Long-term energy considerations impact current prices
Prices recently hit their highest levels since 2014 for crude oil and 2008 for natural gas.
These increases could ease producers facing existential challenges during the COVID-19 recession of 2020, but could also hurt consumers and send ineffective price signals for the energy transition.
We are all under pressure on consumer prices. Almost everything a typical American household buys has become more expensive, as consumer price inflation has increased at its fastest rate in the first nine months of 2021 since 1990, according to the Bureau of Labor Statistics ( BLS). Although energy is only 7.3 percent of the typical basket of goods measured by the BLS, it has historically influenced the prices of virtually everything.
And now, labor and supply chain challenges have contributed to additional upward pressures on wages, housing and many other assets which, when they decline, tend to fall. be “clingy” and drop relatively slowly. By the way, the 6.2% year-on-year price inflation in October pushed up costs by $ 317 per month for a median household (with total spending of $ 61,334 in 2020, per BLS). This is important in itself and seems even more important because households are expected to spend more over the next few months on winter fuels, according to the EIA.
This is the potential short term horizon, and as economists we often say that the long term is made up of many shorts.
What appear to be long-term considerations for the energy transition could have real impacts on investment, production and therefore consumer prices today. For example, FERC President Richard Glick referred to the “power transition” in his opening address to the American Association for Energy Economics’ annual conference, boldly asserting: ” We know where the future is headed. The Biden administration has suggested that nearly half of America’s electricity could come from solar by 2050.
To be clear, this is the government’s heavy hand tilting the proverbial ladder of competing technologies in the electricity sector, bewildered by the administration’s resistance to pipeline infrastructure and access to resources on federal lands, as well as a demonstrated preference for reliance on proprietary technologies and foreign components and resources.
Collectively, the COVID-19 recession of 2020 has taught a few lessons:
- Economic demand and energy demand continued to go hand in hand. We’ve seen it during the recession, and it’s just as clear in the rebound so far, as the world’s energy systems require a great deal of energy, including energy-dense heat sources that are available when ‘they are necessary. Changes in the energy mix are inevitable over time, but a lack of pragmatism about the cost and pace of change could compromise the ability of households to make ends meet.
- Reducing emissions through economic contraction is neither sustainable nor desirable. US energy policies – like the proposed methane levy and the Clean Electricity Performance Program – risk increasing costs and limiting the role of US natural gas in further emission reductions. This is especially true in the electricity sector, where carbon dioxide emissions are at their lowest level in a generation, in large part due to natural gas replacing coal.
These risks – to consumers, businesses and public finances – could be like a sledgehammer on the thumb the administration has placed to tip the scales.
While it may appear that governments are grappling with economic malaise, the money is not free. There are problems that money can solve, and others – like the development and diffusion of technology into world markets – that require effective price signals to produce rational results.
Imposing an economy-wide positive price on carbon dioxide emissions, for example, could help this process and motivate investment in new technologies, while keeping the pulse of consumers and businesses alike. Americans alive.
But with this approach, the Biden administration would not be able to determine the winners and the losers. After all, Glick said they know where the markets are heading.
For more information, visit www.api.org or contact Dr. Foreman at [email protected] or (202) 682-8530.