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When the European think tank Bruegel assessed Europe’s energy crisis, they listed three main problems:
- Household energy prices
- Energy company liquidity
- Contagion to financial markets
Just by looking at prices, we can see the daunting complexity faced by policy makers.
Europe’s Energy Prices
Russia had provided approximately 40 percent of EU gas consumption. As of September 2022, the Russian supply plunged by as much as 80 percent. As a result, energy prices have soared. Compared to a year ago, they are up as much as 15-fold:
The solutions have come from multiple sources. During mid-September, an EU Commission provided policy guidelines. Then, from regions, countries, producers and think tanks the response has been varied.
Meanwhile, synthesizing some suggestions, Bruegel cites three requisites for any solution:
- They want to reduce energy prices. But the tradeoff should not be EU economic damage.
- They want to be sure to support vulnerable consumers. So allocation is an issue.
- Decoupling from fossil fuels, they want to retain sustainability goals .
Continuing, we can take the next step with demand and supply.
Demand side
Supply side
- Windfall profits taxes on energy companies.
- Increase imports.
- Nationalize companies.
On a graph, the policy goals bring equilibrium price down:
Below, Bruegel gave us the entire summary. All were “discussed, proposed, or enacted since September 2021”:
Our Bottom Line: Incentives
Including 27 countries, countless retailers, small and large consumers, importers, and producers of LNG, crude, and coal, and sustainable energy, Europe’s energy markets have a vast assortment of participants. Located on the demand and supply sides, there is one word that they share.
Incentive.
Whatever policy makers decided, they will surely shift the incentives for consumers and producers. And then we can assume, that they will create unintended consequences.
My sources and more: Most of today’s post on Europe’s energy prices is based on a Bruegel Policy Brief. From there, the European Commission’s policy suggestions are in its Four Pillars. And finally, I returned to Bruegel for clarification of some of the Policy Brief. Our featured image is from Bruegel.
