In This Energy Crisis, What’s Stocking Up? What’s Hoarding?

https://www.nytimes.com/2022/08/31/opinion/europe-energy.html

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There are two things you don’t want to do when there’s an energy crisis. One is to suppress prices, which makes the shortage of energy even worse because consumers have less incentive to conserve and producers have less incentive to produce. The other is to hoard the limited supply of energy so you have plenty but others are left dry. Unfortunately, we’re seeing signs of both behaviors, in capitals ranging from Athens to Oslo and Washington, D.C.

The emerging energy crisis that’s centered in Europe would be bad enough even if policy were perfect. Vladimir Putin’s Russia is restricting the supply of natural gas, apparently to punish Europe for supporting Ukraine against Putin’s invasion and for aiming to wean itself off Russian gas in the long run. A prolonged drought in Europe has reduced the supply of hydroelectric power, forced nuclear plants to cut back for lack of cooling water and reduced the traffic of barges carrying coal. Several French nuclear plants are down for maintenance and repairs. Germany’s last remaining nuclear plants are scheduled to be decommissioned at the end of this year.

How bad is it? Daniel Yergin, a longtime energy expert, pointed out to me that natural gas in Europe briefly got so expensive earlier this month that if oil were as expensive in terms of the cost per unit of energy content it would have cost more than $560 a barrel. (And people consider $100 a barrel high.) “That’s an eye-popping number,” said Yergin, who is vice chairman of S&P Global and the author, most recently, of “The New Map: Energy, Climate and the Clash of Nations.”

Bad energy policy makes everything worse, though. The Greek government is so intent on insulating its citizens from high energy prices that it’s devoting more than 3 percent of the nation’s gross domestic product to subsidies, according to data from the International Monetary Fund (see Chart 14-b here). France, Italy and Spain, which matter more because they’re bigger, are devoting about 1 percent of gross domestic product to “measures that impede price pass-through,” per the I.M.F. Suppressing the price of fuel helps even people who don’t need help (the rich), exacerbates shortages and tends to continue long after a crisis is over because people don’t want to give up their subsidies.

Allowing markets to work doesn’t mean abandoning consumers. As my colleague Paul Krugman wrote on Tuesday, “sometimes there are good social reasons not to let markets rip.” Even the I.M.F. says that “temporary measures that suppress price increases could be an acceptable response to a short-lived shock in countries with ample fiscal space.” But as much as possible the aid should be directed to those who need it most, those who aren’t wealthy and thus spend a bigger share of their income on gasoline, natural gas and electricity. It’s better if it’s not tied to how much energy people consume, thus preserving some incentive to economize, although in practice that can be inordinately hard on those with lower income levels who also happen to consume a lot of energy.

Hoarding when supplies are scarce is human nature, whether it’s energy or food or toilet paper, as I’ve written. But that doesn’t make it OK. Norway ordinarily ships about one-fifth of its electricity output abroad but is considering suspending those exports to allow the reservoirs behind its hydropower plants to refill. That would be a disaster for the rest of Europe, which is coping with record energy prices. The United Kingdom has come to the continent’s rescue by shipping electricity via cable under the English Channel but is facing some pushback from hard-pressed Brits.

Then there’s Energy Secretary Jennifer Granholm, who wrote a letter to BP America, Chevron, Exxon Mobil, Marathon Petroleum, Phillips 66, Shell and Valero on Aug. 18 asking them not to export more gasoline and diesel fuel, citing tight supplies on the East Coast. “Given the historic level of U.S. refined product exports, I again urge you to focus in the near term on building inventories in the United States, rather than selling down current stocks and further increasing exports,” she wrote. Granholm is right to care about making sure there’s enough fuel domestically, but Europe’s crisis has to be weighed in the balance. President Biden expressed more solidarity in April when he said the United States would “strive” to increase the availability of liquefied natural gas in Europe.

It’s not all bad news, though. One big improvement from the energy crises of yore is deregulation that allows energy supplies to get to those who most need them. The German chemical giant BASF, for instance, is planning on cutting back on ammonia production. Philip Verleger, an energy economist who runs a consulting firm in Denver, says it will likely sell the natural gas it no longer needs (at a profit) for use in heating homes, offices and hospitals. (A BASF spokesman declined to comment on whether the company was selling gas back to the market.) Large-scale liquefaction allows natural gas to be shipped across oceans, relieving shortages. And governments have been more active in securing supplies in anticipation of trouble ahead.

In fact, European governments have worked so hard to secure natural gas supplies before winter sets in that they have moved the pain forward in time, to right now. If Europe falls into a recession before the end of the year, today’s high fuel prices, by whacking both consumers and businesses, will be among the causes. That will reduce energy consumption. A potential result is that prices could be lower this winter than they are now. “The story keeps changing,” Verleger said. “It’s quite possible that the energy situation will not be so bad this winter in part because the economy’s going to slump pretty badly.”

You might have noticed a contradiction in this newsletter. I started out condemning hoarding and finished up by praising governments for building stockpiles. You could argue that those are the same thing, just with different labels. I asked both Yergin and Verleger — wily veterans of the energy market — whether there’s a difference between hoarding (bad) and stockpiling (good).

They did see a difference. Verleger, who has a doctorate in economics and is a senior fellow at the Niskanen Center think tank, said stockpiling is securing supplies to fill a predictable need, while hoarding is grabbing more than needed out of panic or to speculate for profit. He admitted that sometimes there’s a “fuzzy gray” area in between. Yergin made a similar distinction. “This is a really tough time for political leaders,” he said. “There are pressures of the war and economic pressures at home and it’s hard to find a balance.”

Be smart this Friday when the jobs report for August comes out and take a look at the household survey’s employment figure. As the chart above shows, job growth as measured by the household survey has been weaker and less steady recently than job growth as measured by the establishment survey.

Remember, the monthly report from the Bureau of Labor Statistics is built from two surveys. The household survey is used to calculate the unemployment rate. The survey of establishments is used to calculate the number of jobs added or lost. Through July the payroll figures in the establishment survey have been strong, perhaps counterintuitively, considering signs of weakness elsewhere, such as in G.D.P., which declined in the first two quarters of the year. In contrast, employment as measured by the household survey was lower in July than in March. (Then again, it could have rebounded in August.)

The widely watched establishment survey “is notoriously late in catching recessions,” David Rosenberg, the founder and president of Rosenberg Research & Associates in Toronto, wrote in a note to clients on Aug. 23. “The household survey is the one that provides the more accurate signal at turning points in the business cycle.”

“Our sense is that the best economics is frequently the least strident. The world is a sufficiently complicated and uncertain place that the most valuable thing economists have to share is often not their conclusion, but the path they took to reach it — the facts they knew, the way they interpreted those facts, the deductive steps they took, the remaining sources of their uncertainty.”

— Abhijit V. Banerjee and Esther Duflo, “Good Economics for Hard Times” (2019)

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