Price cap for dummies.
These days the Price Cap on the price of gas is becoming a mantra, and it is a desperate mantra made by those who think that gas will buy it today for tomorrow, or even pay it later, in the bill. But this is not the case and Germany's behavior should have pointed this out.
If you have a regasification plant that will go into service in January 2023, don't wait for January 2023 to buy the gas that passes through it. You buy the so-called "Futures", that is, you participate in a tender where you "reserve" the gas in three months, six months, a year, and so on.
So the German government put five regasification plants into the plan, three of which were completed in 2023, and started buying the gas needed. Same thing he did with Norwegian gas. Today the situation is that the reserves are 85% full and that somewhere there are cubic meters of these papers, which testify to the victory at an auction.
The auction is held in the Netherlands, and German industries have been reserving gas at any price for months. Because they were booking A LOT and “at any price”, the futures price shot up.
This is the first reason: the market is made up of purchases, if the price spikes up it is because someone buys at any price. And it is understandable for a highly industrial country.
That price, therefore, is due to an incredible amount of purchases.
And since they needed gas at all costs, and they had the money to pay for it, they never accepted the Price Cap: the increase in prices cut out competitors who could not afford futures at that price. They basically played for themselves by buying gas futures.
But yesterday Scholz made a move: he sent word that he is available to discuss the Price Cap. What does this mean? What does it tell us?
It tells us that they bought (in the case of futures it would be pre-bought, or reserved, or reserved) all the gas they needed, or that they could, or that it was put on the market for 2023.
So now they don't give a damn if the Price Cap comes along. Because it's useless.
WHY?
Let's also assume that the Price Cap is made, let's say at 80 euros. Those who own gas booked at 316 euros have two choices.
The first is to put it on the "instant" market at 80 euros. The second is to honor the contract and sell it to 316. What do you think he will do?
You will say "yes, but it is an anal fuck for those who paid 316, while today the others pay him at 80". Of course, if there was gas not yet booked, they would pay it at 80 euros. But we forget that it is a scarce, inelastic resource, and if it has increased tenfold in a few months then it has been pre-bought at any price all the time.
You may wonder how they managed to sell all the gas produced in 2023, and the answer is that you do not have to have extracted the gas to sell it: the financial mechanism of the future allows you to sell the gas before extracting it, the milk before milking it, the grain before harvesting it, etc.
So in a few days you can sell a year of wheat, iron, milk, gas, oil, anything. Even if they don't exist yet.
And that's what happened. German industries have stocked up on gas futures, literally doubling the price tenfold. After filling the closets with contracts and reservations, they are now calm and can discuss the Price Cap.
What is the problem with the Price Cap if it is done AFTER someone has bought up at a very high price?
The problem is obviously scarcity. If the gas traded in the Netherlands has already been sold, and you make the price cap, FIRST you will have to respect the contracts, and THEN if anything, sell more gas at a lower price. The trouble is that no one is so fooled as to sell at 80 when someone is absorbing your commodity at 316, liquidating the contracts (futures are paid when they expire).
I give an example. Futures are exchanged for money. Not in Gas, even if they buy gas.
So, you produce gas, you know that the capacity of your plants and transport is “100 per year”, and you have sold your 100 in 2023, at 316 euros / MW. When the contract expires, you have two choices:
- deliver gas and cash 316.
- do not deliver it to sell it at 80, and PAY 316 to whoever owns the expiring future.
And this is precisely because futures are paid in currency, not in gas. And they are ALWAYS paid on expiry.
So if you are German and you have bought all the gas for sale (there is a significant supply crisis, Russia is difficult to replace) you have paid a fortune for it, but on the other hand your competitors are in the cold because you have it. bought everything at a price they couldn't afford.
Or, if the price cap is made and the sellers are forced to make the gas available (I don't see how, but we assume), your future will be liquidated in cash at 316.
There is the third opportunity, the CFD. That is, with a cold Europe, you buy at 316, create a CFD at 316, and trade it on the CFD market, which is not affected by the price CAP, and the CFD does not expire.
Why am I writing this? Because the Price Cap is not such an easy option to implement, if someone has already bought all the gas in the Dutch market. It is true that he paid a lot, but check the offer.
It was definitely the best option a month or two ago. Today, it presents the risk of regulating the price of something that has already been sold and does not have a very elastic supply with a growing demand.
This is the reason why Draghi probably got a little cold towards the idea.
Moreover, the Price Cap only makes sense on regulated markets such as futures, but there are also unregulated markets. It is not really possible, even if you are the EU, to force a price down.
In fact, at the moment, both the EU and Draghi are discussing a smarter proposal, that is to separate the price of renewables from that of gas, in order to reactivate the renewables industry.
In general, all this mess (and a Price Cap that is now too late to make) sets the stage for a phenomenon similar to what happened with the oil crisis of 1972/73.
I know I'm not going to be popular, but it's time for companies to start energy efficiency. It is not possible that small and medium-sized enterprises, as well as shopkeepers, have buildings and processes that waste energy like laughing. And they do it because, said as it should be said, energy was cheap.
Of course, of course, solar energy is not constant, but if your supermarket has 200 m2 of roof, and is only open during the day, you could also cover it with panels, and the same thing applies to the parking lot. Ditto for almost all industrial warehouses.
When we get to the bottom of the modus operandi, we see companies making one meter high pallets but keeping a five meter high door open "to let the truck in". In my opinion, the pallet could also come out.
In general, in short, companies have NEVER optimized consumption and tried to reduce waste and consumption: you do not often find LED lamps in the premises, you do not find any sign of optimizations in companies, and this is an effect of low energy. price we have had so far.
This shock will last for a couple of years, and finally companies will understand that in order to live they must become AT LEAST as efficient as residential homes.
In my opinion, the good of this storm outweighs the bad: and if companies have to close, one wonders if entering I will not end up finding situations of wasted waste, which could have been optimized earlier.
As happened in 1972/73, the consumption of cars became a problem, their efficiency also, the stoves became more efficient, the kerosene ones were almost abandoned, the trams returned to the cities, public transport returned, etc. etc.
The fact that the industry had cheap energy, that is, was probably not a good thing. And this is the good I see in it. So, I'm almost happy that the Price Cap isn't really viable now.