The EU's Energy Price Controls.

• Author: Lemieux, Pierre
• Position: European Union

The Russian state corporation Gasprom has dramatically reduced the supply of natural gas to Europe to punish European states for their support of Ukraine. This affects the price of electricity in Europe, of which a large proportion is produced by gas turbines. Gas is also used directly for heating many European homes.

Even before the cut in Russian supplies, prices of gas and electricity in the world had increased because of high demand after the COVID episode and little supply growth following a period of lower investment. Now, some European national governments have instituted new price ceilings on gas and electricity purchased by households and small and medium businesses.

After meeting on October 20-21, the Council of the European Union formally called for an EU effort to cap the price of gas, including a lower cap on its price in electricity generation, and a possible common cartel agreement to pay lower prices for wholesale gas purchased from producers in foreign countries. The legal verbiage of the Council is indicative of its large and contradictory ambitions. The same document describes one of its goals as

mobilising relevant tools at national and EU level. At the same time, the immediate priority is to protect households and businesses, in particular the most vulnerable in our societies.... All relevant tools at national and EU level should be mobilised to enhance the resilience of our economies, while preserving Europe's global competitiveness and maintaining the level playing field and the integrity of the Single Market.... The Council ... is committed to further reinforce our coordination, in order to deliver a determined and agile policy response. Political factors will have a decisive influence on whatever legislation the EU ultimately adopts toward these ends. But the current intentions provide a good opportunity to review the economic effects of price caps.

Demand and supply of energy / Recall from economic theory that, on a competitive market, if a price is capped below its equilibrium level where quantity supplied is equal to quantity demanded, the former decreases and the latter increases. A shortage in the technical sense develops. (See "Dispelling Supply Chain Myths," Summer 2022.)

Some people think that energy products are somehow not vulnerable to this because they are "essential"--that, because energy is so important, people can little moderate their consumption of it. But what is "essential" is a matter of degree...