German Chancellor Olaf Scholz plans to implement a price cap to assist consumers and industry with rising costs, following broader plans from the European Union to do the same. Following the chaos of reduced Russian supplies to the region, there has been increasing pressures for intervention in the energy markets to avoid a greater recessionary environment. Additional details were put on hold for a subsequent meeting on Wednesday, with implications of these price caps on “friendly” nations and suppliers coupled with fears of volume shortages needing to be ironed out.
Political intervention in energy markets can be incredibly detrimental to the energy industry. Intervention leads by protecting the consumer at the cost of eroding profits of suppliers. The erosion of profits results in greater need for creditors, in less creditor-friendly environments, as seen with Uniper’s request for a 44% increase to their current line with German stated-owned bank KfW amid liquidity concerns. Lower supplier cash positions prevents investment in current, necessary infrastructure with growth projects being a total after thought. As systems break down and deficits to demand grow, further intervention is needed to ration remaining supply and the cycle continues.
Ben Van Beurden, Shell’s Chief Executive, sees the energy crises in Europe spanning years. “It may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and a very, very quick buildout of alternatives,” he said. “That this is going to be somehow easy, or over, I think is a fantasy that we should put aside.”
