The exploding energy prices are causing resentment in Europe. Politicians consider price controls. But even the Ukrainians know that this is a mistake.
The high prices create incentives for providers to develop and provide other forms of energy.
Whenever important prices rise sharply, politicians become nervous. It is the same now. Gasoline and natural gas prices had risen sharply before the war broke out in Ukraine, but they have exploded since the Russian invasion began.
In Switzerland, for example, the price of a liter of premium petrol has risen from 1.85 francs to around 2.25 francs within a very short space of time. The sharp rise in natural gas prices is also causing trouble. Many households in Europe are soon threatened with massively higher electricity and gas bills.
Actionism in the EU
Politicians everywhere have therefore lapsed into activism. The EU Commission wants to allow member states to cap prices for electricity and natural gas. In countries like Germany and Austria, there is a discussion about whether maximum prices for natural gas should be introduced and how households could otherwise be relieved of high energy costs. That’s what he demanded Bavarian Economics Minister a state price cap for fuel and natural gas.
Obviously, these politicians have learned nothing from history. Experience shows that the same problems arise again and again with state-imposed maximum prices.
The state pays
First, price caps come at a price. For example, if the state decrees a maximum price of 2 francs or euros per liter of petrol, two reactions are possible.
The uncomfortable variant is that many oil companies would no longer supply the gas stations because they would otherwise make losses. But drivers with empty tanks don’t want to see politicians either. It is therefore more realistic that the state pays the difference between the maximum price and the market price. Then the taxpayers simply pay instead of the consumers.
Important incentives
Secondly, politicians notoriously fail to recognize that the price wants to tell us something. Currently, the high price of natural gas signals that it is in short supply because the new conflict between Russia and the West is threatening supplies. This is probably not a temporary phenomenon either, but could herald the definitive end of the natural gas and oil era.
Accordingly, the high prices create incentives for providers to develop and provide other forms of energy. It will also be attractive for consumers to switch. Politicians should not willfully turn off such price signals – especially since they have otherwise taken up the cause of climate protection.
Targeted help to households
Thirdly, there are better instruments if you really want to relieve the households affected financially. Instead of pushing down prices for everyone – whether rich or poor – the state can target subsidies to low-income households. This can be done with tax credits, for example.
Bad experiences in Ukraine
Ironically, Ukrainians know all too well what government price caps can do. For a long time, the country had a very low maximum price for natural gas deliveries to households.
Since the state-owned natural gas company Naftogaz often had to buy the raw material at a higher price, the pricing policy tore enormous holes in the national budget. In addition, households had no incentive to save. Heaters often only had two modes, off or on, with the latter meaning overheated homes even in winter.
The price cap was also a central breeding ground for the corrupt structures in the country. Many an oligarch got rich by diverting artificially cheap natural gas for households and selling it to industrial companies at a higher price. All these problems led to the fact that the price of natural gas in Ukraine became an eternal political issue.
It doesn’t have to get that far in Western Europe. But it requires the insight that the idea of a price cap belongs in the poison cupboard.