 The last two years have been turbulent for energy markets. A chain of factors pushed up the price of fossil fuels, triggering a global energy crisis. And this made waves through almost all aspects of our economies. Recently, prices have started to come back down, but the shock has left its mark. You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. I'm here in Cintra, Portugal, at the ECB Forum on Central Banking. Every year, policymakers and academics from all over the world meet here to discuss what is shaping our economies. One of the talks focused on structural changes in energy markets and what these mean for inflation. And that's what we'll be discussing here today. What's changing in energy markets? And what do these changes mean for our economies and for our work as central banks? I'm very pleased to be joined today by central bank governor Ida Voldenbakker from a country that is crucial to the world's energy supply, Norway. Ida, welcome to the ECB podcast. Well, thank you. It's very nice to be here. Now, energy markets have seen significant change over the past years, especially in the wake of the coronavirus pandemic, as supply bottlenecks and increased demand really pushed up energy prices. In 2022, Russia's invasion of Ukraine caused a big shock across Europe's economies, aggravating these changes and further increasing prices. And at the same time of all this, countries are striving to make their economies greener to combat climate change. So that's a lot that's been happening recently, Ida. What has this multitude of shocks meant for the shape of energy markets? What kind of changes have we been seeing? Well, as you say, the energy markets are indeed undergoing rapid changes shaped by pandemic, Russia's invasion of Ukraine, and not least the necessary green transition. And while the transition will yield benefits over the long term, the transition need not be seamless. And we've seen over the past year that mismatches of demand have caused fluctuations in energy prices as clean energy is not being built fast enough to as, while fossil fuels are being phased out. And I think also going forward, although it's very difficult to predict the level of energy prices or the evolution of energy markets over the coming years, that will be affected by technological development, the supply of raw materials and minerals, as well as public policies related both to climate but also to energy security. I think we must prepare, though, for a larger volatility of energy prices and perhaps also more persistent and long-lasting changes in energy prices. And that could, again, challenge central banks. And what struck me in your panel discussions this morning about the changes in energy markets was just how many factors are shaping the energy markets and affecting prices as well and also in how many directions we need to be looking. Because, of course, what happens in energy markets ultimately feeds its way through the system to you and I, the consumers. Most obviously in the price that we pay for fuel and for heating, but it also can have more far-reaching implications on things like the kind of transport we use or how we heat our homes. These structural changes that you were just discussing, how do they impact our daily lives concretely? What have we seen there? I think the most obvious effect, as you alluded to, was the effects that we've seen over the past year in the sharp rise in our energy bills, which affecting families and also firms have passed these cost changes onto their output prices, being a main contributor behind the surge in inflation that we've seen over the past year. And that has had a large impact on many people's lives over the past year. But also, as you say, our economies are undergoing a huge transition. And in Norway, you will at least see now the majority of new cars being sold are electric cars. And you can also see different measures being taken to improve the energy efficiency of both households and firms. I want to zoom in actually now on Norway. The country is one of the world's largest exporters of oil, and it's pivotal to Europe's energy markets, having now replaced Russia as Europe's main supplier of gas. You also mentioned, I think, in your panel this morning, that Norway has also become a flexible supplier of hydroelectric power. So it's really pivotal to Europe's energy markets. All these changes that we've been talking about, how have they affected Norway specifically? So our electricity consumption is mainly covered by hydro power. And we are part of the European energy market. So in fact, Norwegian consumers of electricity experienced the same kind of search in their energy bills as their European counterparts last year. So that has been felt by both households and firms in Norway. But yes, Norway is a large exporter of oil and of natural gas. And natural gas has increased in importance over the past decade. And so as a response to Russia's invasion of Ukraine, we've ramped up our production of natural gas and increased the supply of gas to Europe. And I think the close cooperation with Europe reflects our common interest in well-functioning energy markets in the transition to net zero. And there's also a lot of cooperation in the area of other renewable energy sources. As regards the effects on the Norwegian economy, obviously the high natural gas prices generate large revenues for the oil companies. But a large part of those revenues accrue to the government. And those revenues are again to a large extent transferred to our sovereign wealth fund, the government pension fund global. So in that sense, although it does generate activity in the Norwegian economy, it's in part insulated from short-run fluctuations in energy prices and has over some time. So a large part of the petroleum wealth has been transformed into financial wealth in our sovereign wealth fund. Okay. That would be, I can assume, important as you move away from petroleum. Absolutely. Because in the years to come, the petroleum sector's significance to the Norwegian economy will likely decline as the resources on the continental shelf are depleted. And substantial investment and also reallocation of resources across firms and sectors will likely be needed. But along that path, the green transition can actually be a catalyst. And we're seeing now that the technologies that have been used in petroleum, in the petroleum sector are now a springboard for new jobs in the green sector. I want to look forward a little bit now. And I mean, I mentioned at the beginning, the energy prices are going back down. But the shock and the shifts that it is causing energy markets will be felt for a long time. And with no end in sight at the moment to Russia's war in Ukraine, uncertainties very much remain in the global energy situation. We also heard on your panel this morning just how difficult it is to predict in what way things will go. And a couple of points stood out for me in particular. Number one, the fact that we're on this global shift to net zero with high investment in renewables. But at the same time, demand for gas and coal is still at very high levels. So it's almost like they're going, they're moving in different directions. And then the other one was the fact that as the use of renewables like solar and wind power increases, the weather will play a much bigger role. And of course, predicting the weather beyond short time frames is incredibly tough. So if we look to the future, how, you already mentioned a couple of ways, but how can we make our economies more resilient to shocks and changes of this kind? Yeah, that is a complex issue. As you say, the transition is itself complex. And there's a lot of uncertainty surrounding the future evolution of the energy system and the transition itself, obviously. It's also a big question. And I guess for political authorities and fiscal authorities mainly to address. But to say a few words about how we as central banks can, what our role would be, I'd first like to say that we too need to deepen our understanding of energy markets. It's not just one energy market. There are multiple markets and they interact in complex ways. So we need to get those into our models to improve our forecasting framework and be able to understand the sources driving the fluctuations. At the same time, we should be prepared for prices to be more volatile and perhaps more persistent. And that could offer more challenging trade-offs for central banks. As on the one hand, if changes are more persistent, then spillover and second round effects to other prices and wages might be amplified. And if we fail to respond to that, we could risk inflation overshooting our targets and inflation expectations becoming de-anchored, which would also not be helpful for the transition going forward. On the other hand, if we wrongly interpret temporary changes as more persistent, we could in fact incur output losses and inflation volatility could increase. So those are challenging trade-offs that the central bank will have to face. And I think having a sufficiently forward-looking approach, but with the eyes fixed on anchoring inflation expectations and our inflation targets will be a good starting point. Very good. Well, thank you, Iida, for coming and joining the conversation and providing these insights on this super interesting topic. Now, before we wrap up, we always have a question that we ask all our guests on the podcast, and that is for a hot tip linked to the topic we're discussing today. So broadly speaking, energy markets, energy crisis changes in energy. Have you thought of something to inspire our listeners? Well, I have thought about that, and I must admit that as a central banker of the past year, I've been quite busy. So I haven't been reading a lot of books or watching films for that matter. But now going into the holiday season, I'm looking forward to reading up, among other things, the energy market. And one book that I have on my list is Daniel Jörgens, The New Map, Energy, Climate and the Clash of Nations that comes highly recommended, so I look forward to that. Brilliant. Well, that sounds super interesting and also super timely. The New Map, Energy, Climate and the Clash of Nations, maybe one for my summer reading as well. I want to thank you so much again, Iida, for joining the conversation and providing your insights today. Thank you for inviting me. Well, that brings us to the end of this episode. Listeners, be sure to check out the show notes for more on this topic. We'll also be sure to add a link to the full panel discussion on energy markets from the ECB Forum on Central Banking in case you missed it. You've been listening to the ECB podcast with Katie Ranger. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening.