The Fundamental Interconnectedness of Energy Prices

Energy is Fungible—And That Matters More Than You Think

Some things are fungible. Others are not.

Fungibility refers to the ability to swap one unit of a good for another identical unit without loss of value. Money is fungible—one dollar is the same as any other dollar. A painting by Van Gogh? Not fungible. You can trade it for an equally expensive Lucian Freud, but you’re not getting the same experience.

Energy, though? Energy is surprisingly fungible.

And that means the prices of different energy sources—electricity, natural gas, oil, coal—are highly correlated. It doesn’t matter where your energy comes from; its price is likely to move in lockstep with energy prices elsewhere.

Take Germany in 2021. Around 55% of its natural gas came from Russia. Meanwhile, the UK imported just 4% of its gas from Russia (entirely as LNG cargoes).

So, when Russia cut off gas to Germany after invading Ukraine, you’d think Germany’s energy prices would skyrocket while the UK remained relatively unaffected.

But that’s not what happened.

In reality, energy prices spiked almost identically in both places, with electricity prices soaring from ~$65/MWh to over $250/MWh. And this wasn’t just a European phenomenon.

Australia—geographically and economically detached from the crisis—saw the same massive jump in electricity prices in 2022.

You see… energy is fungible.

When natural gas prices spike in one region, coal-fired power plants elsewhere suddenly become more competitive. That triggers a rush to buy coal, pushing up coal prices. And since energy markets are deeply interconnected, price shocks ripple across the entire system.

This is why energy demand is, in the short term, highly price inelastic. People still need to keep the lights on. Which is also why government attempts to “soften the blow” through subsidies were misguided. You can’t subsidize your way out of a supply shock—world energy demand still has to match world energy supply. Subsidies don’t create more energy; they just delay the necessary demand reduction.

So, How Do You Protect Yourself?

Well, the smart answer is—you don’t.

Energy autarky (self-sufficiency) is a costly illusion. If a country could produce energy at globally competitive prices, it would already be doing so. Attempting to insulate yourself from global markets means locking in structurally higher costs for businesses and consumers.

There’s a reason the world’s richest places—small nations, city-states—don’t bother with grand energy independence plans. They can’t afford to. Instead, they rely on open markets, accepting short-term price volatility in exchange for long-term efficiency.

Energy resilience sounds good in theory, but in practice, it often means paying above-market prices indefinitely.

And that’s not a good long-term strategy.