Natural gas prices world-wide have risen four-fold this year alone; food prices where I live in Latin America increased by about 25% last month; in the USA inflation is hitting a 31 year high. Will it continue?
A useful indicator is the Producer Prices Index (PPI) which measures the rate of change in product prices as they leave the factory gate. It’s not the same as the better-known Consumer Price Index (CPI), which measures the cost of a basket of consumer goods. Instead, higher priced goods leave on the producers’ trucks to the shops and the consumer pays the higher prices. Over the next weeks and months, the higher prices will be reflected in the CPI. To some extent, the PPI is advance warning of changes in the inflation rate
Source: data.oecd.org
The USA’s PPI (FD-ID) for October 2021 gives an increase of 8.6% for the last 12 months (US Bureau of Labor Statistics). Energy, at 4.8%, accounted for the largest rise.
The inflation rate for the OECD countries, USA and the UK are based on the CPI and estimated by OEC 6C data as:
| Inflation % total | Energy rise % | |
| OECD total | 4.56 | 18.85 |
| USA | 6.22 | 29.97 |
| UK | 2.90 | 9.70 |
The PPI and the inflation rate are not directly comparable, though the increase in the PPI shows that more producer price rises will add to inflation. Much of the steep rise in inflation is due to energy prices working their way through the factories, offices, and homes. Very little of what we eat or own is unaffected by energy prices.
So why the rise?
Natural gas prices world-wide have experienced a specular rise over the last 12 months. Demand has vastly outstripped supply, and in response coal and oil as substitutes have also risen to near-record prices.
Rise in natural gas prices world-wide
Units in USD/MMBTu (Source: Trading Economics)
The gas shortage has several causes, and the international media have blamed, at one or more times, the following:
- Russian sources of natural gas were politically motived by Russia restricting supply
- The pandemic reduced demand for gas, and gas companies cut back on production and storage; when demand picked up on Covid recovery, demand outgrew supply
- Low investment in the fossil fuel industry, gas, coal and oil – and nuclear – discouraged by the rush to zero-carbon
Germany ran down its nuclear generation capacity after the 2011 Fukushima Daiichi nuclear disaster in Japan, under pressure from public opinion, although it means that Germany became heavily reliant on Russian gas supplies.
The UK continues its rapid path to zero-carbon, the government infused by its chairing of the recent COP26 conference. Its commitment to nuclear remains tepid at best and it continues to want to entirely phase out fossil fuels by wind power. Fracking for natural gas is heavily discouraged, but imported natural gas provides the bulk of the UK’s energy generation.
The US continues to decommission nuclear power stations but be carbon-free by 2035 by building more wind and solar farms- and relying on natural gas, although the impact of higher gas prices is somewhat muted by their fracking industry.
Wind and solar farms are expensive to build and occupy far more land than a conventional nuclear or a fossil fuel power station, though arguably the running costs may be less. In addition, because of their remoteness, the transmission systems are more extensive and expensive. The additional cost of renewables plus the cost of green taxes on fossil fuels, will continue to contribute to ever-rising energy costs, and be a main determinant in the demand for natural gas.
Furthermore, the increased energy costs are working their way through the CPI, making transport, mining, farming, manufacturing, and services – all those that depend on transport to move people, raw materials, and finished goods around the economy.