As the year winds down, politicians globally are facing some difficult
choices. Those US politicians currently face are well known: Whether to
extend the current tax rates or not and for whom; which spending
programs to pare back and which to continue fully funding; whether to
increase the debt ceiling yet again; and so on. In Europe, officials
face still-lingering questions of how best to organize and run the
monetary union and how to help those countries still struggling to
regain their footing. And, apparently, whether or not to continue
subsidies aimed at alternative energy sources—namely, wind power.
Interestingly, the Europeans' answer to this question has implications
beyond their own borders, particularly in an era of a relative boom in
US natural gas production. Think about this combination of events or
Countries are generally looking to scale back government spending.
Those who've pursued promoting alternative energy sources through subsidies are largely finding those allocations of funds overall inefficient,
given wind and solar power (among others) remain quite expensive
relative to conventional energy sources (and that's even before
factoring in a natural gas boom).
The US is producing natural gas at a clip that's resulted in prices at or near decade lows.
By and large, the US currently doesn't have sufficient infrastructure
to export natural gas in significant amounts—meaning for the time being,
those cheap natural gas prices are effectively limited to the US and
don't apply to Europe.
As a result, some European companies are considering building plants
or finding other ways to relocate portions of production to the
US—particularly those that are generally more energy-intensive.
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An interesting confluence of events that creates some confusion as to the best way forward. Some advocate
finding a way to effectively force alternative energy to make economic
sense—most often through something like a carbon tax. On its face, not
so terrible an idea and one potentially rooted in some economics to the
extent that overall, if you tax something, you generally get less of it.
So if you want lower carbon emissions, tax carbon use! Trouble is,
though, taxing carbon emissions doesn't guarantee alternative energy
sources become more economically efficient. Meaning it doesn't
necessarily spur producers to switch from carbon to wind or solar—it
just increases their operating costs. And in many cases, producers with
sufficient pricing power (meaning their customers need the final product
enough that they'll pay a higher price) will pass those increased input
costs right along to consumers. So at the end of the day, solar or wind
are still expensive, conventional energy sources are more expensive
than they otherwise would've been and consumers pay higher prices for
goods, making them economically worse off over time. All told, it's a
net economic loss for society as a whole.
Another common response (predominantly from US politicians)
is to attempt to restrict US natural gas exports—the thinking being US
consumers and producers are the primary beneficiaries of currently low
prices, so why "share" those with the rest of the world? The problem
with that argument, though, as we argued more fully here,
is it actually has the opposite of the intended impact, actually
potentially goosing domestic prices higher over time, not lower.
Taken all together, an interesting set of circumstances, and one worthy
of watching over the coming months and years. Given the relative
interconnectedness of the various issues, one has to hope politicians
recognize the potential for unintended consequences if they enact
onerous measures that amount to an over-reaction. On the other hand,
maybe they realize the potential benefit to be had if they, to the
extent possible, effectively cooperate across borders. That's far easier
said than done, though, in a world where what matters most to
politicians at the end of the day is whether their constituents in their
district will vote them back in next term—and that applies to US
politicians, European politicians, and so on.
So how would we have these circumstances ironed out if we had our
druthers? Well, we'd let the markets make as many of these decisions as
is feasible. Said another way, we'd let consumers and producers come to a
mutual agreement about the best way to approach energy policy over the
coming decades. Surely an impossible task, you might think, given the
billions of actors that implies involving in the decision-making
process. But it's not—fortunately, we have the technology already
created to allow that communication to happen rather seamlessly and
(over a long enough period of time) efficiently: prices.
This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients.
Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any
security, portfolio, transaction or strategy is suitable for any specific person.
Investments in securities involve the risk of loss. Past performance is no guarantee of future results.