'Germans Don't Understand Markets', part 94

From time to time I am moved to observe that Germans, as a rule, have no intuitive grasp of how markets work.  Perhaps their postwar social-democrat / Christian democrat is so inherently mercantilist and  dirigiste (and, by many lights, successful!) that market dynamics pass them by.

At the state level the French ‘Enarchists’ aren’t much better, though you meet far more French business people who know the score.  So there’s little hope a 2022 Brussels, with no leavening of UK influence, will have the first clue.  Here’s some up-to-date evidence.  

EU leaders pledged to bulk buy natural gas jointly and review the role of the fuel in setting electricity prices as part of plans to protect European consumers from spiralling energy costs … “Instead of outbidding each other and driving prices up we will pool our purchasing power,” said Ursula von der Leyen

Where to start?  We all know where bulk buying  and large-scale procurement by state entities leads, and it ain’t prone to driving down prices.  (It is prone to lead to monstrous corruption: the mysterious middlemen who will insert themselves in this process when the politicians realise they are totally in the dark in such technical matters, will ensure an extra € or two gets added to the unit price, and is silently shared around a bunch of deeply undeserving individuals.)  It’s just one of those things that can be made to ‘sound sensible‘, sort-of, and is promoted by people like Peter Mandelson, who has advocated it in the past.  But experience tells heavily against it.

The one that really amuses me is “review the role of the fuel in setting electricity prices“.  Boris – another ignorant prick – has mouthed similar words.  Well, review away, fellahs, but I can tell you in a couple of sentences what the answer is.  The price of any traded commodity** is set by the cost (or opportunity-cost) of the marginal source of supply (or demand, in some cases), which for most of the time in European electricity is NATURAL GAS.  Occasionally it is something a bit more obscure, and we get negative prices (something else that has always puzzled German politicians).  But the dynamics are exactly the same.

Gottit, Ursula?  Great: so you can save that million € being asked for by McKinsey or whomever to answer the question for you.  All part of the C@W service.

By the way, this situation is destined to prevail for many years – in fact, decades, as far as anyone can see – however much new ‘renewable’ electricity capacity is brought on line.  The only truly ‘dispatchable’ renewable source is hydro from reservoirs (as opposed to run-of-river).   In practice, biomass can be, too (if it isn’t already running baseload because of the vast subsidies involved) – but large-scale biomass ain’t renewable: its deemed renewable status is a massive scam.

Of course, Ursula’s oh-so-predictable follow-up question is: what can we do about it?   Ans:  well, you can suspend the laws of gravity for just so long as you are willing to throw money at it.  But that’s what happens:  you waste even more money, and it still comes out the same when, eventually, you’ve had enough.   Gottit?   Well no, sadly; probably not.

ND

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** the physical commodity, that is.  Forward prices are set by completely different dynamics.