With inflation soaring and price increases across the board —from food to flights, it was interesting to see that gas prices this past week were…negative…in Europe.
Thought provoking article! Some related thought. Consider the price problem: (p-c) P(V\ge p). If c is a random draw from a distribution C, then one can look at the distribution of P=\argmax_p (p-C) P(V\ge p) driven by the randomness in C. Whether the volatility of C is being amplified or ameliorated in P, is related to the property of distribution V. This problem is also related to whether the passthrough rate p(c) is more than or less than 100%.
1-year forward energy contracts are still being offered at 400-500 euros, while the spot market is in the low 100's (today.) How long do you think the energy producers will hold onto these margins? Particularly while countries in the EU continue to enjoy the profits from their energy tax while pricing is elevated...are they really anxious to fix the solution? Also, the spot energy market is dead because nobody wants to take the risk and the future is clear as mud.
My guess is that once 2023 arrives and there is more parody in industry / energy market (i.e. 2022 1-year contracts will have reached their maturity and consumers will have to renew their contracts) that the entire market will move up and the cost will remain elevated. This IMO puts a strangle hold on EU businesses with being globally competitive.
Thought provoking article! Some related thought. Consider the price problem: (p-c) P(V\ge p). If c is a random draw from a distribution C, then one can look at the distribution of P=\argmax_p (p-C) P(V\ge p) driven by the randomness in C. Whether the volatility of C is being amplified or ameliorated in P, is related to the property of distribution V. This problem is also related to whether the passthrough rate p(c) is more than or less than 100%.
1-year forward energy contracts are still being offered at 400-500 euros, while the spot market is in the low 100's (today.) How long do you think the energy producers will hold onto these margins? Particularly while countries in the EU continue to enjoy the profits from their energy tax while pricing is elevated...are they really anxious to fix the solution? Also, the spot energy market is dead because nobody wants to take the risk and the future is clear as mud.
My guess is that once 2023 arrives and there is more parody in industry / energy market (i.e. 2022 1-year contracts will have reached their maturity and consumers will have to renew their contracts) that the entire market will move up and the cost will remain elevated. This IMO puts a strangle hold on EU businesses with being globally competitive.
Completely agree. But I am not sure how this can be sustained in the long run.
I learn so much from your newsletters, Gad. And today, I added exogenous and endogenous to my vocabulary. "Winter is coming". Indeed.
Thank you!