Low Energy Level
Gas and Power prices, not oil, are driving inflation and costs
We have seen unprecedented efforts of European governments to relieve the pain of higher energy prices for private households. Short term, this should be supportive for markets by keeping consumer confidence from eroding even further. However, transferring costs from private households to public debt might relieve the pain, but it does not heal the illness. Europe had already been facing rising energy costs due to its ambitious energy transition plans before the war in Ukraine. Today, having to replace Russian gas while transitioning into a greener future has aggravated the problem and could keep energy costs at uncomfortably high levels for years to come.
Power prices and earnings. While markets have been mostly concerned about European gas prices, we show that (slide 7) rising electricity costs are a bigger concern to corporate earnings than gas prices (as long as there is gas). With shrinking real disposable incomes, we expect that companies will find it increasingly difficult to pass on higher gas and power prices to
consumers. We estimate that average profit margins of European companies could shrink as much as 1% to 1.5% if this year’s gas and electricity prices were to persist into late next year