eco TV Week

About the surge in energy prices

10/22/2021

The actual rise is energy prices is larger than generally expected.

While its inflationary nature is debated, the shock highlights the still high carbon dependency of our economies and the imperative need of energy transition.

Jean-Luc PROUTAT

TRANSCRIPT // About the surge in energy prices : October 2021

 

Thanks to vaccination, we've seen progress against the COVID-19 pandemic. But daily concerns have resurfaced and primarily higher energy expenses.

Of course, it compensates the exceptional price falls we had in 2020. But this phenomenon has been underestimated.

France, like other European countries, is facing a massive energy shock, probably the most important in at least forty years. Energy prices (gas, electricity) have reached their highest level. They have even exceeded the peak reached in 2018.

This is a lingering and huge shock. As winter approaches, stocks are low, that's particularly true for natural gas, when demand is growing. And prices will remain high for a few more months.

With the global current shortage of components, the high energy prices lead to shutdowns, such as in the chemical industry. It also leads to disruption of supplies.

At the consumption level, it results in high inflation rates. Figures we had not seen in a long time. More than 3% in Europe. 5% in the United States.

The question being to know if, beyond a number of technical phenomena, base effect, increase in VAT, the increase in energy prices could impact prices in all other sectors and then the whole wages and salaries.

This is what central banks commonly call second round effects. It would trigger an inflationary spiral that would alter a system that has been quite stable these last years.

At this point, this is not really a widely spread phenomenon.

There are price increases outside the energy sector but they mainly concern sectors affected by the pandemic such as hotels and catering, travels and vehicles.

Concerning rents, telecommunication, clothing, daily consumer goods, there is no real price-level drift.

The labour shortage has the effect of putting pressure on revenues in some sectors but also of speeding up the transition to digital, of encouraging productivity gains.

It is difficult in the end to tell if it is an inflationary phenomenon.

In its last global economic prospects, the IMF does not conclude on a break in trend concerning wages but admits that it is becoming less predictable.

Energy being a mandatory spending, the increase in prices is likely to limit the households' purchasing power and lead to a number of choices to make in terms of consumption.

We know that an increase in energy prices leads to growing disparities. It is the poorest households that spend the largest share of their budgets on heating and transportation.

For governments and European heads of state, the risk is not really inflation but social issues.

European leaders have a meeting this week in Brussels. They will discuss a way to compensate the increase in energy prices.

In France, the solution of energy cheques has been repeatedly mentioned. It will surely be fuel vouchers.

As for the taxes, the largest part of energy bills, 60% of the price of gasoline in France, wanting to reduce them would be a sort of contradiction when the Glasgow Climate Change Conference will begin on the first of November.

The main conclusion to be drawn from the surge in energy prices is that the global economy, to pick up in particular, depend a lot and surely too much on fossil fuels.

As a sign of the times, the International Energy Agency dedicates all its last report to ecological transition. Though they noted some progress, it still seems too slow.

 

 

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