Friday 16 December 2022

Europeans Don't Understand Markets, Part 37

Not a new theme around here, but the examples keep rolling in.  Now it's the protracted attempt to enforce a "European gas price cap".  Even the ECB knows this one is crazy: and for once, the Germans (the usual butt of my scorn on this issue) are more-or-less on the side of the angels.

The idea is this.  Almost all the economic ills of Europe are the fault of high wholesale gas prices.  (Never mind that this ain't true: French electricity prices are even higher, caused by the chronic state of their ailing nuclear fleet.)  So: if we simply legislate to cap wholesale gas prices ... all our troubles are over - right?

Most of the wrangling is over what the magic number should be.  Too high, and "it has no effect".  Too low, and, errr, well hang on, what does "too low" mean?  We want it to be low!

This fighting over exact numbers is an entirely fatuous fracas because the whole idea is structurally bonkers, whatever the level of the "price cap".  How is it supposed to work?  Unlike its predecessor, the "electricity price cap" (which was in effect to be paid for by governments, via a cash subsidy whenever prices actually rose above the cap - like the UK's present "energy price guarantee"), this one is an outright ban on gas dealings above the capped level.  Dealing, that is, on the leading exchange platforms handling spot trade at the main European gas trading hub, the Dutch TTF.  On an automated basis, no deals would be accepted at prices above the cap.

So, errr, no gas for Europe then, if the TTF price goes too high?   That's the German worry; but actually, nope - trade would simply migrate to other forums: bilateral dealing or, whisper it softly, platforms not coming under the EC's jurisdiction (London, NY and Chicago come to mind).  Any problems with that?  Well, there's the question of clearing and credit support: but bear in mind that in the days of yore, almost all gas trades were bilateral - and there are viable (if clunky) means of instituting bilateral credit support.  They'll just need to dust off those old ISDA Master Swaps.

In their deep ignorance, Euro-politicians work themselves into fine frenzies over this stuff - and burn a great deal of precious midnight oil.  Presumably they're all on double-time, free meals and 5* hotels when they work after 4pm or something.  And when it goes predictably tits-up, they all look around in wonderment and call for an enquiry.  What is the point of these people?  



andrew said...

What is the point of these people?

Amusement in places like this
...that is it.

Bill Quango MP said...

Andrew beat me to it.
He stole my bit. Word for word!

Diogenes said...

Energy price caps are indeed pointless as there is no money once rent and mortgages have been paid. Cap rental prices and there will be the cash to pay for energy - and food.

Don't blame politicians for their incompetence. After all, they are only there on the sufferance of the financial community.

Don Cox said...

Cap rents, and the supply of rooms for rent dries up.

All price capping is harmful, as it reduces supply. Why bother if you can't make a profit ?


Anonymous said...

The reason they pursue mad ideas like this is that they have to follow the Yes Minister Protocol.
1 This can't be allowed to happen.
2 We must do something.
3 This is something.
4 We must do it.

Don Cox said...

On a different topic, there is a good video on nuclear fusion engineering at Helion Energy here:

These people are making good steady progress. It probably helps that they are not a government lab but private industry.

Don Cox

E-K said...

Well... the same people think they can control the global thermostat so why not the price of gas ?

Hive mind. Group think. It isn't just Europeans that it affects.

Don Cox - nuclear fusion won't help us in a similar way that electric cars won't help us (they'll start taxing us for rubber pollution if we went to zero emissions.)

The point of all economic activity is to generate tax.

Eventually we'll pretend to work while they pretend to pay us.

andrew said...

"Eventually we'll pretend to work while they pretend to pay us."

There are a series of articles in ft alphaville with the tagline
'The entire economy is fare festival'

You may find them amusing

Anonymous said...

That was one of the things that struck me when Vlad finally got pissed off with US/Ukraine. Everyone talking about Russian GDP.

But British GDP is created by selling houses and coffee to each other, and looking after each other's children so their mums can be estate agents and baristas.

Russia may not create much that UK consumers want to buy, but IIRC they provide uranium to US powerplants, gas, oil, wheat, weapons. For a couple of decades they were the only way Americans could get up to the Space Station.

The UK officially has a PPP GDP of 3.8 (trillion?) dollars, Russia 4.6. Would you fancy our chances in a 1 on 1? Russia is also allied with #1 China.

(Incidentally, where did Indonesia at #6 come from?)