Prices recently struck their highest levels since 2014 for crude oil and 2008 for natural gas.
These increases could relieve producers that faced existential challenges during the 2020 COVID-19 recession, but could also harm consumers and send inefficient price signals for the energy transition.
We all experience consumer price pressures. Almost everything that a typical U.S. household buys has become more expensive, as broad consumer price inflation rose at its fastest pace over the first nine months of 2021 since 1990, according to the Bureau of Labor Statistics (BLS). Although energy represented only 7.3 percent of the typical basket of goods that BLS measures, it has historically influenced the prices of virtually everything.
And now workforce and supply chain-related challenges have contributed additional upward price pressures on wages, housing and many other goods that, when they do fall in price, tend to be "sticky" and come down relatively slowly. By the numbers, price inflation of 6.2 percent year-over-year in October has meant $317 per month in increased costs for a median household (with total expenditures of $61,334 in 2020, per BLS). That's significant by itself and looms even larger because households are projected to spend more in the coming months for winter fuels, according to EIA.
This is the potential short-term horizon, and as economists, we often say that the long-run is made up of many short-runs.
What appears to be long-run considerations for the energy transition could have real impacts on investment, production and, thus, consumer prices today. For example, FERC Chairman Richard Glick referred to the "electricity transition" in his keynote at the U.S. Association for Energy Economics' annual conference, boldly asserting, "We know where the future is headed." The Biden administration has suggested that nearly half of U.S. electricity could stem from solar by 2050.
To be clear, this is the heavy hand of government tipping the proverbial scale of technologies that compete head-to-head in the power sector, confounded by the administration's resistance to pipeline infrastructure and resource access on federal lands, as well as a revealed preference for a dependence on proprietary technologies and foreign components and resources.
Collectively, the 2020 COVID-19 recession taught a couple of lessons:
- Economic and energy demand have continued to go hand in hand. We saw this during the downturn, and it's equally clear in the rebound so far because global energy systems require a massive scale of energy, including energy-dense thermal sources that are available when they are needed. Changes to the energy mix are inevitable over time, but a lack of pragmatism about the cost and pace of changes could risk households' ability to make ends meet.
- Lowering emissions through an economic contraction is neither sustainable nor desirable. U.S. energy policies - like the proposed methane fee and the Clean Electricity Performance Program - risk increasing costs and limiting the role of U.S. natural gas in continuing to drive emissions reductions. This is especially true in the power sector, where carbon dioxide emissions are at their lowest levels in a generation largely because of natural gas displacing coal.
These risks - to consumers, businesses and public finances - could be like a hammer hitting the thumb that the administration has placed to tip the scales.
Although it may have seemed like governments addressed the economic malaise, money is not free. There are problems that money can solve, and others - like the development and diffusion of technologies across global markets - that require efficient price signals to bring about rational outcomes.
Imposing a positive, economy-wide price on carbon dioxide emissions, for example, could help this process and motivate investments in new technologies, while keeping the pulse of American consumers and businesses alive.
But with this approach, the Biden administration would not be able to determine winners and losers. After all, Glick said that they know where markets are headed.
For more information, visit www.api.org, or contact Dr. Foreman at ForemanR@api.org or (202) 682-8530.
