Only 15 years ago, the European Union produced more natural gas than Russia exported, according to the EIA. Repeating past mistakes and maintaining a failed energetic interventionist policy would only worsen what is already a structural disaster.
The prohibitive cost of electricity and gas in Europe is not a result of market flaws, but of a completely unsustainable cost structure where consumers are forced to pay escalating taxes, a hidden CO2 tax, subsidies, and other rising regulatory costs. [emphasis, links added]
More than 60% of an average euro area country’s household bill is made up of taxes and regulated costs, according to Eurostat.
Brussels cannot turn water into wine, and, similarly, the European Union cannot “cap” the price of natural gas and oil.
It is almost ironic, but European leaders are spending days debating whether to impose a cap on Russian oil that would be set above the current Urals price and significantly above the five-year average levels.
The only thing that these so-called “caps” would achieve in a global energy market is to provide a massive subsidy that would then have to be repaid with higher tariffs or taxes afterward.
In Spain, they already made the horrifying mistake that led to what was called the tariff deficit: Putting a cap on a tariff and passing the difference with the actual price to the following year with added interest charges.
The tariff deficit mechanism perpetuated higher tariffs even in periods of low commodity prices as the tariff deficit ballooned.
The proposed gas cap would produce a comparable tariff deficit but at an enormous level if implemented throughout Europe.
Additionally, in a globalized and international market, the cap would create enormous arbitrage incentives that would only benefit China, which would continue purchasing cheap Russian commodities and exporting to Europe its more competitive goods.
We must not forget that the natural gas “cap” in Spain has been a genuine catastrophe. Elevating it to Europe would be worse.
According to Enagas data, natural gas demand in Spain soared while it declined in the rest of Europe, due to the disguised subsidy that the “cap” entails.
Additionally, the cost of the measure for the country has increased to 13 billion euros, according to the power sector, which all citizens will pay with higher taxes, and this has led to a massive transfer of funds to France, which benefits from purchasing subsidized energy from Spain at a discount price while Spanish consumers pay the cost in higher bills.
The total cost of exports to France has exceeded 715 million euros (from 15 June to 4th November, according to sources of the power sector).
Additionally, a significant increase in tariffs (+98 €/MWh) is added for clients with fixed contracts, converting their fixed contracts into variable ones due to the subsidy of natural gas prices.
The creation of a tariff deficit, which is what the current proposal would do to Europe, implies higher future costs and a larger debt burden.
Short-term price “cuts” on gas and oil disguise the reality and incentivize demand while also creating an overcharge whose financing will result in higher prices and taxes in the future.
A European gas and oil cap cause no harm to Russia at all. We should have learned by now that through exports to China, India, and other Asian countries, Russia continues to set trade surplus records.
A European “cap” on Russian gas and oil would be a subsidy to China at the expense of European taxpayers.
Additionally, by short-term subsidizing the price, the gas cap would create an artificial demand and a perverse incentive. More natural gas consumption and long-term reliance on fossil fuels are maintained.
A cap on natural gas prices leads to higher consumption of fossil fuels, higher taxes, and bills while it penalizes renewable investment and a competitive energy transition.
What should the European Union do then?
The European Union needs a competitive energy policy that makes use of all available technologies. Eliminating, delaying, and placing bureaucratic barriers to investments in supply-chain security is a luxury no nation can afford.
h/t Rúnar O.
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And guess who will suffer from their irresponsible acts? Its boing to be the People who suffer from their acts of political stupidity