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The rapid decline in Russian natural gas shipments to Europe and the worst inflation rates in decades have compelled an increasing number of governments to test various energy price control measures.
FREMONT, CA: The steep decline in Russian natural gas shipments to Europe and the worst inflation rates in decades have compelled an increasing number of governments to test various energy price control measures. The proposals will put to the test the theory of economics that price limits distort markets and lead to shortages in supply
Germany is developing measures to control the price of electricity and natural gas, and the new administration in the UK proposes to cap household energy expenses and compensate utilities for the difference between the cap and market rates.
The European Union has approved a plan to recover some energy companies' profits and give them back to customers, and it is also looking into the possibility of establishing a cap on the cost of natural gas throughout the EU. While a United Nations agency last week urged policymakers to choose price ceilings and windfall taxes to combat inflation, the United States is leading a push with its partners to cap the worldwide sales price of Russian oil.
Economics textbooks state that lowering a product's price will result in a decrease in supply. Without a commensurate reduction in demand, which can be through restriction, the imbalance between supply and demand can lead to shortages. It can be challenging and involve a significant bureaucracy to enforce pricing limits. Additionally, greater consumer costs are only postponed rather than prevented because limits are typically withdrawn at some point. Price limitations that were in place at the time were partially to blame for the long lines at gas stations in the 1970s.
Massachusetts Institute of Technology professor of economics Christopher Knittel says, “Economists tend to be quite suspicious about the efficacy of price restrictions.”
These worries have been raised in reaction to a proposal in the European Union to cap the price the unit pays for natural gas, which is supported by EU officials and members including Italy, France, and Spain. Germany and other opponents fear this will lead suppliers, many of whom are based outside of Europe, to send their gas abroad. That idea stands apart from one already adopted that would cap non-gas energy companies' revenue and disperse the remaining funds to customers.
According to Mr Knittel, the measures could limit Europe's energy access. “Policymakers do not want to exacerbate these problems with their policies, and fear is what these ideas will accomplish,” he said, referring in particular to the European energy market policy measures.
Similarly, industry analysts oppose a U.S.-led proposal to allow Russian oil exports only at a cap price because they believe this might lead to Russia withholding supply, driving prices higher. The price-cap proposal forbids G-7 corporations from handling Russian oil supplies unless the oil is sold for less than the cap.
However, not all price controls are the same, and proponents claim there are explanations for why some of the current ideas won't have the adverse consequences expected. Germany and the U.K., for instance, are attempting to limit the energy cost households and businesses in those countries pay through subsidies. In these countries, the government will pay the market rate for energy while limiting what businesses and consumers will pay and absorbing the difference.
U.S. officials want to establish a cap on Russian oil prices at a level that will keep Russia's economical motivation to produce. They think Russia would be willing to endure lower profit margins before cutting off their government's main source of funding.
Some economists also contend that the anticipated rise in demand in response to price limits won't materialise, like Isabella Weber of the University of Massachusetts Amherst. Because households require energy to survive, unlike certain other products and services, their energy use is "inelastic," or relatively insensitive to price changes. Therefore, price limitations would safeguard consumers without promoting excessive consumption that might worsen shortages.
The customer savings are indeed significant. According to the London-based Institute for Fiscal Studies, the U.K. plan will save the average household in the country Euro 1,800, or USD 2,000, over the next year. Officials from the government are hoping to cut peak inflation by 4 or 5 percentage points with their proposal. However, without consistent access to Russian natural gas, Peter Levell, an associate director at the IFS, warned that Europe would experience an energy scarcity for years. He said that governments need to devise a long-term strategy to lower demand. Otherwise, he warned, unchecked demand for natural gas across Europe might drive up gas prices while necessitating long-term, substantial subsidies.
