 OK, so there's no break. We're going to move directly to the second session. And again, in trying to guess what could be interesting topics to have in this year's Cintra, maybe we achieved some success in picking energy price, volatility, and energy sources in Europe to be the topic. So let me invite Hilda Bjornland and Christian Zinglersen to join me here on stage. So with this topic, it's, of course, something that's safety first. OK. So this topic, obviously, has been a topic in global central banking that's been with us for decades. The 1970s, of course, in particular, surveyed large energy price shocks. But in fact, even over the history of the euro, when you go back and think about the mid-2000s, the surge in energy prices in that period, and then the subsequent collapse later on have been really first order issues for the ECB throughout. And of course, over the last year, we have a new wave. So I think we're very lucky this morning to have two very good speakers. Hilda Bjornland has been writing on the macroeconomics of energy for a long time. And many of her papers are really first order relevant for central banking. And for a discussion, Christian Zinglersen directs the Agency for the Cooperation of Energy Regulators, which is in the European Union Agency, which I will confess, a year ago I was not super aware of. But in fact, when I asked my staff last autumn, where should we be finding material, they said, look, the first place to go is go to this website. And if you have not spent your time looking at this website, it's an amazing source of information about energy in Europe. And Christian has been very helpful to the ECB and the European system more generally in explaining to us how the European energy market works. So I think we're all set for a very good session. So let me just turn the floor over to Hilda for her presentation. OK, so thank you for inviting me here to this very interesting forum. It will be a very topical new set of challenges, which I will enlighten you a bit on based on my research and based on research from the current agenda. So let me just go directly into this graph to set the stage. So this graph shows oil price the last since 1983 and until today. And the quarter is from James Hamilton in 1983, where he, in his seminal paper, said, all but US recession since World War II has been preceded by a dramatic increase in the price of crude oil. So the big question is, we have a dramatic increase in crude oil now. What will be the effect of that? And that's what I'm going to try to, at least, and give my views on to you and the implication for Europe. I'm going to give a forecast, but I'm going to collect some views and give you a review of where the literature is pointing to. So I will first talk about the oil-macro relationship. And I'm very pleased by President Lagarde's focus on how ECB are going to identify shocks going forward, because that's basically what I've been doing and most researchers has been doing in the literature. So what are the shocks driving oil prices and how does it affect the macro and the vice versa? I'm going to talk about inflation expectations in transmitting oil price shocks to inflation. And now there's going to be a session on that later also, not related to oil price, but I'm going to focus on some recent research we have there, which could be of relevance. I'm going to talk about high oil price volatility, how it exacerbates the effects and make it even more challenging these things. And finally, I'm going to wrap up with the implication for Europe and my view on entrepôtse. OK. So I don't intend you to read all this paper. You can look it up later on if you're interested, but there are tons of paper following the seminal paper by Hamilton, obviously. And this body of literature has been growing, and there's many, many papers there which I should be really having, I should have loved to go into detail on those. But I will mention them here and there in the presentation as you will see. But the main thing is the main challenge, obviously, which is not to debate that is that higher energy prices lead to an increase in the production cost and inflation. It's a cost channel. And that reduced demand. And as a consumer, it produces how to pay more for energy products or complementary products. That gives you a negative effect on the economy. That's not debated. What's debated, though, is the magnitude of this effect. And indirect effects, which I'll come back to. And in particular, what's also debated is the role of monetary policy in transmitting or worsening or dampening, depending on how you see it, the effect of oil price shocks. And there's all debate there between Bernanke Götler and Watson who said it's not really the oil price shocks, which are the cause of the recession. It's the monetary policy response to these shocks. That has been refuted by Hamilton, Herrera, and others. And I will give my put that in relevance when I come to that point later on. Okay, so there's at least four issues which I think policymakers should be aware of when they look at the effect of oil price shocks on the macro. And the first is that oil prices are not exogenous events. And we heard that already today. So early paper, Hamilton, it was really about correlations. Oil price versus macro. But now it's really about the reverse causality. Macro drives oil and oil drives macro. And I have a paper from 2000 who was one of the first to show, or the first to show that if you disentangle demand and supply from other oil price shocks, you will have different effects on the economy. So demand would increase oil prices, but not the negative effect on the economy. But supply and oil specific concern about lack of supply, et cetera, would have a negative effect. And this shows the effect on three countries, US, Germany, UK. So like a 10, 15% increase in oil price would reduce GDP by 0.3 to 0.5 or less equal. So that is sort of like a benchmark to start off. Obviously that paper defined the demand and supply based on the countries of analysis. A major shift in the literature came with Barsken Killian, a subsequently Killian, 2008 AAR paper, where he said that you really had to identify global demand shocks. So like, weren't the man, not just the man from the countries you are analyzing. And doing so, he found exactly, as I also pointed out, that the demand and supply had different effects. And the importance is to identify the sources of shocks, driving oil prices and the economy. However, during the last decades, global demand is not just one thing. We heard that already in the previous session. Global is a multitude of countries. So what I did with a couple of authors from Nogges Bank in 2015 was to separate between developed and emerging countries in driving the man and in responding. So what we typically looked at was who have been driving the oil price increase in the 2000s and during the 2000 decades. And doing so, we found that it's in particular demand from emerging countries who are driving the man. And that's not bad news for the economy. The fact that oil prices increased due to demand from emerging countries. However, we do find that different continents respond differently to oil price shocks. So here on the left, it's basically what I said. This is demand shocks, driving up oil prices from a emerging country, which has obviously huge effect on Asia, smaller effect on South Asia, South America, sorry, but also positive effect of Europe and North America. So demand as a driver oil price is not bad news. That's what I want to emphasize, but also in particular, when it comes from growth in emerging countries. However, supply disruptions, fare of supply, shortage of supply, et cetera, are bad news for the world economy, and in particular for Europe. This is what we showed in this paper and I've seen also in subsequent paper. And I give you a little bit more detail in the end of some European countries. So an oil specific shock, which is scarcity of supply, like we have now, which you don't see in supply directly, but you see it in the build up of stocks, et cetera, that has a negative effect on GDP in Europe, 0.5 on average. So 10% increase in oil price due to supply concern, 0.5 reduction in GDP within two years. OK, so countries, regions respond differently. That's one thing. Secondly, early papers like Kelly and also what we've been doing emphasized a lot demand as a driver of the oil price and a little role to supply shocks. So supply, although it had this effect, it wasn't really important. Subsequent paper by Baume St. Hamilton, Caldera, Cavaya, and Acovelli, and Kensig, which won actually the ECB Young School, the prize last year for this exact paper, showed that it is really important to relax the assumption that oil or energy producer do not respond instantaneously to price news. And particular shale producers, which I'll come back to in a second, do respond much more rapidly to price signals than, for instance, conventional producer in the North Sea, where I come from, Norway. So there's a difference in the market there. So shale producers are suddenly becoming a player, which could change the effect on how the market respond. And that flexibility, the increased flexibility, will have an effect on the oil market, not immediately, but eventually, in the sense that it can potentially stabilize oil prices further out. And there's a paper by Bornstein, Krusell, and Reble pointing in that direction. So we learned demand's important, but supply elasticity is probably a bit higher than we thought, and that will emphasize supply shock, but also could be a stabilizing effect in the longer run. What about exporters versus importers? An implication for Europe. Yes, there are some exporters, small open economy exporters around the world. Norway is one, Canada, Australia, and others. And there's a lot of research to show that they respond positively to oil price shocks, and could have a small, dampening effect on these effects. But it's small, and it's not really important. But all these papers point to the same thing. Exporters respond differently than importers. But US is not a small country. And US has gained momentum as a major oil producer, the most important oil and gas producer. And there are research that shows that there are changes in the way US respond to oil price shocks going forward, or already going forward. So there are some local spillovers around the industry and states, which are oil producers. But there are also spillovers to industries around that across the US. And I have a paper which shows that there has been some time-varying changing there. So high oil prices are not just bad news to the US. For consumers, yes. And for some producers, yes. But many producers are benefiting from the high oil prices. And that has a dampening effect on the US more than we've seen before. Will that help Europe? Probably not. Because trade linkages, at least what I've seen so far, but here I will also encourage more research, between US and Europe, are not of the magnitude that US as a shared producer can dampen the macro effect. However, US as a producer can dampen, as I said, the effect on oil price volatility. So further out, we can expect to see benefit for US from that. OK, so we have seen that we expect negative effect from a high oil price due to supply disruption, due to scarcity of supply, et cetera. And I come back to the more direct on Europe in a second. But before that, I want to go a little bit into inflation. Because so far I've talked about GDP in models which also contain inflation, but it's important to look at the direct and indirect effect on inflation from the energy price shocks. So we established that there are a direct effect from higher energy prices to the cost channel of energy. So cost increase. And we already heard that this morning from President Lagarde, namely, how that has fed into inflation. But there are also indirect effect, working through inflation expectations. And if that effect is important, it could lead to a wage pricing spiral if that effect, if that helps magnifying the oil price shocks into inflation. However, that channel is debated. That's fair to say. Some researchers like Kwebo and Nagorno-Chengke point to a high sensitivity of household inflation expectation to oil prices. And they think that that can even help explain the missing deflation we saw during the Great Recession. Others, Dansharangali and Wong and others, suggest that this mechanism is a weak at best and could even have disappeared since the 1990s. So in a new paper, except for publication in review economic statistics, I, together with Kuntar Rosted from Norway's bank and an Australian colleague, we question whether inflation expectations do play a role in passing oil price shocks into inflation. And we do that by separating between demand and supply again for inflation. Because as with the effect on the macro economy, it's also important how demand and supply affects inflation. And we think that household might form their expectations differently when faced with long-sustained increases in the oil compared to abrupt supply disruptions. And doing so, we find we have key three findings. We do find that inflation expectation, and we measure one year ahead, so it's short to medium term, are sensitive to oil price shocks. But we find that the degree of sensitivity depends on the analyzing source. When demand for oil is increasing oil prices, that's when it has a huge effect on inflation expectations. And using this knowledge, we can then also decompose the period 2003, 2008. And we can explain the period of missing deflation with these demand shocks. However, when they're short or brief shock to oil prices due to supply, we do find a smaller effect. We do find it passed through to inflation expectation, but the effect is smaller. And obviously, we don't necessarily think that households are, although they are rational, know when is demand and supply. But they are looking at the persistence of the shocks. And demand tends to be more persistent. So when there are brief shocks like supply, that's when we don't find much effect. What about now? I'm not sure when you can see all the details there. So let me just emphasize to you what I'm showing here. Here we have the paper where I updated calculation for 2020 and 2021. And the red there is inflation expectation. And the blue are the contribution from the different shocks. And you should pay attention to this and this. That is supply shocks and oil specific oil consumption demand shocks, which are now feeding into inflation expectation in the last year. So these are coming from the model where we allow for the different shocks. That tells us that, yes, oil price shocks are feeding into inflation expectation, but they're not explaining everything. Two things, but they are important. And they haven't been so important in the past as in the past at all. So that tells me that also knowing that this is, there's some uncertainty there at the end, but that tells me that oil prices shocks are getting more persistent. And it has an effect on short-term inflation expectations. Third point I want to go briefly to before going to wrapping up in Europe is that oil price volatility matters. Many models central bankers are working with assume and steady state. So shocks go back to an equilibrium. There is a growing literature focusing on non-linearity, time-wearing changes, et cetera. And as all papers look at the asymmetric effect of positive and negative shocks, there's paper who look at the declining inflation, declining elasticity, because we are less energy intense in our consumption. But in another paper I have with quarters in American Economic Journal Macro, we show that high level of volatility matters. And we estimate a new case model where we look at regime switching. These are also with colleagues from Norway's bank. And what we find that we do find, so there was a hypothesis that oil price shock has vanished. That's why we had the great moderation. We find that that's not the case. Oil price shocks are our current sources of shocks. And that's what you see here. This is the probability of high oil price shocks in the 70s, in the 80s, in the 90s, in the 2000 and 2008. And we show that that coincides with when we also have high inflation and also high lower growth. So we find, and what we also find is that when we are in a situation where oil prices are volatile like now, they tend to exacerbate the effect of the shocks. So it makes things worse than if it goes up and down in a stable environment. So that tells us that it's going to be more tricky now stabilizing inflation because oil price volatility exacerbates that. I think I'm going to skip that for the sake of time. We find that there is an independent role for oil price shocks. And we find that all the policy makers are in the hawker's response. They do find that oil price shocks have a negative effect on GDP. But it's even more negative when on GDP, when they're hawker, than when they're dowished, not surprisingly. So the effect on inflation is going the other way around. But we find, and that's a little bit worrisome, that there is a substantial share of the variance of inflation explained by oil price shocks even though central banks are hawker's. So that suggests that during periods of high oil price volatility, stabilizing inflation is difficult. OK, that leaves me to, and I skipped that too, that leaves me to what's happening with Europe and implication to wrap up. So this is oil price elast since the pandemic, the decline and the subsequent recovery. And if you look at the period from summer of 2021, this increase on its own is more than 50%, which is substantial. So what is that doing to the Europe? Because we are no longer talking about catching up after the pandemic, we're talking about sustained and volatile increase in oil prices. So there's four effects. We can think of four effects based on what I've been saying so far. So there was an initial catching up. The first point here, which is really behind, but which also had an effect on inflation. But then we have the geopolitical tension and subsequent Russian invasion of Ukraine, which has increased prices further with 50%, which has a negative effect in the isolation based on what you've heard so far. And then we also know that supply is constrained by investment. Little spare costs are very low lag lengths in production except for shade producers, which I've talked about, between investment and production, which means that it may take time before energy markets will respond to these subsequent price increases. And then in addition, we have a push for the working capital to more green energy. And finally, which we also heard this morning, all the commodity prices are on the rise, which means that the effect on growth and inflation is even more magnified. So here's sort of like a simulation. Don't think of this as a forecast, but the simulation from the models. This is a particular model from 2015 with some adjustments. What's the effect of a 50% increase in oil prices due to oil-specific shocks? So shocks which are not demand, positive demand, which are precautionary demand, lack of supply, fear of tensions. We find that there's a spectrum of differences between France around 2% and Finland around 3.5%, on average around 2.5%, reduction in GDP. And what we also do find is that, although we can, although most should not overinterpret the difference here, but we do find that countries like Finland do have a large energy intensity in the economy in terms of pulp, paper, metals. So it turns that they are more vulnerable than maybe some other countries on the other end, France and Spain. So a country with differences matters. This shows another type of supply shock, where I tilt it a bit more with direct supply changes, which is a little bit smaller, but pretty much the same. So obviously, it will be a combination of these two. But all else equal, around 2.5%, 3% from the reduction in GDP is what these models tells us. Come out the prices and the effect on growth and inflation is, as I already mentioned, is not only GDP, sorry, is not only oil prices, which has increased, gas prices, coal, wheat, et cetera, the whole spectrum. And that itself has a negative effect on the economies. So compared to initial 70s oil price shocks, the current oil price shocks is smaller, a little bit smaller in magnitude, but it's much more broad-based, which means that there are challenges for more larger part of the economy. And there's a recent paper by Gert Persman from Ghent University, who have been looking into food commodity prices and find that food commodity prices have large negative effects also on GDP, identified correctly, and also has an inflationary effect. He argued that 30% of euro area inflation in the last decade relates to food commodity prices. And as with oil price shocks, you find that these transmission channels are direct, but there are also indirect effects through wage claims, through depreciation of the euro, and also whether you are importer and exporter. So I realize this is not, I'm not giving you a lot of good news in the way I'm decomposing it, but that's how I see it going forward. All right, so what's the effect on growth and inflation in Europe to wrap up and then talk about one slide on monetary policy implications? So what I'm saying is that increasing energy prices is a combination of factors. It is due to demand, which has very little negative effect of Europe, obviously, but has an inflationary effect and can work through inflation expectations. But supply disruption, fear of scarcity of supply, will have large effect, and I gave you some indication of what the model's tensors it could be, and also high volatility exacerbates these effects. So that tensors that is going to be challenging to stabilize this. And when you have commodity prices in addition, that magnifies that effect further. So although I'm not giving you a recession scenario, I think that what I'm saying is that the combination of supply disruptions, the combination of commodity shocks and the combination of the high volatility and the exposed Europe increases the probability of recession significantly. Will we have a stagnation of the 70s? I don't think so. For the reasons I've been saying, shocks are smaller. Yes, they're broad-based, but monetary policy is very different now than in the 70s. Monetary policy is more active. Stake inflation, there's higher monetary policy is more responsive, and also nominal anchors are better appreciated in the economy. So short-term inflation and inflation are on the rise, and probability of recession has increased. But monetary policy has the possibility to respond much more aggressively now than what we've seen before. And the importance of monetary policy now for stabilizing the median and longer inflation expectations are important to repeat the 70s. But that requires swift action from the central bank, and it requires this swift action now. However, as I was also saying, because the supply shocks are of a certain magnitude, and they are, if you add on the geopolitical tensions and all the disruptions in the economy, stabilizing inflation will be difficult. And the cost of growth and employment will further on, could further on be too large for the central bank. So I think that is going to be a challenge, a trade of hair further on, where the combined effect of the high commodity prices and the effect of financial markets will need to be taken into account. So swift response in the short-term, more balanced response going forward is the conclusion. Thank you. So we've had a very comprehensive survey of the macroeconomics of energy shocks over the decades, and now I turn over to the discussant, so Christian. Yes, first of all, thank you a lot for the invite. This is a special privilege for me, and thank you for the very generous comments about Acer in the beginning. I had not expected that, but I will relay that back home. Thanks a lot. So I understand that a discussant has privileges in this forum. One of them is to choose a little bit the angle vis-à-vis the first presenter, and I have chosen an angle which primarily complements Hilda's presentation, which of course is focused on oil. Primarily, I will focus much more on gas and the interplay of gas and electricity, sort of the full sweet picture as it were. So getting going then. It's a unique time with quite some unique questions being faced, such as whether to invest in gas vis-à-vis the longer term transition trajectory ahead, or the existence or not of stranded asset risk for private company players linked perhaps to whether one focuses primarily on supply side measures or demand side measures. And that poses perhaps the question, is this new? Not really. It's not really new. I just grabbed a few articles 10, 7, 8 years ago. They're not dissimilar to the debate today. But perhaps the consequences and the pressures that we face are new and somewhat unique. So let's turn to these and what I will touch upon in my presentation. Like Hilda, I have sort of four main categories as well. First, the nature of the current energy shock for the EU, I would say is largely gas-driven with some near-term implications. Second, I would talk a little bit about what I would call the stubborn resilience of gas and why it's unlikely to go away. Third, I'll touch upon the relatively tight, medium-term gas markets. And fourth, I will offer some early lessons humbly for energy transition policy ahead. So if we turn to the current energy shock as it were, we see that as significantly driven by gas and characterized by three distinct phases. Now the first phase could be relatively well explained by fundamental supply and demand dynamics. There were some climate and weather patterns playing out as well with lower renewable production and relatively short gas stocks explainable by a relatively harsh winter up ahead. So no big deal, right? Well, then again, second phase, significant price rises, very significant increase in volatility, conspicuously lower Russian pipeline flows to Europe, price signaling working to some extent because they managed to attract quite significant flexible energy cargos to Europe, primarily coming from the US. And the third phase characterized, of course, by Russia's invasion of Ukraine, brought high volatility, high uncertainty, high pressure on prices, and up until very recently actually not supplemented that much by actual physical scarcity, although that may be changing. And this last development I think is important, of course, because it signifies a little bit or signals the scramble for alternatives to Russian gas as one point, but it also points to the need to fill gas storages ahead of the winter. Typically gas storages cover roughly a quarter of winter demand across the EU. So how's that coming along on storage? Well, up until the day it's looking pretty good. It's higher than last year and the trajectories are broadly on track, so say 80, 85, a filling rate, or even broader. They're actually edging towards 55% filling rate as of late last week. But of course, that positive outlook rests on certain assumptions, namely continued flow of Russian pipeline gas in particular, and that is not so certain. Many people say one needs at least 20% Russian gas flows to make it pretty possible to get to an 80, 85% filling rate ahead of the winter season, which would be a relatively comfortable storage filling rate as it were. So this is one to watch. And another one to watch with a watch fly is on electricity, where in many parts of Europe, gas or to some extent coal generation is the marginal price setting technology in some jurisdictions, not all. And here, not surprisingly, the rise in gas sourcing costs have led in many places to very high rises in electricity costs, 180 euros per megawatt hour, 200 euros per megawatt hour, 220 euros per megawatt hour. And some of those who checked the latest numbers this morning would see some jurisdictions in Europe being above 300, presumably because of low renewable production that particular day. So these are the prices in the very near term and they're very significant. And I'm assuming they occupy you as well. Actually, in addition to the price outlook, there is another issue to look at from the electricity side. And that is one, whether one goes from high prices to actual electricity security of supply issues, or that which we call scarcity. Normally, gas generation accounts for roughly 20% of power generation across the EU. It's falling a bit because of the high prices, but not that much, so it's a relevant issue. So this admittedly slightly complicated figure shows a more simple message. So whilst the average yearly gas consumption for electricity is up there with the orange dots, there can be significant reductions made in gas demand for power generation. That's the light brown arrow, if a number of measures are taken. But however, those reductions have limitations in the current electricity system across the EU. And they depend on a number of variables. Some of them are weather and climate dependent. Is it a harsh winter or a mild winter is one? Is it a season now with a lot of hydro reservoir replenishment, or is it not? So there are some variables to this asset work. Let's turn then to the prevalence or the preoccupation, if you will, with gas and why it is so ingrained across the EU. And one primary reason why it has this stubbornly significant role, of course, is because of the energy needs that gas meets. In terms of volumes, gas accounts for roughly a quarter of the overall energy mix, so not electricity mix, but overall energy mix in Europe. And secondly, and perhaps more importantly, in a transition oriented perspective, gas today provides a significant share of what I would call seasonal flexibility needs. And this is one of the reasons why gas is likely to have an important role to play for many years ahead in the EU. Most would estimate that overall gas demand will decrease over the next decade, but many would also point to gas being needed more to meet peak demand. This is exactly because of this. And that it is supremely well positioned to do. Now finally, a third reason why the current gas mix is somewhat stubborn in the EU relates to infrastructure. Not surprisingly, given competitive sourcing costs, legacy systems, and expectations until recently of supplier reliability, there is a very significant portion of gas infrastructure in Europe, which is east to west dimensioned. That is no surprise. And hence, that will need to change a bit. As an example, more LNG terminal capacity will need to be built and also targeted investment in new pipeline projects will likely be necessary. This, of course, takes time. And indeed, other pipeline suppliers don't have that much spare capacity to make up in the time it takes. So let's look at the market outlook in the coming years. As Europe seeks to diversify away from Russian gas, what to expect for global gas markets and indeed also for other diversification options? And we can start with the forward markets themselves and looking towards the first quarter of 2024. Currently, forward markets display relatively high prices until, say, a year from now. And then they are currently contracting to significantly decrease afterwards, though not to the good old days of, say, 25, 30 euros per megawatt hour. However, what this figure also shows is that the forward prices have seen very significant shifts in the last months and also very recently at Russia's announcement of a significant decrease in Nord Stream 1 pipeline flows to Europe. So I would be surprised if this was the last shift in this forward price graph that we would see going into the autumn. One of the key fundamentals for energy price developments in Europe over the next three to four years is the reliance on and the availability of LNG in an increasingly competitive global market. It's pretty clear that one key diversification tool for the EU will lie in attracting increasing volumes of LNG. This that you see before is the repower EU plan for this year, which looks at a, shall we say, theoretical max potential of 50 BCM, so a billion cubic meters of LNG, to come to the EU to, quote unquote, squeeze out Russian gas supply. That is a lot for LNG to carry on its shoulders as it were and maybe it's a bit too much. This basically means that the EU this year needs to scoop up 10% of global LNG trade as an extra compared to what is already being scooped up in a normal year. So what kind of LNG markets are we looking into to assess this potential in the coming years? And we're looking into a tight LNG market. Not much new capacity is coming online until 2025, 2026. And still the projected overall global demand in the time period 2020 to 2026 is to increase by a factor of 30 to 40%. Much of that increase demand is likely to come from Asia as Asia grows, but also to some extent as Asia seeks to diversify at least partially away from coal, which of course is a good thing for overall climate objectives. What about the argument then that this is at best a two, three year transitory development? Investment must be booming, right? Prices have been insanely attractive. And after all, this is a cyclical commodity business, isn't it? Maybe. It's not super clear. IA's energy investment outlook came out last week and while it found that whilst upstream oil and gas investment is increasing, it's only the Middle East state-owned energy companies that are above pre-pandemic investment levels. And in addition, investment costs are increasing, so they buy slightly less capacity per dollar spent. And part of this likely relates to what is arguably a bit new compared to the FT articles I named dropped in the beginning of the presentation, namely that the energy transition trajectory ahead in terms of what it dictates in future gas demand is uncertain, not necessarily in the next three, four, five years, but in 10 years, 15 years, 18 years from now. And that may have an impact. And linked to that, there's also increased shareholder pressure on new investment. And perhaps if you can see in the graph, it's safe to assume that that shareholder pressure is quite unevenly spread across the different actors on this graph. Now there's a counter argument out there that all this Russian pipeline gas that EU purportedly will seek to replace fairly soon, for example with LNG, will come back to the market, rebalance, supply, et cetera. And so in the long run, there will actually be no impact. This seems unlikely, at least in the near term. It looks very difficult in the coming years to evacuate those gas volumes to other jurisdictions across the world, including Asia. There could be some, but certainly not all. It would require a huge pipeline investment and likely also very significant investment in LNG capacity. That takes time. And the latter may also be impacted by Western sanctions, as it were. Now there is one final aspect to this challenge of getting out of Russian gas. And perhaps a bit surprisingly, it's contractual. There is a prevalence of Russian long-term gas contracts towards EU markets also after 2027. So getting fully out of Russian gas may prove contractually difficult, unless, of course, those contracts are broken by the other side. Let's turn then to the other parts of the diversification puzzle, the energy transition, and what might need to be done here, starting with energy demand reduction, the no regret. This will not be news to too many. Energy efficiency will need to play a key role, a more important role, and efforts will need to be accelerated. And one of the key areas there are buildings, energy, usage, heating, cooling, electricity, et cetera. This is actually less about global markets and price signals. After all, what better price signals could you have for efficiency investment currently than break through the roof, gas, and electricity prices? Rather, it's about institutional barriers and behavioral barriers that need to be tackled. And frankly, some of those initiatives to tackle them may be seen in some jurisdictions as rather heavy-handed and rather intrusive type of interventions, which may impede their uptake. Nevertheless, they remain necessary. Now, the other side of the coin, as it were, is, of course, to increase clean energy supply. And again here, the simple message is that we need to do more. But also again here, this would seem to be somewhat less about price signals and capital availability, at least currently, and more about targeting, permitting delays, and inadequate infrastructure and grids across the EU. And this is actually one of the few areas in terms of clean energy uptake where there has been very significant progress made over the last three, four, five years, and very significant cost decreases as well. However, this progress, if you will, is also coping with pressures of late. And President Lagarde, you touched upon this in your opening remarks as well. So for the first time in a long while, what I would call sort of plain vanilla renewable investment is not falling in costs. Rather, it is increasing a bit. There are some supply chain shortages impacting new projects. Material costs rise are impacting them. And we're also seeing select labor shortages as well. So while this new build obviously will still contribute to alleviating supply and put downward pressure on prices, the impact is not as great as it might have been a few years ago. Turning to close then, what lessons to draw over the next years for energy transition policy across the EU? And I'll start with an image. It revolves around getting the balance right. This may sound simple. It may look a bit cute, but it's not necessarily so. In fact, one might argue that supply side measures or supply side restrictions have been given a bit too much focus over the last five, six, or seven years. Such a focus, in my view, on supply side restrictions holds risks. This was brought out well, in my opinion, in the IMF's latest economic outlook for some months ago. Indeed, supply side measures, if they are restrictive, without targeting the structural demand drivers of that which you wish to restrict, can provide very significant upward pressure on prices and thus be inherently inflationary. Whereas if they're matched by an adequate focus on demand side measures, this can have deflationary implications. This is not a super popular message to send, which is why I think many choose to couch it very carefully. At its core, it's a fundamental call for pragmatism. Or, I'm Danish. In Danish, we have a saying which literally goes as follows, don't seal the skin before the bear is shot. This is literal. I'm not choosing the animal for it is last can. Yes, you can verify. Excellent. The second lesson turns a bit on the role of the market. Now, the current electricity and gas markets in the EU deliver quite significant benefits in terms of trade, trade benefits, volatility mitigation compared to an isolated systems type case, innovation signalling, and indeed also security supply. Obviously, in times of very high prices, there is a need to protect those that are deemed most vulnerable. That is completely legitimate. Everyone would expect so. So I would submit then a key focus going forward rather than perhaps hampering too much with price formation and market functioning, absent situations of true physical shortages to focus more on what I would call sound redistribution measures that are done well, that are perhaps done ex ante, that are done very transparently. And that can range from the design of long-term support instruments to taxation policy and the like. Turning then finally for the EU more specifically and related to this, I see some opportunity ahead. Namely for the EU to leverage its respective renewable resource endowments and other endowments at scale across the continent. This is a resource sharing model amongst countries which arguably in terms of gas storage, solidarity, or LNG access, solidarity to some extent also touches upon this. However, to make this happen at the hundreds of gigawatt scale, which is the vision of some, some member states will need to be comfortable at being structural exporters and to draw the implications of being so, whilst others will need to be comfortable in becoming structural importers and drawing the implications of being so. This has enormous investment implications in infrastructure, transmission, generation, in rules and in governance. However, in my opinion, most of all, it will require a very significant political investment in anchoring and defending enhanced mutual reliance amongst countries. So I'll close with that. That for me is the key issue facing EU policy makers in the next three to four years outside of tackling the very immediate and legitimate storms. Can we make more shared politics and further mutual reliance work vis-a-vis the national political pressures which may at times bend the other way? Thank you very much. So I think between the presentation and the discussion, it really has been quite a somber 45 minutes, very much a lot of challenges facing us. So I'm sure there's going to be comments or questions from the floor. So let me just get the first question from Beatrice Vader here in the middle of the second row. And then Daniel Gross after us. Thank you very much. That was really very impressive. And of course, you haven't even only touched very lightly on the fact, Christian in particular, on the fact that we are facing a situation in which not only prices, but also quantities are being adjusted in the gas pipelines. We are seeing, I mean, the gas price shock is very well identified. We know it's the war and it's the Russian invasion of the Ukraine, which is causing this. And until now, our sanctions regime has essentially dealt with the hope that gas would keep flowing until we have sufficient capacity. There have always been, at the same time we are seeing, and this was very clearly shown, we are seeing the costs that we are paying ourselves in the forms of higher inflation and possibly soon lower growth. So there have been various calls for dealing with this situation differently by also exercising market power on the receiving end, not only on the supplying end, in the form of some kind of price cap, negotiated schedule, prices, and quantities at the same time. Why are we not seriously contemplating this? Thank you. So next is Daniel Gross here in the third row. Many thanks for these really two excellent presentations. I have two questions relating to the impact of the current high level of prices on supply and demand. The question regarding supply is about US shale, where according to newspaper reports, there has been very little reaction so far. One explanation one reads is because the producers cannot be certain that the prices will remain high. But we have forward prices for oil, right? At least for the duration of a shale oil project. So I don't understand why shale oil is not reacting at the present as we had expected. And the question regarding the impact of high prices on demand concerns gas, where we have a limited supply available, which might be reduced politically, right? But I would like to know, do you have any idea of the medium term, let's say 12 months, 18 months, elasticity of demand for gas? What I have read is around 0.2. But if I multiply the 0.2 with a price increase, which is 200%, I get a very significant reduction in demand. So if I take the European and the Asian market together, at the present price level, there should be enough demand destruction just through the price effect to allow us to do without Russian gas. Is that correct? OK, thank you, Daniel. And let me take an online question over Zoom from Xavier Vieve. So thank you first for the excellent expositions, which were extremely informative. I have two questions related to the green transition or the energy transition. One, more medium brown and the other more short run. We don't have Ukraine. There are several factors that explain this development, as explained, right? But my question is, is there an investment gap in fossil technologies, in fossil transition technologies, for example, gas, due to the way we have defined net zero objectives for 2050, 2040, et cetera, and so on? And if so, if we can quantify it. And the second is more short run. I see, and this is motivated a little bit because of the Iberian exception for the gas input into the wholesale electricity market, that national authorities have the temptation to suppress inflation by decree, right? So it's with price controls. I think that we have history from the 70s, which is not that we see that this is not very effective. So what is your view on that? So and in particular, should we, in Europe, reform the way prices are formed in the wholesale electricity market? Thank you. Thank you. And I think in terms of a time management, I'm just going to see, is there maybe one or two more questions from the floor, and then I'll turn over to the speakers. So Richard, and then if anyone else wants to. So I had a question about a policy reaction that people are talking about to mitigate the inflation effects, and that is removing the taxation on energy. What do you think about that policy? OK, and being taken at diversity of views, I'm not going to turn to the left side of the room, Clare Jones, and Bayard as well. And then we'll close the list. OK. So just very quickly, what do you think are the discussions coming out of the G7 today of an energy price cap? Will it work? Please. Thank you. Just two simple questions. One for Hilda. When you said there should be, in terms of monetary policy, swift action, but at the same time, balanced. So I was just curious when you look at what is currently being proposed, what your judgment would be on whether that's appropriate or not what you read and hear. And for Christian, in terms of you were talking about the storage looking good at the moment. But what would you say is your realistic assumption at the moment how this is going to look a few months from now? And what do you think in terms of the price that we are seeing now, what is being priced in the market for natural gas at the moment? Thank you. OK. Thank you for all of those questions. Let me first turn to Hilda and then to Christian. So Hilda. OK. So thank you for excellent questions. So briefly on the supply and the shale, I think that's an intriguing question. It was you who had an intriguing question in the sense that what we do find in these two studies and also another study which I've seen is that it's not the spot price they are responding to. Obviously, it's the market forward. So it's the future prices we are looking into. And that's what we also find in the study. And it's not, I mean, in all situations, but what we do find is that this increased flexibility in terms of how quickly you can start production. So investment is one decision and how quickly you start production is much, much quicker than what we see. So that allow them to gain from this expectation of increased prices. Then came the oil prices recession in 2014 and then now again. So I think the motivation and the possibility are there. But I think that there are other factors now which is probably preventing them from doing increasing production over and above what they could do immediately. Including, for instance, uncertainty about also one thing is shareholders getting some return relative to uncertainty of investment. So investment going forward is uncertain given that we don't know exactly what the future price will be. And also, in particular, I think this green transition, which was another question. I mean, how much investment in oil do we need? So I think there is a balanced view there. But the possibilities are there. And I think that is more related to the return from shareholders and also uncertainty with regard to the quick transition. All the number of questions about price controls, tax on energy. I don't think those are good ideas. That's a quick answer. I think they did work in the past and I don't think they will work well now. I think also that it will even fuel, I mean, it's politically, it's a popular measure but it will just fuel inflation expectation even more going forward. So I think the way we see it now, I don't think that's a good measure. Price control or caps. The question on swift action versus a balanced approach. So when I say swift actions, I mean now. In August Bank, they set up the interest rate with 0.5 basis point in the U.S. they're done and ECB are planning for that. I think that's a wise decision. Could it be more? Probably not now, it's probably wise to follow the plan but I think that it's important that inflation expectation which are on the rise in the short term do not feed into the medium long term inflation expectations. Going forward, I fear more of a recession and I think that will dampen economic growth even further and I think stock markets will respond very negatively to it. So I think central banks will not be able to increase interest rate as much as they want to. So that's a quick answer. Thank you. Christian? Yes, maybe my few cents on the price capping of oil or oil and gas, either globally or vis-a-vis certain suppliers. It makes intuitive sense to try to capture some of the enormous rents being made so they can be redistributed towards those who are facing the brunt of the impact. I think it will be difficult to do. If they're targeted towards Russia, you will need to make an equation as to whether this will be convincing towards Russia or whether they will perhaps take more extreme measures to the extent that one is not already expecting them. And if it's more globally, I think you will need to split somehow between pipeline-shipped gas and LNG gas because LNG is a competitive global commodity and Asian economies have substantial growth and to the extent we no longer are price competitive, the flexible corgos will go there and not here and probably exacerbate supply. So you need to have that distinction, that I think is difficult to do. You could say you have increased market power over the biggest pipeline suppliers because where else will they go? As it were. But that may hamper the relationship just a tiny bit in a situation where we are actually reaching out to some key pipeline suppliers and seeking goodwill in terms of maintenance schedules and elsewhere. So let's call it political. Maybe on the demand side, indeed, there was roughly 9% industrial demand destruction in the first quarter, slightly less in the subsequent quarter. It is true that the demand side responsiveness of the system, whether it's from electricity or from gas, is subpar compared to where the system needs to move. So that is actually for, shall we say, those working in the energy system, a key issue going forward, which is just brought into start limelight by the current situation, but it was actually also there on the to-do list beforehand. There are certainly options for switching generation, so getting not out of gas for generation, for electricity, but to lower it. We are in not great circumstances just right now. It's a bit of a perfect storm. We have very significant outages on nuclear production, particularly in France, which exacerbates the situation. However, you'll probably see a number of jurisdictions going back to coal for a temporary period of time that has some climate impacts, but I guess security of supply is front and center in terms of weighing that up. Our colleague from Yese Business School has some energy transition oriented questions about investment gaps going forward. That may be the case. It's difficult to judge because whilst currently upstream oil and gas investment is in the aggregate 20% lower than in pre-pandemic times, it is not entirely clear if it's too low. That would be revealed in the future years by the uptake rate of alternative clean supply and demand reductions. But this is sort of the managed transition that policymakers probably need to do more of in the future and not rely, shall we say, on target setting and thinking that target setting will necessarily deliver the result because if they don't, we have these spikes. So this is the tricky one. I was looking at you, but I was looking at the screen. At the Yese Business School colleague. I won't pronounce myself on the Iberian exception. As such, we were not involved in that. You had a question, I think, over here from the US, was it? Yeah, indeed, there are actually the vast majority of member states have enacted, shall we say, supportive measures towards households and to some extent, also towards industry. And it's been this mix of taking taxes away, VAT away. Others have opted for the cash transfer approach whereby you leave the whole thing intact and then you offer up a certain amount of money assuming that there would be the behavioral incentives remaining in place. My impression is that most economists would favor the cash transfer approach as opposed to the tax of VAT approach. I'm sure policymakers know that, yet many of them are opting for a different or complementary route. Finally, there was a question about storage. I would say if there is no Russian gas supply, it would be very difficult to fill gas storages across the EU to the necessary level. Let's just face it. And therefore, I think policymakers will probably move into a different realm where it's less about pricing and more about rationing and having good informed ways to determine who gets what at which time. What that says about pricing in the market actually an interesting phenomenon observed until very recently was that TTF pricing, this is the main reference gas hub in Europe, those prices were actually being lowered after the Russian invasion. They rose significantly after the invasion of Ukraine by Russia and then they were tentatively lowered to still very high levels but they were lowered, which would indicate that market participants were living more with the uncertainty but then comes a new shock announcement which kicks up the TTF price again, not least the one about very significant decrease in Nord Stream 1 pipeline supplies. So what to make of it, I think that the market participants are facing a lot of uncertainty. They're getting increasingly good at pricing it in but once you see the effects of that, it seems that something new happens. There seems to be a high correlation between that effect and a new announcement coming from the East. Very good, I think we've had a very informative session. So let me thank again the two speakers. The next session, the panel on digital currency is scheduled to be start at 12. So let's take a 20 minute break more or less and come back at 12 o'clock. So thank you very much, thank you.