Commentary number 1

Title of article EU countries agree on gas price cap to

contain energy crisis

Source of article https://www.reuters.com/business/energy/eu-c

ountries-make-final-push-gas-price-cap-deal-t
his-year-2022-12-19/

Date of publication 19/12/2022

Date commentary was written 06/03/2023

Number of words

Section of syllabus (unit) Microeconomics

Key concept Scarcity

 According to the article, on 19 December 2022, after weeks of debate on the need to take

emergency measures, 27 countries in the EU agreed on a price cap to lower gas prices after

Russia cut off most of its gas exports to Europe. This is with the ongoing tensions between

Russia and the rest of the EU, where Russia, as mentioned before, cut off its gas exports after a

series of tariffs were implemented to try and cut off Russia’s income off of gas.

With the cut of exports, there have been skyrocketing energy bills and record-breaking

inflation.

A price cap or price ceiling refers to a maximum price control set below the equilibrium

price determined by the supply and demand curve. The government sets a price to make goods

more affordable for low-income households. In this case, the price cap on gas will lower the

price if the prices exceed 180 euros per megawatt hour for three days on the TTF’s gas hub’s

front-month contract. Jozef Sikela, Czech Republic’s industry minister, stated that this price cap

“will shield citizens from skyrocketing energy prices.”

Analyzing the key concept involved in a situation like this is essential. Scarcity; Russia,

being one of Europe’s biggest oil exporters, after the cut of exports will inevitably cause gas to

become more scarce.

Figure 1

This supply and demand diagram displays the price cap that was implemented in order to

combat the rising gas prices. However with a price ceiling there is going to be excess demand

which causes a shortage. This puts a variety of stakeholders at risk as the quantity supplied (Qs)

is much lower than the quantity demanded (Qd).

While the price cap should technically make gas more affordable, the shortage created by

the price cap will cause some consumers to not be able to get the gas, making them worse off.

Further more, producers and their workers are both worse off. Producers must sell a lower

quantity, while also gaining a lower price (from Qe to Qs), and the fall of output can cause a fall

in the work force needed, ultimately higher unemployment.

Price caps on energy help protect consumers, especially low-income households, from

sudden and excessive price increases. This ensures that everyone can afford essential services

like electricity and gas. Price caps also stabilize the energy market by preventing extreme price

changes. This stability benefits consumers and businesses by providing predictability and

preventing government lobbyists’ market manipulation. By setting a maximum price, consumers

are encouraged to use energy more efficiently, knowing that prices won't suddenly increase. This

promotes energy conservation and the use of energy-efficient technologies. However, there are

also adverse effects of price caps. Price caps can distort the energy market by discouraging

investment in infrastructure and production. If they can't establish profitable prices, energy

companies might be less motivated to invest in new technologies or explore alternative energy

sources. Artificial price limits can cause supply shortages. Suppose energy producers can't cover

their costs due to low prices. In that case, they might reduce production or allocate fewer
resources to maintaining and upgrading infrastructure, which could lead to shortages in the

future. Price limits can also affect the quality of energy services. Faced with reduced revenues,

energy providers might compromise service quality, resulting in unreliable supply or lower

service standards. Additionally, price limits can hinder innovation in the energy sector. Without

the potential for higher profits, companies might have less incentive to invest in researching and

developing new, more efficient energy technologies.

I think price caps on energy are not a very good idea because of the overwhelmingly

negative impact they can have on the economy. While in the short-run, they are beneficial as the

prevent a sudden increase in gas prices, because they do disrupt an economy’s equilibrium (Qe),

in the long run as they disincentive producers from producing the quantity demanded (Qd to Qs),

ultimately leading to more stakeholders being put at risk.