The International Monetary Fund has predicted that international energy prices, some of which are now at their highest in years, will come down early next year as, among other things, the demand for winter heating sees a reduction.
The prediction has been made in a blog post by Andrea Pescatori, Martin Stuermer, and Nico Valckx, all of whom are with the IMF Research Department.
While Pescatory is chief of the Commodities Unit and Stuermer is an economist in the department, Valckx is a senior economist focusing on energy markets and climate risk.
Together, they have said in the blog post that these prices “will revert to more normal levels early next year when heating demand ebbs and supplies adjust.”
However, they have also warned that “if prices stay high as they have been, this could begin to be a drag on global growth.”
The current situation
The trio said that an “unprecedented combination of factors” is currently affecting energy markets across the world.
The situation is dire enough that it is “rekindling the memories of the 1970s energy crisis” and making things more complicated for an “already uncertain outlook” for inflation and the global economy, they said.
Summing up the situation, they pointed to how spot prices for natural gas have more than quadrupled to record levels in Europe and Asia.
“Typically, such moves are seasonal and localized,” they noted, explaining how this surge is more of an outlier than the norm.
Asian prices, for example, saw a similar jump last year but those didn’t spill over with an associated similar rise in Europe, they said.
The factors fueling the shortage
The trio explained that the pandemic and the resulting lockdowns halted almost all economic activity, which in turn caused a collapse of energy consumption, leading energy companies to slash investment.
However, consumption of natural gas rebounded fast — driven by industrial production, which accounts for about 20 percent of final natural gas consumption — boosting demand at a time when supplies were relatively low.
Energy supply, however, apparently reacted slowly to price signals due to factors like labor shortages, maintenance backlogs, longer lead times for new projects, and lackluster interest from investors in fossil-fuel energy companies.
Even weather played its part in the shortage, with the Northern Hemisphere’s severe winter cold and summer heat boosting heating and cooling demand.
Requisite economic policy
The writers also warned that central banks — especially if they are from an economically weak country — should be prepared to check oil-fueled inflation.
They said the banks should be able to “look through price pressures from transitory energy supply shocks.”
However, they should also be ready to act sooner if concrete risks of “inflation expectations de-anchoring” do materialize.
The authors also urged governments to act to prevent power outages in the face of utilities curtailing generation if it becomes unprofitable.
They also said support to low-income households could help mitigate the impact of the energy shock to the most vulnerable populations.