Understanding the gas crisis.
I see that some sectors of US capitalism are trying, using Italian newspapers, to propose an idea of the gas crisis that reflects the "good-bad" vision they have on Wall Street. Unfortunately, since gas (like oil) is produced in a situation of oligopoly, the proposed model is not valid, and whoever writes this bullshit (like that it is the fault of China and India) should be postponed for not even understanding the classic economic models.
Let's go step by step. The first thing to understand is that the gas and hydrocarbon market (as well as all fossil energies or mineral raw materials) is a natural oligopoly, if not a monopoly.
The reason is simple: they can be extracted but not produced. Tomorrow a producer of anything can be born anywhere, but if we talk about raw materials there is little to do, some nations have them and some don't.
These nations that have them, in a not very globalized world, will also be able to compete with each other, but when the world globalizes, we end up in a cartel situation, as OPEC can be for oil, for the simple reason that there is only one market to buy from, with a price that is agreed, publicly (as Opec does) or not.
Opec, for example, manages oil production on purpose to keep prices within a range of convenience for extractors. And he does it in public. This however does not prohibit hidden signs, but it does not change things much.
What does basic economic theory say?
Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and / or quantity sold of the item. This result does not occur if a “kink” exists. Because of this jump discontinuity in the marginal revenue curve, marginal cost, s could change without necessarily changing the price or quantity.
The motivation behind this kink is the idea that in an oligopolistic or monopolistic competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices (price rigidity). However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is, therefore, more price-elastic for price increases and less so for price decreases. Theory predicts that firms will enter the industry in the long run since market price for oligopolists is more stable or 'focal' in the long run under this kinked demand curve situation.
I take it directly from Wikipedia to make it clear that whoever writes boiate today in the newspaper of good salons has no justification, since these are things so well known as to be available to everyone. It is therefore a question of bad faith.
You have to be very careful about what it means to “be more elastic when the price rises than when the price falls”. Since elasticity is described as the reaction of the price when a market parameter is perturbed, it means that the more perturbations arrive, the more the price rises: for example, the Covid crisis arrives and the price rises, it ends. but the price does not go down as much, then the war in ukraina begins and the price goes up, but when it ends the price will not go down as much, and so on.
This means that the gas market, like that of oil, is NOT sustainable in the long term. What does it mean? It means that every now and then a "shock" comes, which resets the balls in the center, because the market conditions are upset.
During the energy shock of 1972/3, France decided to produce 70% of its energy with nuclear power, and many European countries followed suit. The market upheaval that followed 'reset' prices, which began to rise again, but it took nearly 30 years before they ended in another shock (remember when the price of oil was so low that you were paid to store it?)
On top of the mining world, there are national oligopolies, which as oligopolies suffer from the same problem: elastic when the price rises, inelastic when it falls. And as a result, this market also has periodic shocks.
From the point of view of the end customer, the natural gas market passes through three oligopolies
- who has the reserves and extracts it
- who has the facilities to store and transport it
- who has the facilities to distribute it to the public
this stratification tells us that whatever shocks occur on any of the three layers, the price increases, but when the perturbation ceases, the price does not decrease as much.
The hydrocarbon market is ECONOMICALLY sustainable only for producers, less for transporters, even less for distributors, NOT AT ALL SUSTAINABLE for the end customer in the long term.
In a nutshell, it is a market that produces continuous shocks: even if it were true that the price increase is due to China and India (which already existed before, however), apparently it would be enough to increase the extraction and supply. . But this is not true, because a market in oligopoly is not elastic in the descent of prices.
And so I repeat, the market for oil, gas, coal, any mineral that is extracted only here but not there, in the long term is an unsustainable market for the final consumer, as it is materially oligoplistic. Point.
This is the real reason for the shock, which cannot be explained otherwise:
in the case of Germany, gas contributes only 15.3% to the cocktail, and Russia accounts for 40% of imports, ie 6% of total energy. But even if it constituted 60%, as some sources say, we would be at 9%. Nothing that can justify the tripling of the price: but we know that it is a market that is elastic when it grows, but inelastic when the price falls.
After all, if a variation of 9% is enough to trigger a price increase of 300%, we are no longer talking about amplification, but about divergence: it is an unstable market.
These energies therefore had a stable price in a relatively quiet world, but as soon as disturbances arrived (covid, war …) the price soared. But I want to point out that the price of gas had already risen since before the war in Ukraine, and to say it all, the prices were seen to rise even before the covid, which has SLOWED down industrial production, that is, the demand.
After all, the discovery of a new mega-stock off the coast of Cyprus has not particularly changed the price, while an even less likely event causes it to spike a lot. It is a divergent market, which is unstable and unsustainable in the long term.
What should be done when the market is unstable? Many will propose market reforms, but in reality there are three markets (extraction, transport and storage, distribution), so they are simply deluding themselves. And a change in the rules by the state can only produce yet another shock.
The only rational reaction to a market that diverges by its nature is not reform: it is simply abandoning that market. If necessary, together with the product itself.
Of course, the abandonment of fossil fuels was already foreseen by various plans, but I would like to remind you that this too is a shock, which will inevitably cause the price of fossil fuels to INCREASE, and not decrease, at least until demand it will have collapsed so much that it has destroyed the fossil fuel market. Why'? Because we have said that there are 3 stratified markets, which oscillate with each disturbance, but the price oscillates more easily upwards than downwards: in the complexity of the dependency relations, the final price will increase in any case .
Is nuclear a solution? No, and those who think so are wrong. There are other oligopolies: not all of them have uranium and fissile materials to extract, and if everyone converts to nuclear power, sooner or later the OPEC of fissile materials will emerge.
In general, the only sources that are ECONOMICALLY sustainable in the long term are renewable ones. But not because they are renewable: because they are ubiquitous. On a continental scale, the risk of having all the wind turbines stationary is very low, as is the risk of having clouds over the whole territory. If we also add a good dose of geothermal, which is continuous, and we exploited hydroelectricity better, things would improve.
BUT one thing is certain: the risk that an ubiquitous renewable source such as the wind or the sun could be interrupted can be calculated on a statistical basis. That fossil energy sources will rise in price for consumers is simply SAFE.
Anything American shale gas lovers claim.
It is simply not rational to continue on this path.