Introduction

In this week’s blog post, we’re sharing insights based on our latest interview with Stephen Schork the editor and the principal of The Schork Group. The Schork Group's primary goal is to provide research analytics and trading as well as  hedging recommendations with analysis for the global energy community.

Stephen gives insights on the current status of the energy market, and how recent agreements have made an impact on the economic growth, such as with the raise in energy prices. This has also shed light on what is happening in the global commodity markets and specifically energy. Our topic for today focuses primarily on the key lessons in the energy sector and global commodities.

For over the past six months, there has been a significant rise in the price of energy, both in Europe and in the United States in North America. This is just not for crude oil, but also for natural gas. When it comes to Europe and rising power prices, this can be impactful since it means a lot for the economic growth and the outlook for the New Year.

Lesson 1: Markets Scarcity Must Be Balanced

The first lesson of economics is scarcity. You’ll never be able to produce everything that everybody wants. Therefore, you need a mechanism to balance that scarcity, which, of course, is the price. Now, the government has ignored the first lesson in economics and this is directly impacting Europe as visible from the data regarding the natural gas market.

For instance, if we backtrack now to January of 2020, the EU was not comfortable with the way carbon permits were traded. Carbon permits for European industrials and end-users of fossil fuels are a requirement that allows you to emit a certain amount of CO2 into the atmosphere. The market was depressed because of the way these carbon permits were traded. Therefore, the price of carbon was low, not encouraging any users to move into more desirable renewables.

It’s evident that the EU decided in January of last year to reduce the number of permits in the market. When you cut back on the supply of an asset, the price of that asset rises. So, by the end of last year, a 140% rise in the price of carbon was witnessed. Therefore, end-users in Europe who burn coal find this not economical because the price of carbon prices them out of the market. This led to the EU accomplishing half of their planned goal.

Lesson 2: Give End Users an Alternative

In theory, discouraging end users from using coal should open up a bigger market in the renewable energy sector. However, unfortunately this is not what has happened. Instead of going for alternatives such as solar or wind, a lot of end users went into consuming natural gas, which led to low supplies of natural gas at the end of last winter, when prices were already rising. This significant amount of demand moved prices up in the European natural gas market. At the end of the year, Dutch TTF contract title transfer was trading at the equivalent of $300 a barrel of oil. We are globally enduring higher costs, especially now in the winter. More so, this has been escalated with the ongoing dispute between Russia, Ukraine and NATO. The geopolitical situation in Europe indicates that they are in complete reliance on Russia for gas and the European gas supply security is worrying since it’s not future-guaranteed.

Lesson 3: Be Aware of the Price Knockdown Effect

With the governments’ artificial control of the demand of coal usage, it has created a continuous effect in not only coal but also gas, and then oil prices. So, the end product is what we consume: heat for our homes, lights, electricity, to power our homes, all at exceptionally high levels, creating a significant downturn or drain on economic growth, both in Europe and the United States. The United States is a little bit further behind Europe, but they’re certainly moving in that direction, because despite its massive supply of coal, of natural gas, and of crude oil in the United States, the politics suggest that they should not be used anymore.

It can be said that this is against a basic principle in economics, which is that capital goes where it is welcomed and stays where it is well treated. On that note, it seems like that capital investment in the fossil fuel industry is no longer welcomed — and Stephen predicts that this will cause the prices for the whole energy market to go even higher.

Lesson 4: High prices are the best cure for high prices.

Another important lesson of economics is that high prices are the best cure for high prices. If you drive prices high enough, the industry, if you allow it, will respond and supply the market. And that’s exactly what happened 20 years ago in the early 2000s, when oil rallied to $150 a barrel. All of a sudden, you saw a tremendous amount of investment into the industry that got a lot of supply in North America into the market, and that was the primary driver of pulling oil prices from $150 a barrel down to $40 a barrel.

We’re now in the reverse situation where we’re discouraging this investment, even though demand is growing. And so right now, with the way the government is moving, they are the primary driver of higher energy prices in the years ahead.

The Big Takeaway Point to Stabilise the Energy Sector

We all want a greener earth, but bear in mind that fossil fuels should still be a part of the future where it can be better utilised than renewable energy. Governments shouldn’t be focusing on the energy sector as a zero-sum game. This means we should be consuming renewables where these technologies or options work the best, and compensate with fossil fuel energy where this is not possible. For example hydroelectricity would work great in the Pacific Northwest region of the United States, but if there is a drought, although the demand exists, there is no water to run the turbines causing either the prices to go higher or simply not being able to provide this region any energy. The same case applies to the rest of the world, which was the case in the UK when they stopped wind energy because the wind stopped blowing.

When these happen, you need to have a dispatchable, like coal, gas, oil, and so forth, that you can always use in reserve. On that note, governments should encourage the safe use of crude energy and invest in the industry to find more eco-friendly solutions without completely disregarding the existence of these resources. We are hopeful that everything will get more balanced and sustainable on all ends, essentially on the green energy part of things too, but also in this sense of crude oil or fossil fuel and everything to just achieve sustainability. This is doable since the markets have a great way of reconciling the choices of the myriad individuals.

Closing Words

For now, this sums up the key points of our interview. As the Global Risk Community team, we once again thank Stephen Schork, for providing insights on the current status of the energy market, and how recent agreements have had an impact on economic growth, such as the increase in energy prices.

More information about this topic is available in our original interview, which is accessible here.