August 15, 2022

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Eight questions and answers about the energy crisis |  markets

Eight questions and answers about the energy crisis | markets

Spain, Europe and the world at large are waiting for the development of oil and gas prices and carbon dioxide emissions rights. Its rapid price hike is holding back the recovery of the global economy after the pandemic.

The implications of these price increases have all kinds of ramifications: their impact on the cost of electricity, rising inflation, monetary policy of central banks, or investment decisions to protect portfolios or the balance of assets. .

The energy crisis is the main topic of global conversations, but it remains to be seen if its impact is temporary or if it will end up having repercussions in the coming years. For now, the winter is expected to be harsh.

Why is the cost of electricity so high?

The rise in the price of electricity is conditioned by three factors. the first , Increasing the cost of carbon dioxide emissionsWhich tripled in price. The hardening of the European Union’s climate targets is the reason for this price increase. You want to end polluting energies faster and the direct result is that pollution rights are more expensive. Second, electricity has skyrocketed due to the rising cost of natural gas, which is one of the most commonly used fossil fuels to replace coal, and is more polluting. Finally, electricity is rising due to the increase in demand due to the strong re-opening of the global economy.

Will the price of raw materials continue to rise?

Unfortunately, most experts believe that the uptrend will continue. On the other hand, countries push to ensure the supply of an increasingly scarce commodity. In addition, the pandemic has halted some drilling, and supply chains have been disrupted. Mark Dowding, chief investment officer at BlueBay Principal, believes that “higher transportation costs and supply disruptions will keep prices high for at least another six months.” At Bank of America, they expected the price of Brent crude, which has reached a three-year high near $80, to reach $100 this winter.

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How do these hikes affect the economy?

From a macroeconomic perspective, higher energy and electricity prices mean a decrease in competitiveness. Companies cost more to produce, so they have to sell their products at a higher cost. This effect increases as the country’s dependence on energy increases. Rising oil and gas prices are causing analysts to revise downward growth forecasts for many countries. At the microeconomic level, higher energy prices indicate lower purchasing power for households, who have to spend more and more money to pay electricity, gas and fuel bills.

How does it affect inflation?

Prices have been on the rise in the US since the first quarter. Initially, the main reason was the breakdown of supply chains. Many factories have come to a halt due to the pandemic, and with the economy reopening and revitalizing vigorously, bottlenecks have been generated in many industries, such as semiconductors, a phenomenon that has also grown and felt a lot in shipping costs. In the spring, soaring oil, gas and electricity prices entered the equation. In June, US inflation exceeded 5%, a level not seen in 13 years. In Europe, it took a little longer to arrive, but the prices were already in September Disqualified 3.4% in the eurozone, which we have not seen since 2008. And in September, in Spain, they rose by 4%, which is also an unprecedented rise since 2008.

What can be done to control prices?

Keeping inflation under control is one of the primary tasks of central banks. The US Federal Reserve (Fed) and the European Central Bank (ECB) are keeping a close eye on price hikes. His first reading was that it was a temporary situation and that energy prices would return to normal. But recent data has shown that the problem is more serious than it seemed and that what initially indicated a rise as a result of the rapid reopening of the economy, could now be a more structural problem, linked to the process of energy transition towards more sustainable sources in which the planet is immersed. With the economy growing strongly and inflation well above the 2% target, the Fed has already suggested that it will start reducing its debt purchases in November and that rates may rise as early as the end of 2022. Jerome Powell, Fed Chairman, has a favour These are the days when high inflation continues for longer than expected.

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How will this affect other assets?

The mere suspicion that rising inflation is speeding up central banks’ withdrawal of stimulus plans has already caused European bonds to post their largest increase in yields in recent months in September. If the Fed and, to a lesser extent, the European Central Bank, reduce their purchasing program, there will be less demand for sovereign debt and investors will demand a higher return for buying government issues. This means that, little by little, the costs of financing public administrations will become more expensive, at a time when the indebtedness is greatest. Hence the big dilemma for the ECB and other central banks: keep stimulus to continue supporting the recovery or withdraw it to try to contain inflation, not overheating the economy.

What is the impact of this on the stock market?

High energy prices, inflation and uncertainties about monetary policies are adding to the uncertainty that investors hate the most. BlackRock, the world’s largest asset manager, believes that the stock market is still the asset more attractive To invest in it now, but you have to admit that the vision is much worse than it was six months ago. Inflation is already the number one concern of asset managers, not a potential pandemic outbreak. Experts also remember that stock markets have a very long ascending streak. In the history of the S&P 500, only once in more than 70 years has there been an extended period without dips from highs of more than 5%.

How does it affect China?

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There, too, they suffer from high energy prices, and in fact, they had to stop production from some factories. The rising prices of coal and uranium made production costs prohibitively expensive. In 21 of the 31 counties, they had to implement some kind of restrictions on the electricity supply.