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Inflation Management in Energy & Natural Resources

Inflation Management in Energy & Natural Resources

The energy resources such as gas, electricity, and coal prices have reached to the highest levels in the previous decades. The price fluctuation depends upon parameters such as demand, supply, quality of product, etc. In fact, these prices are interdependent, for example, factors that influence electricity prices are fuels, power plant costs, distribution and transmission systems, weather conditions, and other government regulations. We have seen that whenever there are summers prices are usually the highest. The cost of altering the electricity alters minute by minute. Although, most consumers pay rates on the basis of the seasonal cost of electricity. In this blog, we will discuss the inflation related to energy and natural resources.

What factors are responsible for the inflation in energy & natural resources?

It has been witnessed that people across the world are facing higher costs of the products. There is a rapid increment in various product costs which is driving inflation means the price of everyday goods is rising exponentially.

A research conducted by Research Nesters found that energy systems based on the fossil fuel are volatile and humongous components to measure inflation. The price rise of services and commodities related to energy has a large share than any other item in the consumer price index in various countries. Numerous governments all over the world are extracting solutions as citizens are demanding actions to handle inflation.

“Energy is now contributing approximately 3.1% points to annual inflation in the Eurozone.”

A prominent driver of the surge in inflation all across the developed economies is on the back of the large jump in the inflation in energy. According to a research report, the energy sector is responsible for almost half of the rise in the CPI inflation in the numerous advanced economies from the 4th quarter of the year 2020. Other than this some prominent factors responsible for the fluctuation in prices are as follows:

  • Cost of crude oil
  • Price charged to dealers
  • Commission for the dealers
  • Various kinds of duties such as excise or customs duties
  • Demand for fuel
  • Consumption ratio for the refineries
  • Value of the currency of the country against the USD

In recent years there has been a historic plunge seen in the early months of the pandemic which drove the prices of numerous fuel products to a very low level in comparison to the past few decades. After the lockdown, the prices have bounced efficiently on the back of a remarkable economic recovery. The years after the pandemic economy was on track for the fastest growth and natural gas prices saw a humongous increase in supply. In fact, the Asian benchmark prices witness an all-time high in the last few years. The prices are around 10-11 times high than their level a year ago.

The strong rise in the prices of natural gases led to the increased switch to the utilization of coal instead of natural gas. This was done to generate electricity in the various key market all over the world.

What are the challenges for the policymakers?

The shocks given by the energy prices usually pose 3 challenges for the various policymakers.

  • It is imperative to keep in mind that monetary policy can not do much to influence the prices of energy.
  • Secondly, while there is a rise in the prices of energy it causes inflation in the short term.
  • The lower income household spend proportionally much more of their whole income on energy and they can have significant consequences based on the distribution.

Can renewable energy resources be able to solve various inflation crisis?

The expert says that the main causes of rising inflation all across the world can bring down by low carbon energy transition. From harnessing solar power to wind power, these renewable energy plants are low maintenance once established. Also, extracting energy from renewable resources is cost effective as well as high yielding. Fossil fuel plants are expensive and prone to price volatility while renewable resources enhance sustainability credentials. This is the reason various businesses are expected to deploy renewable power plants and tackle not only inflation but also manage carbon footprints.


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swara-keni
Swara Keni

Head- Global Business Development

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