“We need to declare a national crisis,” Andrew N. Liveris, the chief executive of the Dow Chemical Company, said in recent testimony before the Senate. Dow, the nation’s largest chemical maker, has shut 23 plants in the United States in the last three years in places like Somerset, N.J.; South Charleston, W.Va.; and Elizabethtown, Ky., as it shifted production to Kuwait, Argentina, Malaysia and Germany, where natural gas is cheaper.–Link to New York Times story
Whenever I read something like that from an industry exec my first instinct is to grab onto my wallet. The problem is, in my view an fundamental misunderstanding of economics and markets. For example, after looking at a litany of proposals to “deal with the problem”, the author of the article writes,
Some of these projects might eventually materialize, but none quickly enough to bring natural gas prices down substantially before this winter. Still, the proposals are part of a major push by the energy industry to raise imports and overturn decades of environmental limits on domestic exploration.
Brilliant, except for one small detail. To the extent that natural gas is a world wide market, these programs would have little impact on the world wide price for the most part. And even if the U.S. prices are higher, then the idea of subsidizing an industry whose prices are increasing is just nonsense. Profits are usually an increasing function of price. Hence, it would be like subsidizing a fat person’s potato chip consumption–i.e. stupid. However, getting the government out of the way to the extent of allowing for more drilling, more imports, and not building new import terminals on the coast of Louisiana and Texas for crying outloud would be a good place to start. Further, they’d be cheap in that we wouldn’t have to spend billions subsidizing companies that are already posting record profits.
One could argue that places like Canada and the Middle East could produce more natural gas. That’s fine, but the current prices are not just a function of what is out of the ground now, but how much can be produced, and how much is also estimated to be in the ground. And anything that reduces the price of natural gas will only reduce the incentive to produce natural gas.
And don’t be misled by statements such as this,
The hurricanes made a bad situation worse. The American Chemistry Council estimates that 100,000 jobs at companies that rely largely on natural gas have been lost since prices for the fuel began climbing in 2000. Chemical companies have been particularly outspoken in calls for the Bush administration and Congress to focus on curbing consumption and repairing energy infrastructure in the Gulf of Mexico.
Sure, 100,000 sounds like alot of jobs. However, that is not even a noticable blip when spread over several months in an economy with well over 1,500 times as many worker. Calling something like this an emergency requires that we re-define the word emergency to mean a rainy day or traffic congestion. And with prices already high and profits rising very fast, there is no need for the government to step in and do more to repair the energy infrastructure damaged in the Gulf. Those companies want that infrastructure repaired as soon as possible to take advantage of the high prices. And given that their competitors are thinking precisely the same thing, getting the government involved is just a way for these companies to get consumers to subsidize the repairs.
So what will the “national emergency” likely mean? More subsidies for energy companies and either higher taxes today or in the future. Personally, I say let the prices rise and let the alternatives become relatively more attractive in terms of price. For example, if the price of natural gas stays high, then generating plants like the one at Mohave may stay in operation. Sure, such a policy will be painful in that it will raise cost for electricity and heating homes, but one thing to keep in mind, in economics there is never a free lunch. The idea of lowering prices and increasing supply just tend not to work together.1 If there is one lesson that we should have learned from the oil crises is that when the government gets involved it usually screws things up royally.
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1The only thing that could result in increased supply and lower prices is if there is a downward shift in the cost function for all firms producing the good in question. One could argue that a subsidy would achieve this, but all we’d be doing is paying higher taxes (along with the deadweight loss inefficiency) to get the lower prices, probably not a good exchange.
