October 28, 2021 — Prices of fossil fuels rose sharply in October. The European price for natural gas hit a record peak early in the month. The price of US crude oil, is above $80 a barrel, the highest it has been in seven years. Prices for thermal coal in China have also reached record highs. Heading into the northern winter, consumers in many parts of the world are understandably worried.

1. Explanations for high prices

Why the rise in prices?  To be sure, a variety of factors are at play in individual countries:

• European inventories of natural gas are unusually low, and Europeans fear that Russian President Vladimir Putin will use gas supplies as a political weapon.
• German demand for fossil fuels has been higher than it needed to be, ever since it decided in 2011 to shut down its nuclear power plants, in the wake of Japan’s disaster at Fukushima.
• Britain has shut down coal and nuclear capacity, leaving high demand for natural gas in the power sector. Meanwhile, a shortage of truck drivers, exacerbated by Brexit, has raised the retail price of gasoline.
• In Brazil, a severe drought has curtailed hydroelectric power.
• In China, a history of subsidies for coal and price controls for electricity has discouraged conservation.

Despite such idiosyncratic factors in individual countries, however, the recent rise in fossil fuel prices must have some more fundamental cause. Just as with fuel prices, indices of mineral and agricultural commodity prices, have recovered from a low six-year period and have now re-attained their levels of 2014. The longstanding correlation across prices of different commodities suggests a common macroeconomic explanation.  In 2021, the rise in fossil fuel prices, and commodities in general, is readily explained by rapid growth in the global economy, recovering from the recession of 2020.  To that extent, it is a good thing. read more