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How higher energy prices are making things better this summer

In early January, a barrel of crude oil fetched $76.08 on the New York Mercantile Exchange. At the time, American consumers were hitting the road again after their COVID-19 lockdown, and the industrial economy was waking up from a harsh disruption. Demand for energy is rising, as is the price of gasoline at the pump.

While analysts noted a recovery in the energy economy, no one predicted that crude oil prices would hit $118.87 in early June, more than 50 percent in just six months — before Russia would invade Ukraine and simultaneously disrupt the flow of petroleum and natural gas. Western world. In the United States, the average price of a gallon of regular gas rose from $3.16 in January to $4.87 in early June.

We may not see such a big price increase, but everyone knows when it happens. Politicians squabbled, lashed out at oil companies and called for patience. Their voices certainly mattered but paled in comparison to the clear signals delivered directly to every consumer and producer by the ever-badgering price system. Enough time has now passed to see how effective our response has been.

The price system was relentless and constantly warned of worldwide shortages. Whether it’s auto-rickshaw operators in Dhaka, Bangladesh, Uber drivers in Baltimore, mothers picking up children from school in Savannah, Ga., managers of truck fleets and police departments or managers of large manufacturing plants, the signal is the same. It told consumers, “Energy is scarce; It’s time to conserve.” And for suppliers, “it’s more profitable to produce this stuff; See if you can find ways to provide more.”

That is why, although it may sound cruel, some have said that a high price is a high price for treatment. Did it make a difference? And how was that possible?

Take a look at the latest prices. In the first week of August, crude oil prices were at $88.54, up from $76.08 in January, but much lower than June’s $118.87. The average price of a gallon of regular gas stands at $4.19. Yes, lower prices have come, at least for oil, but not so much for gasoline.

Consumers responded in countless ways to reduce energy demand somewhat. With budgets under pressure across Europe, national governments made the decision to darken lit national monuments. In France, all air-conditioned shops were ordered to close their doors; Air-conditioned sidewalk cafes were banned. In some countries, illuminated billboards were ordered to be darkened late at night. As with individual consumers, common sense prevails. People reluctantly adjusted thermostats, started working more from home to eliminate commuting, and generally reduced their driving.

What about the supply side of the story? These adjustments did not come so quickly, but some important things did happen. Germany postponed a decision to shut down some of its remaining nuclear power plants. The Netherlands and Germany announced a joint effort to produce natural gas from a newly discovered field in the North Sea. Qatar reported a large increase in liquefied natural gas production for world markets. The United States appropriated funds to accelerate nuclear power generation and some support for oil extraction was included in the final version of the 2022 Inflation Reduction Act.

Naturally, most readers are wondering about the sticky gasoline price that doesn’t want to drop even more. There are many issues to consider, but the potential for refinement is huge. Refiners reduced capacity when COVID led to a sharp drop in travel. Closed plants cannot be opened quickly. Federal actions supporting electric cars and general anti-fossil fuel policies have made it clear to carbon fuel producers that aging fuel generation capacity should not necessarily be replaced and increased. Reversing the actions they’ve taken won’t happen quickly, and given the volatility of the issue, probably won’t make economic sense.

Are higher prices the solution to higher prices? Yes, they definitely help. These types of incentives get people to act, and prices communicate scarcity when it matters most.

Bruce Yandle is Distinguished Fellow with the Mercatus Center at George Mason University and Dean Emeritus of the Clemson College of Business and Behavioral Sciences.

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