The case for a EU Single Buyer of Gas

“And here it becomes evident that the bourgeoisie is unfit any longer to be the ruling class in society and to impose its conditions of existence upon society as an over-riding law. It is unfit to rule because it is incompetent to assure an existence to its slave within his slavery, because it cannot help letting him sink into such a state that it has to feed him instead of being fed by him. Society can no longer live under this bourgeoisie; in other words, its existence is no longer compatible with society."

―?Karl Marx,?The Communist Manifesto

I rarely quote Karl Marx to suggest he was right, but the undeclared war between the EU/NATO and Russia has us standing on the brink of giving permanence to the veracity of the quote. The problem is urgent, as the amounts and stakes are high, time is of the essence, and the proposals for dealing with the current energy crisis from leading politicians are largely going in the direction predicted by Marx.

In short, gas prices have multiplied by more than a factor of 10 as of July 2022 compared to the long term average price. Europe had built what appeared to us to be a stable and mutually profitable relationship with Russia for its gas supplies, importing 40% of total needs from Russia in 2021, and with Germany in the lead taking a full 65% of its gas from Russia.

Policy response following the outbreak of war in Ukraine with Russia the aggressor, has been to seek replacement sources, but these take time to activate. Meanwhile, gas is a major portion of utility bills for hot water and cooking in many EU countries, and it is one of the major drivers of electric utility generators, leading to very high electricity prices across the EU. Political pressure is explosive for compensating consumers and industry for this 10x rise in energy prices, which is the major driver of the leap in food prices and the current (August) 10.10% rise in EU inflation. Whereas asset values halve in 35 years at ECB target rate of 2%, assets will halve in just over 7 years at the current rate of EU inflation. Desperate consumers and enterprises ask governments for help, and cognitively impotent politicians respond with price caps on Russian gas, domestic transfers to households and enterprises. These can largely be summarized as

1. leaving the market price of gas where it is, and so paying the 9x war and oligopoly premium. Gas distributors must then charge utilities and consumers the wholesale prices plus a premium. The governments take their cut in the form of excise taxes and VAT.
2. adding to that, using fiscal income and borrowing to subsidize the difference between the oligopoly price asked and the new price cap introduced in the market. Now the countries engaging in this version (Italian proposals in election campaign) not only allows the seller oligopoly to charge what they deem fair, but we also ruin our government finances for generations.
3. no or little coordination of the domestic measures across the Union

In addition to these measures, the EU is negotiating with the US and Norway to achieve a "friendly" solution, increasing the supply from these nations. No trace of a change on the buyer side, so 27 countries times the average number of buyers per country bidding for supply as usual, allowing oligopoly sellers to charge "what the market can bear".

The idea of internal transfers to neutralize the high market prices paid is primitive and costly. The membership in the European Union allows for a potent solution to neutralize the oligopoly pricing and cause gas prices to tumble lower by organizing a Single Buyer - the purchase side equivalent of a sell side monopoly - a Monopsony.

Whereas we have suffered the monopoly or oligopoly pricing of OPEC since the early 1970ies, and we know how their market power succeeded in raising prices, it is more rare that we think of a monopsony with a specific example leaping to mind and with a price collapse resulting in markets. Yet, economics are essentially the same.

We can look at the above chart and think of it as the gas market in Europe, where E is the ruling market price with a group of sellers colluding in a market near-monopoly / oligopoly. MC is the marginal cost of supply of the monopolist. MU is the marginal utility of supply of the monopsony buyer. The monopoly is producing M and offers that to the market, where only one buyer remains. This Single Buyer offers price B for supply M. There are no other buyers in Europe, so the monopolist can re-route supply East, but that is costly and takes time. We could speculate that in Europe today, the price at point B is at the high end of the long term normal range of gas prices, so around 36 EUR/mWh. This was the price in June 2021, so not that long ago, and more than twice the rounded long term average price of EUR 17/mWh.

The point is that the introduction of a EU Single Buyer is without substantial costs to the EU and the member states, but it is certain to result in an immediate collapse of the market price of gas in Europe. This is why the US and Norway are courting Ursula von der Leyen for a negotiated "deal", as that can remove the price collapse scenario. The apparent willing response to this on the part of President von der Leyen is a huge risk to Europe's competitive future in a world where we are already at a disadvantage relative to the USA and China on our input costs. Ignorance and haste risks taking the best of politicians at the federation level and in the member nations, causing structural damage for decades to come.

Informed industrial leaders like former ENI CEO, Paolo Scaroni, now Deputy Chairman og Rothchild & Co. , have indicated that a Single Buyer would be a good solution for Europe in the current situation.

The urgency of reducing gas prices has only one solution that stands out as massively better than any other proposal, as it preserves member state finances and hits directly back at the root cause of the predicament - the price formation in the market, and the attempt at the oligopoly players to maintain their massive price premium.

This decision is urgently needed in order for European industry to remain competitive and to protect state finances across the Union - and specifically in Italy where debt levels already are very high, and political parties proposing the solution that Marx had foreseen centuries ago.