by Raymond J. Keating –
Things have gotten very uncomfortable on the inflation front – especially since the start of 2021. Over the past year, inflation (as measured by the Consumer Price Index) ran at 5.4 percent. Businesses are struggling with rising input costs, and consumers obviously are getting hit in the pocketbook by higher prices. But things could get worse.
As noted in the latest CPI report, energy costs are skyrocketing. Over the past 12 months, energy prices index jumped by 24.8 percent, including the gasoline index up by 42.1 percent, fuel oil by 42.6 percent, and natural gas by 20.6 percent.
The debate rages over how much of the overall inflation story comes from transitory issues, that is, due to the struggles industries and businesses face as we emerge from the pandemic (e.g., supply chain problems and labor shortages), and how much is due to broader, deeper and more permanent inflationary matters, such as the Fed’s loose monetary policy finally coming home to roost.
But there’s more to consider as we look ahead.
Intrusive, Anti-Investment Policies
Other policies inflicted by government have come into play. For example, proposed increases in corporate income, personal income and capital gains taxes, as favored by President Biden and Democrats in Congress, would generate negatives for the economy in terms of reducing both resources and incentives for entrepreneurship, investment and work. But it is exactly those undertakings that grow the economy and help to relieve pressures on prices by generating increased output, more innovation and productivity gains.
Now, consider what’s been happening on the energy front.
The Biden administration, this Congress and many state lawmakers have been aggressive in opposing fossil fuels. The Biden energy agenda is completely focused on raising the costs of investments in and production of oil, natural gas and coal, while pushing subsidies for the politically preferred energy agenda focused on advancing wind, solar and electric cars, for example. Investments in pipelines, and in expanded oil and natural gas production are aggressively opposed by politicians (largely Democrats), the environmental movement, and green investors.
And this political mantra has become so vocal, unrelenting and ubiquitous, that the only real question is: How much damage is being done to U.S. (as well as European, of course) investments in oil, natural gas and coal production and innovations?
We know that the harm has been deep on the coal front, but it may not be fully clear as to the degree of negatives for oil and natural gas until we’re clear of the pandemic. But make no mistake, it has been unequivocally negative.
Ignoring the Costs and Consequences
Unsurprisingly, as is the case with most political agendas of this nature, no serious consideration is being given to the enormous costs involved – including making U.S. entrepreneurs, small businesses, large firms and workers uncompetitive in the global economy – in such a government-guided energy agenda now and in the longer run.
Indeed, the consumer, who in the free enterprise system serves as final judge and jury on goods and services brought to the market, is being muscled aside by politicians and the green movement.
Economics 101 and history make clear that when government overrules or supplants consumers as the ultimate decision-makers, it never turns out well. Misallocation of resources, inefficiency and waste reign under such scenarios. It will be no different this time, and the potential ills of a government-guided energy industry could be devastating for U.S. entrepreneurs, businesses, workers, consumers, and our economy.
The recent bout with inflation likely will be just a flavor of what looms on the horizon – unless U.S. policymakers wise up and get refocused on reducing costs and enhancing incentives for entrepreneurship and investment across our economy, including in the vital energy sector.
In the end, like other markets, energy works best when entrepreneurs, businesses and investors are left to compete in service of consumers. Without government interference, such as by refraining from actively taxing and regulating certain energy sources while subsidizing others, real innovation can flourish.
We have seen this, for example, with the advancements in hydraulic fracturing and horizontal drilling over the past near-two-decades (amazingly even in the face of hostility from government at times), which have opened up previous inaccessible oil and natural gas resources to competitive production.
As for wind and solar, these undertakings should not be subsidized, but instead, tested in the marketplace, and when and if subsidy-free solar and wind production rivals oil and natural gas, for example, then consumers and the economy will benefit accordingly. The key is for entrepreneurship and private investment, not politics and government subsidies, to flourish in the energy industry, and across the rest of the U.S. economy.