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Price caps

Many markets are global. A price cap imposes a maximum price a futures contract can trade in a trading session. If the price exceeds that cap, the market is halted.

Calls to implement price caps on energy markets would not provide a solution to high prices.

Prices reflect economic fundamentals of supply and demand. Price caps prevent the market from finding a price by providing an artificial ceiling. As a result, there can be unpredictable and undesirable knock-on effects.

As an exchange, ICE’s role is not to judge whether a price is too high or too low but whether it is representative. We operate and supervise the trading platforms which let buyers and sellers decide what the price of a commodity should be.

Oil and gas markets are critical because they provide the input price for most energy production and hence most economic activity. From the price of oil and gas comes the price of petrol and electricity, for instance.

Gas, power and carbon markets are intricately linked - impacting one, impacts the other. To create a spark spread for example, which is how the profitability of a natural gas fired generator can be assessed by calculating the difference between the input costs and the wholesale prices, a power producer will typically buy gas (or coal) to generate power and will buy carbon positions to hedge their resulting emission costs.

Energy and related markets are also significantly subject to substitution economics, sometimes with unexpected results. When the price of natural gas rises, for example, petrochemicals producers may switch to processing naphtha instead. This increase in marginal naphtha demand will influence in turn the prices of gasoline, of jet fuel and of naphtha-rich crude oil.

In cotton and frozen orange juice, you don’t see this structure of other markets pricing off them, allowing price caps to be relatively contained to that single asset.

For governments seeking access to gas to meet the energy needs of their populations, price caps could oblige sellers of gas to direct it to other markets, exacerbating the lack of supply.

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