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Why raw material and energy prices are increasing?

The increase in the prices of some raw materials and basic necessities has been at the core of the debate for several weeks. Significant increases in the price of raw materials and basic necessities happen from time to time: such condition like the one we are now experiencing rarely occurs, in which many goods at the same time have seen a simultaneous increase in prices as a result of different conditions. 
So, what happened: why are the costs of raw materials and energy rising? 
Surely the increase in the price of energy products has impacted the generalized increase in prices. But The reality is more complex, and cannot be traced back to just one aspect; geopolitics comes to our aid.  

The first time that European consumers clashed with this reality was between 1973 and 1974, when, in a context of already reducing supply and increasing demand, the Arab member countries of OPEC decided to drastically reduce their prices for crude oil exports to Western countries that had supported Israel in the Yom Kippur War. To cope with this situation, the European countries introduced a series of measures that have gone down in history with the term “austerity”.  In Italy alternating number license car plates were introduced and speed limits were lowered; public establishments were obliged to reduce opening hours, as were cinemas and theaters; the public TV ended its programs by 11 pm. Public lighting was reduced and the use of written or illuminated signs was prohibited. ENEL (then a public monopolist) was authorized to limit the power supplied. All of this just 49 years ago! 
This experience marked public opinion considerably and gave way to the energy saving and efficiency policies of many European countries which, mindful of what happened, decided to invest in alternative resources to be less dependent on the political choices of other states. 


Italy, one of the European countries with the greatest interests in oil and gas, despite the countless patents by Italian inventors, has not followed this path and even today the containment of consumption
is more often the consequence of a response to contingent events such as the increase in costs, which is the result of a structural policy of energy efficiency and the diffusion of renewable energies. A lot could be said about what it means to "implement a structural policy" but this is another episode of this old story. 
What is happening these days is, on the one hand, the consequence of the tensions between Russia and Ukraine and on the other hand the effect of the tensions between Russia and the various countries of the European Union. 

In fact, from what emerges the cut in the supply of natural gas is not equal for all: it seems that it is greater for those countries that have invested in infrastructure, which allows them to purchase natural gas from Russia.  And this is the case of Italy, the landing point of the TAP (Trans-Adriatic Pipeline), a gas pipeline which, by connecting to other gas pipelines, allows gas to be received from the Caspian Sea, from the Azerbaijani territory, through Georgia, Turkey, Greece and Albania. On the contrary, it seems that Russia has not reduced the export of gas to Germany, a country heavily dependent on Russian gas and where the North Stream 2 pipeline passes through the Baltic countries whose entry into operation is partially delayed and - like the current North Stream - it aims to avoid the transit through Ukraine and other Central European countries by depriving them of transit royalties and increasing Russian importance in Europe.  
Many countries have gas tankers at coastal regasification points that can increase through gas from anywhere in the world: at this time, the amounts of gas from the United States have increased. And here an important paradox arises: because the United States, on the one hand, exports gas, on the other, removes oil. 


These days an unexpected cold wave is ruining the days of Americans. And among the various reasons that are driving the increase in demand and pushing up the price of oil, there is
the increase in demand from part of American consumers, in addition to the economic recovery after the two years of closures linked to the pandemic, pushing up the price of all energy commodities, including the price of coal. 
The climatic trend for years has influenced the demand for fuel. Suffice it to say that in the autumn even Europe, short of gas stocks, hoped for a mild winter like in 2020, when the favorable climate, in addition to the lockdown and strong wind production, contributed to the drop in demand. 

Often, the drop in demand does not necessary lead to a drop in prices because this is linked to the type of contract in place between buying and selling Countries. 
At other times, the cold wave in the United States would not have had the importance it does now. The point is that the demand for oil is still quite high in the world. The push to replace this source with others is rather slow, but it becomes increasingly difficult to find it: in a situation of high demand and low or hardly expandable supply in the short term, the markets react by increasing prices. 
With a high price it becomes convenient to extract oil also from the so called marginal wells (stripper wells), that is, those from which oil can be extracted but only at high costs or which guarantee supply only in limited quantities. This situation is by no means new but has lasted for some years and now all the new fields are marginal and this situation will continue and worsen as long as the demand for oil continues to grow. 
Someone will ask why the demand for oil is not going down then. But we will see this in a next episode. 

Understanding what drives global demand for energy commodities
read The energy consumption dilemma

Vania Statzu

Environmental Economist MEDSEA

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