gallon, which works out to be about twice as cheap as it is currently about twice as cheap as in a number of EU member states. The differences in how the EU and the USA are going about energy after the invasion of Ukraine become dramatic. In the middle of this month, the price of energy in Europe broke a new record, and the pressure of energy uncertainty threatens the beginning of a recession on the old continent.
Alarming in Germany
The biggest drama is taking place in the largest and most important European market, Germany: electricity prices for next year have risen to 477.5 euros per megawatt hour, which is six times more than in the same period last year, and twice as much as just two months ago . Market participants in Europe seem to predict that the problems in the supply of gas and oil will be so great that during the winter it will not be possible to produce enough electricity. And day-ahead energy prices earlier this week in Germany also broke records. This price shock is the result of heat waves and drought, which increased the use of air conditioners and all cooling capacities.
In the EU, the rise in energy prices therefore has a much more significant impact on the movement of the consumer price index and, consequently, on the standard of citizens, while the business models of a large number of energy-intensive businesses are at risk.
In different ways, European nations are trying to bring themselves to a state of some kind of energy security and to calm down the rampant energy costs. In France, for example, they plan to fully nationalize Electricite de France SA, a troubled company that runs operations with nuclear power plants. Currently, the production capacities of French nuclear plants are relatively low. At the EU level, there is an obvious lack of hydropower sources, as well as energy production by burning coal. Everything puts pressure on price growth; the amsterdam gas index has doubled since june.
Germany is under the greatest pressure, where the authorities have already decided to transfer part of the energy cost to households. They calculated that the average higher cost for a German household will amount to around 290 euros per year, and this price increase will take effect from October.
“The new levy is a consequence of Putin’s illegal war and aggression against Ukraine, which caused an artificial shortage,” German Economy Minister Robert Habek said in Berlin.
Some of the poorer consumers in Germany will receive compensation because the new levy could be too much of a challenge for them. According to analysts, the German authorities do not aim to introduce new levies just to cover rising energy costs, but also to reduce consumption. Only with significantly lower consumption can Germany survive the winter without Russian gas. According to the calculations of the German authorities, a single household will suffer an additional annual cost of new energy levies of 97 euros, while a four-member household will pay 290 euros more.
Individual households will receive subsidies for heating. Several significant German energy companies are asking the government to raise prices for consumers, in order to avoid the domino effect of bankruptcy in the energy sector. Gas traders are aggressively trying to secure supplies to customers, but the system of rules that determine price adjustments is such that many market participants are at risk of insolvency, which could lead to a systemic collapse.
Hopes placed in a new nuclear agreement
In contrast, the Americans estimate that oil prices could fall further if Iran signs a new nuclear deal, which seems likely after they backed away from demands that the US delist the Islamic Revolutionary Guard Corps as a terrorist organization. While an additional million barrels of Iranian oil on the market is expected as an additional relaxation, the key American risks are in the growth of interest rates and financing costs.
When oil prices fall, as is the case now in the US, cost reductions can be expected for a significant part of industry and agriculture. Therefore, Americans hope to avoid the experiences of 1970 and 2008, when the prices of the most important energy fuel fueled inflation and made business difficult.
At the same time, the fate of Europe remains very uncertain.
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