Questions for a TUD expert: UJ sat down with Dominik Möst, TUD Professor of Business Administration, especially Energy Economics

For months now, energy market prices have only traveled in one direction: up. And as of a few weeks, they have really been skyrocketing. Of course, crisis and war always drive prices up. The worry about and even the speculation of reduced supply in the face of increasing demand leads to developments that can hardly be explained if we take a rational look at the situation. Is it all “just psychology?” Or is this development being deliberately steered, using profit maximization and the free-rider effect to milk the cash cow for all it’s worth? The UJ sat down with Prof. Dominik Möst, whose research at TU Dresden is primarily concerned with the conception and use of techno-economic models and quantitative methods of decision-making support in the energy sector. He places particular value in the interdisciplinary cooperation with engineering and social science research institutions, companies in the energy and industry sectors, and political decision-makers. Current research projects concern issues surrounding the integration of renewable energy, long-term development of energy markets and prices, the shaping of electricity markets, grid expansion, developments in grid fees and the German Renewable Energy Sources Act (EEG) that provided incentives for using renewable energy as well as flexibility options in the electricity system.

UJ: Prof. Möst, your expertise is currently more sought after in the media than seldom before – most recently in conjunction with scenarios surrounding options for ending imports of natural gas from Russia. But the energy market has really been in motion for a while already. Many sectors are at risk of losing their competitive edge because, in some cases, the cost of energy in Germany has surpassed the product value. What is behind these exponential price increases – are they exclusively due to the classic relationship of supply and demand, or are other substantial factors at play here?

© Ben Gierig

Prof. Dominik Möst: It’s important here to differentiate between crude oil and natural gas. The cost of crude oil compared to that of natural gas, but also in comparison with historical crude oil prices, has not risen inordinately. In summer 2008, crude oil prices had reached a high of 140 dollars a barrel, and between February 2011 and September 2014, they remained above 100 dollars a barrel. Today, at just over 100 dollars a barrel, prices remain relatively consistent to those of the years I mentioned.

The current development can be explained by supply and demand as well as by the historical price developments and production volumes – in each case with regard to years with high crude oil prices. Before the second oil crisis in the late 70s, the global production had reached about 65 million barrels per day and the OPEC declared an embargo, restricting production volumes by about five percent to put pressure on western countries in reaction to their support of Israel. Prices rose sharply as a result – much more drastically and to an extent incomparable to what’s happening today. Combating the short supply required tapping into oil production outside of the OPEC, which would help deal with the OEPC’s oil embargo and satisfy rising demand.

During the 2007–2009 financial crisis, which was also an oil crisis, global production was at 87 million barrels a day, and further production capacities became necessary to meet demand. The US played a large role, managing to increase its own production from about 7.5 million barrels a day in 2005 to over 15 million barrels a day in 2020 by means of fracking. This made them the greatest supplier of crude oil, putting them ahead of Saudi Arabia. The rise in demand was thus met to a great extent after the financial crisis by the additional production capacity in the US. Prior to the Covid-19 pandemic, oil production had already reached over 100 million barrels a day. During the pandemic in 2020, this number shrank by about 8 percent due to the fall in demand.

We are currently entering a situation where the demand has once again risen significantly and an expansion of production capacity to an estimated 103 to 108 million barrels per day will become necessary on a global scale (despite worldwide climate protection efforts). Following the USA and Saudi Arabia, Russia is the third-most important producer of oil in the world, with a volume of about 11 million barrels a day. Regardless of a possible embargo, supply from Russia has already fallen by more than ten percent since the invasion of Ukraine. Price developments in the oil market depends on the extent to which Russia can redirect its supply to the Asian markets, in particular to China and India, which could find the incentive of profiting from price reductions for Russian oil appealing. In addition to the uncertainty of Russian supply and its use, the OPEC and expansions in production, a potential Iran deal and the developments in demand resulting from high prices also play an important role. An extreme scenario in which Russian oil is in part eliminated from the equation, and no other countries increase their production, and the price of crude oil rises significantly in the direction of 150 dollars per barrel cannot be ruled out altogether, but the prices on futures markets for crude oil are showing a slight decrease for the coming months. Nonetheless, we must assume on the basis of the outlined developments that the present high cost of oil will not return to the lower price levels of the past years very quickly.

The situation on the natural gas market is substantially tenser and conceivably more sustained. Over the last 20 years, prices for natural gas have fluctuated between €15 to €30 per MWh. In November 2021, these prices had already risen to over €100/MWh, nearly five times previous price levels. Similarly to what happened on the crude oil market, global demand for natural gas sank by about 3% as a result of the pandemic and has since recovered and even risen beyond previous levels. This is underscored by extremely high prices on the Asian natural gas market. In addition to physical scarcity, possible explanations for this immense price increase on the European market include the pressure exerted to approve the Nord Stream 2 pipeline and the attempt to move away from spot market contracts and toward long-term contracts. In retrospect, some experts see the increased pressure in preparation for a planned war as an explanation for the market development. Following the Russian invasion of Ukraine, isolated prices skyrocketed above €350/MWh and have since settled somewhat above €100/MWh, well above the previous level. Gas from Russia represents about 40 percent of gas on the European market. Plans are in the making to substantially reduce this figure. In the short term, a potential permanent elimination of Russian gas could hardly be compensated for and the natural gas prices will remain at a significantly higher level. This is in part due to inflexible supply – meaning that this amount of gas cannot easily be conserved or replaced – and in part because alternatives tend to be more expensive. Liquefied natural gas (LNG), which should replace a large portion of exports from Russia, is in demand around the world. Therefore, competition is high and it is more expensive to purchase.

Accordingly, futures market data for natural gas shows prices in the range of €100/MWh through to nearly the end of next year. The market expectation therefore coincides with my prediction that natural gas prices will remain for the time being well above the price level of the last years. Since natural gas power stations set the price in many hours of the year, we can also expect electricity prices to rise. In some areas, they already have.

UJ: How would targeted influence on this price development – which is so alarming for the economy and for social harmony – be useful and realistically possible? A nationalization of this essential sector, which has recently seen scattered demand, could curb the focus on shareholder value and maximal profit. But would it also be a sustainable, “healthy” solution for the sector?

From a purely economic perspective, high prices are a signal to expand supply and in turn reduce demand. The invisible hand of the market takes over this important coordination task and also solves it quite efficiently. Regardless of this, the price jump on the natural gas market is immense for the final customer. In industry, the high wholesale prices for natural gas have already had a distinct impact on production decisions and have led to a reduced demand for natural gas. For example, natural gas power stations are only used when they are required for providing electricity. Ammonia production and subsequent fertilizer production, both of which depend on natural gas, have already been drastically reduced. By contrast, thanks to downstream rate adjustments, household customers have barely been affected so far – with the exception of those who are currently looking for a new contract. If household customers purchased natural gas for about 6 cents per kWh in the last years, we can assume that these rates will increase substantially due to increased wholesale prices, just at a later date. It wouldn’t be unrealistic to see rates of up to 12 or 14 cents per kWh.

In the coming winter, costs for natural gas-powered heat generation will likely double at least. Policymakers will therefore have to decide on how to deal with this added burden. They have already responded to the rise in fuel prices – a moderate one in comparison to natural gas prices.

I don’t think nationalizing the sector would be expedient, as it would not solve the fundamental problem of high wholesale prices on a global scale. Rather, the question is whether in a counterfactual world nationalized energy supply would also increase our dependence on natural gas. Of course, it is impossible to answer this question. But purchasing substantially more affordable natural gas via pipelines from Russia would be appealing to nationalized institutions as well. Projects such as Nord Stream 1 and 2 – which incidentally have contributed primarily to the diversification of the conduit infrastructure (especially by bypassing Ukraine) and less so to the diversification of the countries supplying energy – were driven forward at least as strongly by politics as they were by independent companies. The warnings about this dependence – issued most intensively by the US – were not taken seriously enough by the energy sector nor by policymakers. The future only holds more abundant challenges in the energy industry that will need solving, especially when it comes to reducing greenhouse gas emissions. This challenge is not simplified by the high gas prices and the gas power plants, which are envisaged as a transitional technology.

I generally believe that a functional market combined with a politically well-designed regulatory framework can achieve its goals much more effectively than a nationalized sector.

UJ: If Russia’s war against Ukraine were to end suddenly and unexpectedly, how quickly would the energy markets restabilize? Typically, a reversal in price levels cannot be observed and they tend to stay high after dramatic price increases, even if the original reasons for the change no longer exist.

A swift end to the war against Ukraine would be desirable, but the effects on the energy market would be limited in the short term. The oil market requires additional production capacities to meet the further global increase in demand. Here, we will see which countries will contribute to the production of over 100 million barrels a day. And, of course, another decisive factor is how much of the Russian supply with its production capacity of about 11 million barrels per day will be available on the global crude oil market.

On the natural gas market, the effects will be felt for a considerably longer time, as the European market strives to become fundamentally independent from Russian gas. At the same time, the volume of natural gas to be replaced is currently only obtainable at substantially higher prices than the Russian pipeline gas. And the energy infrastructure must be reconfigured as well. The envisaged LNG terminals will only become available in a few years at the earliest and will enable the purchase of LNG in competition to the Asian market. In the medium term, natural gas prices will therefore remain at a higher level than we have been used to over the past decades.

The energy transition, in particular the expansion of renewable energy and the implementation of energy-saving measures, can provide relief in the face of these high fuel prices and must be driven forward with the utmost urgency. It is imperative that the current momentum be used for quick action in the energy transition. The contribution of a more accelerated energy transition is important and essential, but the global challenges of climate protection remain. The further global increase in the production of crude oil – but also natural gas and coal – may be astonishing, as it appears to be in conflict to the worldwide goal of reducing greenhouse gas emissions. Ultimately, this target means nothing other than that fossil resources must be left in the ground (at least to the extent that no carbon capture and storage is intended).

However, the developments of the last years and decades show a global increase in fossil fuel production despite international climate protection agreements, even though renewable forms of energy are undisputedly taking on an increasingly critical role in meeting the global rise in energy demand. On the one hand, energy transition profits from the high fuel prices, since renewable energies are becoming cheaper in comparison to fossil fuels. On the other hand, the expansion of renewable energies will likely also be affected in the coming years by rising prices of raw materials and scarcer public funding, potentially making a stronger prioritization necessary. We must bear in mind that the energy transition is like a marathon with a time frame of only the next few decades, which at the same time must be run like a sprint. The challenges in the energy sector are correspondingly great.

Prof. Dominik Möst was interviewed by Konrad Kästner.

This article was published in issue 7/2022 of the Universitätsjournal on April 12, 2022. The full issue can is available on the UJ website at https://tu-dresden.de/uj and can be downloaded as a PDF for free. The Universitätsjournal can be ordered in print or as a PDF from .