Interesting Times article on why energy prices will likely fall soon7 Sep 2022 19:06
What’s the one thing that would make life a lot easier for households and businesses, for the world economy — particularly its European wing — and the new prime minister and chancellor? The answer, of course, is a fall in the cost of gas, the one price dominating the outlook and one that makes the difference between “just managing” and penury.
In the 1990s James Carville, a political strategist advising Bill Clinton, famously said that if there was reincarnation he would like to come back as the bond market, such was its power over governments. These days, you would want to come back as the wholesale gas market, such is its power not merely over governments but all of us. The question for today is whether that will last.
Last week I explained that inflation would fall even if energy prices stayed at elevated levels but did not rise further. This prompted a small avalanche of emails asking what might happen if energy prices fall back. It was a good question to ask — and the answer is that if gas prices were to fall, the prospective future fall in inflation would become a plunge.
It also would be a massive relief for the UK’s strained public finances, and a prime minister and chancellor new to their jobs, as the government prepares an expensive energy relief package. The only way that freezing energy prices works at manageable cost is if this is only a short-term hump to get over, though I note that Greg Hands, the energy minister, told the House of Commons on Monday: “We see no reason to believe that gas prices will fall any time soon.”
Can gas prices fall? Will they fall? It is not wishful thinking to think so. A new paper that has made its way to me — from a source I have never quoted before, the Kyiv School of Economics of the University of Kyiv — suggests strongly that they can and will.
The paper, European Gas and Power: Overreacting to the Threat of a Russian Cutoff, by Jacob Nell, Borys Dodonov and Nataliia Shapoval, says that the tenfold rise in gas prices, together with extreme market volatility, is an “overreaction”, reflecting deficiencies in energy markets rather than the fundamentals. Prices rose again this week when a “technical” closure of the Nord Stream 1 pipeline evolved into something more permanent.
I know what you’re thinking, which is that the Kyiv School of Economics is talking the Ukrainian government’s book, though you would not expect the London School of Economics to do so for the British government. The Ukrainian government is worried that as the energy crisis bites, the appetite for supporting Ukraine against Russia will diminish. Lower gas prices would ease that danger.
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