-
Maria Cernat
- Energy
- 0 Comments
Speculation on energy markets
How has the European Commission reacted to rising energy prices? On the one hand, the European Commission recognises that there is very high volatility on the spot markets and that there is also financial speculation. The prices we are seeing are a way of saving energy companies like Enel from bankruptcy. But how is it possible that these companies that sell at such high prices can go bankrupt? The answer is mind-boggling: they started speculating on the financial markets attached to the energy markets and, in popular terms, stuck their fingers in the socket! Speculation has bankrupted them. We are witnessing a crisis comparable to that of 2008, only this time the speculative bubble was created not in the property market, but in the energy market. The solution? American liquefied gas. Of course, there’s a lot of hypocrisy since replacing Russian gas with Qatar gas doesn’t let us make much headway in supporting democracy. After all, we are rejecting a violent autocratic regime, such as the Putin regime, in order to replace it with other autocratic regimes. But, given the situation in Ukraine, let us accept that it is the right moral solution. But there are very serious problems with liquefied natural gas. Things are even worse on the electricity market. Financial transactions are happening at high speed, favouring speculation. We are also trying to explain why people always buy at the highest price. Our guest, as usual, is Andrei Mocearov. Watch his explanation if you want to understand what happens to the money you pay on your bills.
Video (in Romanian; translation of transcript to follow):
Andrei:
The European Commission, in addition to the political speeches of Ursula von der Layen and those of Kadri Simson, the Commissioner for Energy, also has some technicians and, like it or not, they have to say what is going on. And here’s the European Commission’s roadmap saying: The Commission will take further action to limit volatility and extreme activity to reduce prices. Here’s an acknowledgement that it’s volatility generated by the market model. Ursula also gave a speech on the subject. She gave herself away on this occasion. They want to do another benchmark, with another benchmark price. I mean, they found that the price on the Dutch exchange was completely wrong, but everyone was going for it and to reflect the reality of the gas market. So here’s an admission that it had nothing to do with fundamentals. That those prices were completely wrong. That’s not it. In the European commission’s fact sheet. Then a temporary management mechanism to avoid volatility in the market the next day excessive volatility and limit those “spikes”, i.e. price spikes in derivative energy prices . Here already.
Maria:
I mean in that area where you’re talking about derivatives speculation.
Andrei:
I mean here it’s total capitulation. Of course, this text: who reads it? I’m reading it, some specialists are reading it. What about someone else? Nobody. So here is a clear recognition that there is volatility in the spot market with the Dutch stock exchange reference and that there is excessive volatility in the day market, in that market, all day. That’s not the next day, that’s the day itself. I said that they trade every 15 minutes. Because there are financial plays speculating around. So the recognition of the European Commission is not taken from obscure sources or from the Kremlin; it is taken from Brussels, from the European Commission. And finally, two delegated acts today are acts that the European Commission does not send through Parliament and the Council. They get permission from the Council and the European Parliament. To reduce liquidity, liquidity pressure on non-financial participants In coordination with the European Securities and Markets Consortium, which is actually the Financial Supervisory Authority of the markets in the European Union. So here who’s really reading this thing? “To ease the liquidity pressure.” What does that mean? This sentence says that we actually have a terrible financial crisis in which non-financial participants, i.e. energy companies, have got their fingers in the socket and played financially. And now they’re coming and demanding money from us, i.e. the state.
Maria:
I mean, they’ve started to play in that market too, because if anyone reads it, they don’t realize it. And now they have to save themselves.
Andrei:
When I talk about the financial markets, that I’m in the energy markets now, I’m going to say what terrible things are happening there. I mean this liquidity crisis is as big as the one in 2008. Trapped there are not financial players, but the big companies Enel, for example, which you know is pulling out because it’s financially bankrupt. It is withdrawing its operations. It’s not that it doesn’t like Romania or that it didn’t make money from energy here, but it lost so much in the financial markets that it can’t sustain itself.
Maria:
So it is now. This gas thing is very important and this chapter. I mean there’s a lot of talk about this liquefied gas and that’s an important chapter, because it seems like it. This gas is better than Russian gas, because this gas is sold by a democracy and if it is sold by a democracy, even if it is more expensive – I understand, maybe there are people who sincerely believe these things. I believe that most of them, you know, are not well-meaning, but I just sincerely believe that if we buy more expensive gas from a democracy, we are doing a much better job than if we buy cheap gas from an autocracy that has also invaded Ukraine.
Andrei:
There’s also an explanation that seems plausible to some extent that we pay a cost to maintain a high moral benchmark. Only, here it has a bizarre side. Ursula is again taking the piss. She’s made a lot of blunders. He gave an interview in which he said that today we no longer take gas from authoritarian regimes like Russia, we take it from elsewhere, and he listed Qatar and Azerbaijan. Of course he also listed the US.
Maria:
As theocratic, this beacon of democracy.
Andrei:
And he listed some regimes. Sure, he listed the US, but besides the US he also listed Qatar, Azerbaijan and I know Kazakhstan, in any case, recognised “democratic” regimes.
Maria:
He didn’t even realize it. He put the US in there and then added those two countries. There are three big problems here: gas, which is very serious, again said by technicians not politicians. One is economic, one is reliability of supply and one is environmental. Economic: it’s much more expensive. Even some politicians are outraged. American gas, four times more expensive than gas. But here we said we were defending morality. We sit on the moral roof of the universe and pay out of pocket to come out clean. Well, the reliability of supply is a bit of a problem, because here these methane tankers were what they are called, i.e. the ships that transport the liquid gas do not belong to sovereign states, be they authoritarian states such as Russia or Qatar, which, however, being authoritarian, still offer some guarantees that those 10 to 15 year contracts are honoured. These bones can go anywhere and everywhere. There’s a story of a case where one of these ships was on its way to Europe and because it had received an order from Asia. It turned around, opened the lock and went the other way.
Andrei:
Oh dear. So you were sitting there getting, warming up, getting your gas and they left because somebody paid more. I mean you’re left out in the cold, we’re sorry.
Maria:
We’re sorry. They gave us a better price and we went. So that’s it.
Andrei:
Right. These boats are walking around, they’re going. Where’s the higher price? Sure, there’s probably some political interference. Biden calls the head of the company and says, come on, be a reasonable guy and send some gas to Europe. Now we’re at war with Russia. But basically these are private companies that, if they operate according to market principles, have no reason to go where prices are low, they have to, where prices are high. Well, yeah, that’s green, that’s thick as hell. Here. I have some data. Calculated. They’re calculated how much it costs to get to France? I mean, actually, not how much it costs. Isn’t the environmental cost calculated what the CO2 footprint of Russian gas is? To get it to France is 23 grams of CO2 kilowatt hours. American gas is at least 58, that’s two and a half times, almost more grams, two per kilowatt hour. That’s if they transport good liquefied gas, i.e. with regular gas as the source. Shale gas gives them an even bigger footprint. It adds not only transportation and other things. It comes to 85, i.e. almost 4 times the footprint of US gas, which has shale gas as its primary source.
Maria:
So we don’t just have to sacrifice economically, we have to sacrifice environmentally.
Andrei:
But it’s already a bad joke. I mean this is what Germany does, they have a deputy prime minister and minister of ecology, a Green politician. So this whole fight against climate change is becoming a bad joke. When you make that decision. Okay, the morality part I get. We’re going up to the moral roof of the universe and stop taking gas from the Russians and take it from the Democrats.
Maria:
But the green thing. What do you do when you have no political explanation? This is existential stuff.
Andrei:
I mean we make these decisions after we’re already behind. We’re behind in the fight against climate change. We’re running late now. Because, as an aside, the whole financial crisis that produced deflation produced very low energy prices, abnormally low. For a decade, that has completely stalled the fight against warming. That is, slightly higher prices were needed. Not 15 times, but 10-15%.
Maria:
Moving on to another chapter.
Andrei:
It’s a quote that comes separately to try to make the point that there’s a geopolitical choice behind it, actually: America’s. John Deutsch. He’s been writing since 2011 the article “The Good News about the Gas” in which he argues for a global market, gas that will be very efficient in terms of economic solutions, he says. But, more importantly, it will block major exports of resources for political gain. I mean what you were saying, we don’t take from authoritarian regimes trying to make political gains. We are trying to win. I have a set of Foreign Affairs articles I subscribe to. So there have been countless articles from 2010-2020 highlighting America’s geopolitical option. To make the global gas market, to switch from long-term contracts to spot market and otherwise get Russia out of Europe and make sure America replaces Russian gas. That is, how shall I put it? It’s not disinformation, it’s something said in prestigious American magazines. How the electricity market works.
Maria:
That’s exactly what it is. How to say with gas, how to tell you, again someone with one of these untrained minds in the field like me when it comes to gas. Yeah, I imagine it’s something concrete, it’s pipeline transportation with electricity. It gets even more interesting that you can’t even see how you’re going to put this in a mug with the actual digital images. But mostly it’s produced and it comes to you instantly in your house at the speed of light.
Andrei:
Yeah.
Maria:
That’s what I can tell. Now define the orderly movement of the charge carriers. Something like that I remember from when I was a kid.
Andrei:
Brownian motion? No. But here it’s orderly. I left the electricity market, because everybody here is in a consensus that these high prices are related to the gas market. But why? These have been passed on as the electricity market here too. An important role is played by the model in which the electricity market was designed. There is the so-called merit. I mean the merit order. What does it mean? That you load the cheapest to the most expensive into the system. But the interesting part is that the equilibrium price is just the imaginary cost of the most expensive electricity production. So no matter how cheap some sell, you have to pay the highest price and the same.
Maria:
But it’s totally counterintuitive. That at the market, if you go to get carrots, you get the cheapest ones. What do you mean you’re going to get the most expensive ones?
Andrei:
Maybe some more expensive, better quality ones? Yeah, that’s where it’s even harder. I gave one example, that you go get carrots. We still call them 3 lei, some are 6 lei, some are 9 lei. You get carrots for 3 lei. In the morning you go, but the man at the market, the head of the market, says that you come in the evening to pay, that we then do clearing, we balance it and in the evening, when people come from work. Those who work come in the evening. I have a neighbour who works at the European Funds and she comes all the time in the evening, but she probably has a high income, that is, she gets extra money and she buys 9 lei carrots and you come in the evening to pay. And she says: today they sold 9 lei carrots, so you pay 9 lei too. That’s what happens in the electricity market. The proponents of the merit order make two arguments: that it encourages producers to sell at a price close to the cost of production. That is, one doesn’t want to sell at a higher price, one is afraid, one won’t sell at all. We have now seen what this price close to the cost of production has meant. Prices have skyrocketed. They are nowhere near the cost of production. And two, there’s this madness. Green. I’m not against the green transition.
Maria:
Ah, yes, the idea that if it goes up, so if it’s too expensive, we’re going to be forced to invest in solar panels and other sources.
Andrei:
First of all, the ones that are already on the market. They’re getting profits as much.
Because they will invest, they are encouraged to invest here as well. Here’s the scheme that’s happening, I said. I mean if the demand is low, coal doesn’t come in and gas and the price is lower, it’s only 160 euros if you give it just coal, I mean if you provide all the electricity with solar, wind, nuclear and coal, and if the demand increases to 100 gigawatts then gas comes in at 215 euros and the break-even price is the 215 euro price. So that’s what I was saying and it is an example. It’s quite clear.
And now the intermittent problem. Here it’s very important as to why that logic that gives advantages to renewable producers is wrong. And that’s it, said at one point. I’ve read two conservative American economists who say the market actually doesn’t work. And, they say, missing money problems. I mean the problem is that there’s no money and we’ll see here why there’s no money. And a conservative magazine draws attention In which they tell about the dirty secret of clean energy. And it says that wind and solar actually dismantle electricity systems. Why? Because, as I said, electricity has to be produced for exactly what amount is consumed.
Now, sun and wind are not permanent. If there’s no sun and you don’t have anything to top up, you don’t have a backup, you don’t have a reserve of polluting energy, you’re left in the dark. The wind, likewise, doesn’t blow all the time. But what’s more interesting is that the more investment in wind and solar, the more unprofitable the polluting sources become. For example, when I graduated from the Faculty of Energetics, Electrical Section, in 1979, of course, there were no solar power plants then, but the basic power plants were coal and hydrocarbon, i.e. hydro and nuclear. The hydro plants operated at peak hours, so they were coming in too. Coal industry was designed, for example, to operate all the time, 24 hours a day, all week. When they don’t work like that they are no longer profitable. And so, in order to keep the lights on, I say, for a period of time these forms of energy production must coexist, both clean and dirty technologies must be profitable. Here, American economists used to say that money is missing, because there is actually no money left to invest in the dirty technologies that you need, because otherwise you run out of energy. Or. The market can’t solve this, because if dirty, polluting technologies are no longer profitable, they go out of business. The market does not solve the problem. The market takes them out. They go out of business. So they have to.
Maria:
They have to find solutions because otherwise we stay in the dark.
Andrei:
Basically, we stay in the dark. So that was all hypocrisy. This whole giving money to Rhine thing: it was the hypocrisy of the market. The market’s not going to solve it, but we’re still keeping a market. And I say this model of the electricity market is completely inadequate because it fails to reconcile the green energy transition with the need for energy security. This model has created very high prices, because the equilibrium price was the price of electricity produced by gas. I can say right now that the price is low in the Nordic countries. Spain and Portugal have also introduced the Iberian scheme, but it is an illusion, because they have low gas consumption. And again in Poland, very interesting, because Poland uses coal. What we saw here is if the break-even price is given by coal, something lower than gas, so coal became very expensive, gas would become very expensive. We saw why. Because there is terrible speculation in the spot markets and in the financial markets. The financial markets brought us here. So, this electricity market has caused gas prices to be passed on to electricity.
This article was originally published in Romanian here.
The Barricade is an independent platform, which is supported financially by its readers. If you have enjoyed reading this article, support The Barricade’s existence! See how you can help – here
Also, you can subscribe to our Patreon page. The Barricade also has a booming Telegram channel, a Twitter account and a YouTube channel, where all the podcasts are hosted. It can also be followed in Rumble, Spotify, SoundCloud and Instagram.
