by Luigi Manfra *
The newspapers are full of news about the huge increase in energy prices, which is reflected in the bills that consumers and businesses are forced to pay. The increases are so large that the government has allocated several billion to contain them, at least in part. The causes of this phenomenon are financial in nature, because the international price of natural gas is rising due to speculation that multiplies the effects of the increase in global demand in 2021. In other words, the increase in GDP, together with delays in deliveries and the increase in sea freight rates, has just started the rise in prices, while financial speculation did the rest.
The energy and other commodities market, like the stock market, is characterized by futures, i.e. by promises of future purchase at the current market price by which the right to buy or sell an asset is obtained at a later date for a price fixed at the time of the conclusion. Obviously the buyer expects a price increase, and therefore expects a profit, while, conversely, the seller hopes in its decrease.
The futures trading activity is a private zero-sum transaction, in which a person’s profit corresponds symmetrically the loss for the other party. Ultimately a neutral operation that has no direct economic consequences on third parties. However, when upward speculation prevails, as has happened in recent months, an effect also occurs on the markets, where the prices of the assets involved in the transaction increase, harming both producers and consumers. The profound dependence of the energy market on speculation is the effect of a radical change in the nature of sales contracts. In the past, these were mainly long-term at a fixed price, but, since the financial crisis of 2008, the number of transactions that take place at the spot price, i.e. daily, has continually increased, the value of which is determined on the Ttf, Title Transfer Facility. , the Dutch market of reference in Europe. This change was due to the long stagnation of those years which, by reducing the demand for gas, made the spot price cheaper than that of long-term contracts. But, since the beginning of 2021, the strong growth of the economy has rapidly changed the situation, resulting in a continuous growth in the spot price that has changed the expectations of operators, triggering increasing bullish operations on the FTF futures market.
The latest data from the Ministry of Ecological Transition for 2020 show that 43% of the gas that Italy imports comes from Russia, while the second supplier is Algeria with 22.8%. In absolute terms, 28.7 billion cubic meters of natural gas arrived from Moscow in 2020, out of a total of 71 billion cubic meters. National production, on the other hand, is in continuous decline and currently accounts for four per cent of final domestic consumption. Most of the gas is imported into Italy by three companies, Eni, Enel and Edison. Eni, the largest buyer, is estimated to have imported approximately 47.6% of the total in 2021, equal to 33.8 billion cubic meters31.6% of which made through purchases on the spot market, i.e. at high prices, while the remaining 68.4%, equal to approximately 23.1 billion cubic meters, was purchased at much lower multi-year contract prices stipulated with Russia, Algeria and other supplier countries.
All wholesalers who supply end users buy from Eni or other large importers at the price of the Rotterdam spot market (Ttf). Therefore, Eni collects for several months the enormous difference between gas prices on the TTF spot market, equal to 180 euros per MWh, and the much lower prices of long-term contracts, equal to 40 euros, for at least two thirds of total sales. The measurement in Mwh, used internationally, corresponds to the 91.37 cubic meters of gas needed to produce it. The existence of super-profits, which all the media talk about, is evidenced by the growth that Eni’s profits had in 2021, equal to 4.7 billion euros, against a loss of 8.2 billion the previous year.
This enormous increase is the result of the method used by the market regulator, Erera, to establish the “marginal price” of gas. In other words, all the offers accepted in a given time slot, necessary to saturate the demand for electricity, take place at the price of the system with higher marginal costs, which is thus able to recover the costs made for production. Suppliers, who instead produce at lower costs, obtain revenues which, given the high price of gas, have gradually become very high.
* Former professor of Economic Policy at the Sapienza University of Rome, he deals with international economics, especially in relation to the Mediterranean