How the cost of energy is changing
On 24 February 2022, Russia invaded Ukraine to widespread international condemnation. Immediately, many countries enacted sanctions, preventing imports of oil and gas. The US has banned all Russian oil and gas imports. The EU has stopped importing Russian coal and will ban all imports of refined oil products from Russia by February 2023.
For Italy, the sanctions have resulted in significantly higher energy prices. Italy receives almost half of its energy from natural gas. Italy consumed 29 billion cubic meters (bcm) of Russian gas last year, representing 40% of its imports. Italy is replacing 10.5 bcm of that by increasing imports from other countries starting this winter.
However, this substitution of gas has not been sufficient. Global gas prices have risen over 100% since last year. In the face of rising global energy prices, Italy has experienced a 44.5% increase in the price of energy over the last year.
The United States has also suffered from increased global energy prices. Energy prices in the US are up 23.8% since last year. Under 10% of US energy originated from Russia, so the US has had little trouble finding alternative energy supplies.
Italian Government Response:
The Italian government has allocated 62 billion dollars to reduce electricity, gas, and petrol costs. As a result, energy prices have been lower than market value. However, consistent spending on energy is unsustainable without significant tax increases. Italy will likely have to remove energy subsidies soon, leading to energy price increases.
US Government Response:
The United States benefits from a temporarily strong dollar and significant domestic oil production. As a result, energy price increases in the US are lower than in Italy. In addition, the US is using its strategic oil reserve to decrease prices. It has released 160 million barrels of crude oil since March, a quarter of the supply. The policy has reduced oil prices by about $0.4 a gallon.
Summary:
Energy prices are likely to remain high for the foreseeable future. They can increase even further in Italy if Russia reduces its gas supply to Italy or the government reduces energy subsidies. Gas prices are significantly higher than energy prices paid by Italians, and prices will increase as subsidies are reduced.
In the United States, oil and energy prices will increase after Biden stops using strategic oil reserves. In addition, the strength of the dollar will likely weaken over the next year and lead to higher energy prices for Americans.
Advice for Businesses:
Reduce energy consumption as much as possible. Energy prices will likely keep rising, and rationing may be instituted during times of scarcity. Invest in measures such as high-quality insulation, reduced office space, and newer machines. Don’t be afraid to borrow money to pay for improvements, since borrowing money is still very cheap.
Integrate renewables into building designs. Roof-top and green space can be outfitted with solar panels. A single solar panel can produce 0.35 kWh, which can power up to 5 desktop computers.
Be aware of the most significant energy users in your company. Examples include indoor and outdoor lighting, printers and copy machines, heating and cooling systems, security systems, computers and laptops, and refrigerators and freezers.
Reduce supply costs. Energy cost changes and supply chain disruption have led to significant increases in raw material costs, but some companies are less affected than others. What might have been the cheapest possible supplier in the past may be more expensive now. Negotiate raw material costs and seek to find the most affordable supplier.
Advice for Entrepreneurs:
Plan out energy usage of new businesses. Energy is a significant expense for businesses, with an average annual bill of €8,000. Consider using an energy consultant to plan energy-efficient offices and machinery.
Keep more cash on hand. Energy prices are currently highly volatile, and surprise energy bills can remove needed financing from daily operations. To maintain stable operations, keep more cash on hand. This can take the form of more fundraising through the sale of company stake or more business loans.
Pay attention to government policies. The government is likely to change its stance on energy subsidies in the near future. This would significantly affect energy prices. In addition, taxes are likely to be changed in the future. Due to the tremendous uncertainty currently, remain vigilant of government policy changes.
Conclusion:
There is significant difficulty worldwide due to an energy shortage. Energy prices are significantly higher than in the past, but prepared entrepreneurs and businesses can overcome the difficulty and remain profitable even with higher prices.
Sources:
Reuters - Europe Russia
Reuters - Europe Italy
Reuters - Energy
BBC
EIA
Statista
CNN
TaxFoundation
Constellation
NY Times