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20 Jan 2023  (366 Views) 
International economy

Inflation and energy prices in 2022
1. Europe and America experienced high inflation during 2022. Inflation in China was comparatively low. The data from showed the inflation rate to be 11.1% in EU27, 8.3% in USA and 2% in China.

2. A large component of the inflation is caused by high energy prices. Why was China able to keep inflation low, when it had to import a large proportion of its energy needs? Europe had to import most of its energy, but had a high inflation rate. Even the US, which was a major producer of energy, had high inflation.

3. The reason for the difference is probably due to the working of the energy market.

4. China signed long term contracts with oil producers in the Middle East countries to supply oil and gas at fixed prices. These contracts provide price stability for the producers and for China. My guess is that these oil companies that buy the energy on these contracts are given long term contracts to produce energy to the energy market in China at fixed prices.

5. I read that the pricing mechanism in Europe is different. The electricity and gas prices are based on the current market prices for energy. When the oil and gas prices increased sharply, the electricity and gas prices charged to consumers and industry increased accordingly. As the oil companies probably had long term contracts for their purchases, they enjoyed bumper profits.

6. My guess is that the energy prices in America follow the same pattern as in Europe.

7. The approach adopted in China is better. It ensured that the electricity and gas prices are kept relatively stable, based on the long term contracts. The oil companies produce the energy and supply them to the energy market at the contracted prices. The energy is then distributed to the households and industries at a small markup on the wholesale prices.

8. The energy market in Singapore probably follow the practice in America and Europe. The price of electricity and gas is probably quite volatile in Singapore. 

9. The above observation is based on my research, understanding and speculation of the workings of the energy market. I am not an energy expert and may have interpreted the research wrongly.

Tan Kin Lian


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