Commodities in the form of metals and agricultural products are not the only commodities facing price inflation this year.

Electricity costs have been driven up by a combination of a pandemic rebound, extreme weather in the United States, Europe and Russia this summer, and supply constraints.

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Rising natural gas prices

Natural gas prices in Europe and the UK have reached some of the highest levels on record, according to the Financial Times. The UK faces the highest price since 2005. Meanwhile, in Europe, prices hit € 40 per megawatt hour for the first time.

Prices in Asia are also high as countries try to attract liquefied natural gas shipments to meet high demand. The spot price of LNG cargoes has exceeded $ 15 per million British thermal units (MMBTUs), according to the Financial Times.

Prices in Europe and the UK, when converted, are close to $ 14 per MMBTU, the publication reports.

Supply and demand

Demand is definitely a driver, but so is the limited supply.

Normally, elastic fracking supplies in the United States have not reacted this time around to rising oil or natural gas prices as the industry undergoes radical restructuring in the hands of super independents through a series of consolidation games.

After a decade of free growth, the focus is on cost containment, profitability and a more sustainable return to shareholders. Contrary to previous expectations, a resurgence in fracking supply has not capped a higher oil price (and, now, higher natural gas prices).

Supply from Russia to Continental Europe

In Europe, the continent’s largest supplier, Russia, is not responding to higher demand and rising prices as it previously would have.

The Financial Times and many commentators describe this as blatant pressure on the European market by Russia to force prices up.

While there may be some truth to this, it is also possible that Russia has limited additional supply to give.

Russia’s exports to China increased after the commissioning of new pipelines to the east. In addition, Russia’s domestic energy demand will be higher as it faces a heat wave in Siberia and strong domestic industrial demand. Meanwhile, Europe’s own production is on the decline – down 10% since 2019 – and the largest field off the coast of the Netherlands is set to close permanently next year.

In Asia, demand for electricity in the face of shrinking water supplies for hydropower has pushed up not only natural gas prices but also coal prices, which has yet to be a prominent feature in the United States. .

But electricity costs are adding to cost pressures from manufacturers on the supply side this year. In turn, these costs add to the inflation debate in the wider economy, as manufacturers pass these costs on.

For now, the Federal Reserve seems quite optimistic, suggesting that inflationary pressures are temporary.

But as supply costs remain high this year and next, the temporary means may well change.

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