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Power disaster fuels inflation, financial restoration feared

© Reuters. FILE PHOTO: A coal-fired power plant can be seen in the city of Baotou in China's Inner Mongolia Autonomous Region, October 31, 2010. REUTERS / David Gray

By Muyu Xu and Shivani Singh

BEIJING (Reuters) – Authorities from Beijing to Chennai attempted to fill a yawning power supply gap on Tuesday, sparking global equity and bond markets fearful that rising energy costs will fuel inflation and slow economic recovery.

Electricity prices have soared to record highs in recent weeks, fueled by energy shortages in Asia, Europe and the United States, with an energy crisis in China expected to last through the end of the year and dampen economic growth.

And the impact of supply constraints on power and manufacturing components is showing up in data, adding to concern.

A sell-off in global stocks and bonds lasted through Tuesday, sending short-term US Treasury bond yields to 18-month highs while global stocks fell for a third straight day on fears that energy prices would dampen economic growth.

Tuesday data showed Japan's wholesale inflation hit a 13-year high last month, while UK buyers cut spending and China saw auto sales decline 20%.

In its most recent attempt to tackle the crisis, China said it would further liberalize coal electricity prices, forcing industrial and commercial consumers to buy from the market.

A widening power shortage has forced production throttles across China in industries such as cement, steel and aluminum as electricity producers unable to pay for coal throttle production. Utilities have not been able to keep up with demand after the pandemic.

In India, the Department of Energy warned that federal electricity producers would cut back supplies to them if their utilities sell electricity on exchanges to take advantage of rising prices.

Asia's third largest economy faces major failures as several power plants have low coal supplies due to the sharp rise in global energy prices.

The ministry said it had instructed electricity companies to increase supplies to the capital Delhi, whose prime minister warned of a possible electricity crisis on Saturday.

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Oil rose towards $ 84 a barrel on Tuesday, in sight of a three-year high, as a rebound in global demand from the COVID-19 pandemic spiked prices and bottlenecks in other energy sources. Coal has reached record highs and gas prices in Europe are still four times higher than they were at the beginning of 2021.

To meet recovering demand, OPEC +, which includes the Organization of Petroleum Exporting Countries and other Russian-led oil producers, is increasing production on a monthly basis as it lifts restrictions put in place to support prices and oversupply.

The price of oil has soared more than 60% this year, aided by OPEC + supply restrictions as well as record gas prices in Europe, which have encouraged a switch to oil in some places.

Brent crude rose 24 cents, or 0.3%, to $ 83.89 a barrel at 0810 GMT. It hit $ 84.60 on Monday, its highest level since October 2018. U.S. oil surged 21 cents, or 0.3%, to $ 80.73 and hit $ 82.18 on Monday, its highest level since late 2014.

The sharp increase has resulted in OPEC + coming under pressure from consumer countries. A US official said Monday the White House stood by its demands that oil-producing countries “do more” to ease the situation.

In France, President Emmanuel Macron said Tuesday the country aims to be a green hydrogen leader by 2030, building new, smaller nuclear reactors as part of a € 30 billion ($ 35 billion) investment plan.

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