Explainer Episode 38 – High Energy Prices, Public Policy & Possible Solutions
Energy law expert, Professor James W. Coleman, shares his analysis of the factors causing high energy prices – including public policy on the federal, state, and local level – and suggests some policies that might alleviate high energy prices.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and Narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Steven Schaefer: Hello, and welcome to this Regulatory Transparency Project Podcast. My name is Steven Schaefer, and I am the director of the Regulatory Transparency Project. I would like to introduce to you Professor James W. Coleman, the Robert G. Storey Distinguished Faculty Fellow and Professor of Law at Southern Methodist University Dedman School of Law. James Coleman received two degrees from Harvard University, a JD cum laude and a BA in biology magna cum laude with highest honors in the field. Upon graduation from law school, he served as clerk for the Eighth Circuit Judge Steve Colloton and then practiced energy, environmental, and appellate law as an associate in the Washington D.C. firm of Sidley Austin LLP for three years.
Prior to joining SMU, he was on the faculty of the University of Calgary where he taught at both the law and the business school. Before Calgary he served on the faculty at Harvard Law School as the Climenko Fellow and Lecturer on Law. James Coleman’s scholarship addresses regulation of North American energy companies focusing on how countries account for and influence regulation of fuel and electricity in their trading partners and how global energy companies respond to competing pressures from investors and regulators in multiple jurisdictions. He publishes the Energy Law Professor blog, and you can follow him on twitter @EnergyLawProf. That’s EnergyLawProf.
Note as always, The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speakers joining us.
Well, thank you James for being with us today. I really appreciate it. Just to start with, why are energy prices so high right now?
James W. Coleman: Well, the basic problem is that the world isn’t producing as much energy as it’s consuming and that’s been a growing problem over the last year and a half. So if you look at the year 2021, basically for that whole year, the world was consuming 100 million barrels per day of oil which is near an all-time high in terms of its consumption. But if its production was only 98 million barrels per day — so it was two million barrels per day less. So what that has basically meant is that for an entire year, we were short of energy –consuming more than we produced. And naturally, the only way that can work is that you have two million barrels a day coming out from stores. And so right now, global supplies of energy are very short.
I think the other important thing to understand here is that it’s not just oil prices. We’ve seen the same thing in natural gas markets where natural gas storage is lower than usual. We have continuing demand for natural gas. But after the pandemic, we haven’t had as much natural gas production to meet that demand. And it’s increasing here in the United States. That demand is increasing from all over the world because the United States is increasingly exporting natural gas to help meet really critical need for natural gas in Europe, especially with the challenges with continuing to get natural gas from Russia. And you also see this in other commodities. You’ve seen the price of coal power move up. You’ve seen the price of all the minerals that are required to build batteries go up, to build solar power go up. So we’re seeing really a run up in prices across the board.
Steven Schaefer: And how do energy prices impact inflation?
James W. Coleman: Well, they impact inflation a couple different ways. So the first, of course, is that you see higher prices at the pump because basically, the price that you pay for fuel whether its gasoline or diesel is determined by the price of oil plus the price of refining that product. And so when energy prices go up, that means the price of fuel goes up. That also typically raises the price of refining the product. And so you’re going to see higher prices at the pump. But of course, there’s a bunch of indirect effects that then work their way through the economy.
So for instance, when the price of diesel or gasoline goes up, that means that the price of everything that gets shipped with gasoline and diesel goes up. So that means the price of all consumer goods rise because it costs more to ship those across the country either on trains or on trucks both of which run on diesel. Also if you’re shipping things overseas, that’s heavy fuel oil again the price of that goes up. You’re going to pay more for those overseas products.
And one thing that we’re seeing increasingly now and will see in years to come is that when you’re — developed agriculture for food products, those are very dependent again on oil and gas. They’re dependent on diesel fuel to run all the agricultural machinery and they’re also dependent on natural gas which is the primary component of all the fertilizer that’s used to produce our food around the world. So there’s a number of avenues by which those energy prices eventually work their way up into food prices. We’re obviously already seeing higher food prices. I expect that we’ll see even higher ones going forward.
Steven Schaefer: And would a transition to cleaner energy help lower prices?
James W. Coleman: Not necessarily. So and unfortunately, probably not at least overall. So if you think about energy, one of the big challenges is that the energy commodities that really built the modern world in terms of enabling modern industry, that’s really coal and oil. Coal for electricity, for industrial heat, and then oil to — is because it’s so energy dense. It’s one of the very few fuels that can transport an airplane or transport a ship across the ocean or you can take in your car and drive 500 miles. And, so, because it’s that energy that can carry with you, that means it enabled globalization and a global world with global trade driving down the price of products that all of us have come to depend on and making it possible for us to produce more to feed a growing population.
Now the great — the bad thing about those sources of fuel, oil and coal, is that when they burn, they’re pretty dirty. And you don’t want to burn coal or oil in your house. That would not be a good idea. Now, so we’ve been looking to move to cleaner sources like natural gas. You can burn that in your house just fine. We’re moving to electricity, renewable energy, nuclear power etc. And so those sources of energy — much cleaner but they’re harder to transport and store. And you might say, “Well, okay. That’s a problem. We’ll figure it out.”
Unfortunately, how easy something is to transport and store basically determines how smooth the prices will be for that, how much you have to worry about price spikes and whether you have to worry about running out. Because the thing with coal or oil is, if there’s a shortage of coal or oil anywhere in the world, it can be a problem, but it’s not a huge problem because anywhere that has extra coal or oil can send them that coal or oil. They can send it by tanker, by truck, by rail etc. Right? By contrast, if you have a shortage locally of natural gas or electricity, really nobody can help you unless you already have the transmission lines built. You can’t send it by rail. You can’t send it by ship etc. And so that kind of means every person is in it for themselves. And there’s no ability to smooth out those prices and deal with shortages by shipping it to people in need.
And because it’s very expensive to store, there’s a huge problem about preparing for future shortages because if you think that the price of coal or oil might rise in the future, no problem. Stockpile that coal or oil. So if we think about oil, we were two percent short for a year. How is that even possible? How could we be consuming two million barrels a day that we weren’t producing? Well, it’s because we had it in storage and so you could just bring it out. And so basically that ability to transport and store means we’re less likely to run out of those products, and we have more smoother prices because everybody can help each other out by sending coal and oil to meet shortages.
That’s just, to a first approximation, not possible with electricity. You just simply can’t store electricity on a very large scale currently. Now, maybe in the future we’ll develop that technology so that — I don’t think anybody really thinks it’ll ever be as easy as it is for oil or coal but at least it could be significantly easier. Natural gas can be stored. It is stored in certain geologic formations. But there is just not very much natural gas storage when you compare it to how we’ve been able to live off our oil supplies for a year.
So it’s just the case that these cleaner sources of energy are much harder to transport and store and so that means the markets are substantially more fragile. And that means that if, as we transition to these cleaner energy sources, we’re going to have to get used to — everybody gets mad when the price of gasoline doubles. We’re going to have to deal with much bigger spikes in prices to the extent that we transition to these cleaner sources of energy. So as an example, in Europe they’ve been trying to transition to more electricity etc. but as opposed to the world dealing with these doubling of global oil prices, they’re dealing with five times, ten times the electricity price, ten times the natural gas price. These are huge spikes in prices and unfortunately, that’s maybe what we’re dealing with with these more fragile systems going forward.
Steven Schaefer: What actions is President Biden and his administration taking to address high energy prices, and are there — what are your thoughts on what policies may lower energy prices?
James W. Coleman: Well, unfortunately they really haven’t seemed to settle on a coherent energy policy just yet. And I think there’s probably unfortunate ways in which the democratic coalition is a little bit split on energy policy issues because undoubtedly, I know there are folks in the Biden Administration who realize that it’s a problem that energy prices have gone up so much. And let’s keep in mind — I mean, really so there’s really three reasons. I said earlier, the reason energy prices have gone up is because the supply has not kept pace with demand for those energy products. But there’s really three reasons that’s happening. I mean one I kind of previewed which is that there is a — when the pandemic hit, there was a big reduction in production of energy because people weren’t — were locked down. They weren’t going as far. And so it’s taken a while for our productive capacity to reverse all that and to catch up where we were before the lockdown. So that’s one kind of problem that we’re dealing with.
A second problem that we’re dealing with is that the investors, particularly in the fossil fuel sources that really provide our energy security, are the ones that we can count on — not like solar and wind. We can’t count on them. So they don’t really help us in situations where we really need energy. Those sources — investors are a little bit wary of investing in them because there have been very mixed signals about how much the world wants fossil fuels going forward. So if you look at what would allow our economy to keep going, prevent us from being impoverished, etc. would help feed growing demand for electricity in the developing world from — there’s a third of the world that uses less electricity than an American refrigerator by itself uses. And if you were looking at that and treating this as an economic problem where you’re trying to raise people out of poverty and achieve prosperity, you would say, “Okay. We’re going to need a lot of fossil fuels going forward.”
On the other hand, if you said — I mean, the world has said it would like to keep things to 2 degrees or even to 1.5 degrees in terms of global warming. Those are very, very, very strict goals. And so if the world were to do that, then you’re talking about a very rapid phase out of fossil fuels. And I think the president at times during his campaign suggested that’s kind of what he thought we should do. He said, “Look in my eyes. I will — I guarantee you I will end fossil fuels.” That’s a very dramatic — it’s kind of like that “Read my lips. No new taxes.” promise. “I guarantee you I will end fossil fuels.”
And so it sounded — and so investors, when they’re talking about making investments that will only lead to — when we invest now, that means maybe we start producing in a couple years. And the whole investment doesn’t end up being paid off for 5, 10, 15 years. You’re talking about, what’s the long-term demand for my product? And so those investors I think have been — well, is the world serious about these one and a half degrees goals or two-degree goals? It’s one thing if they say, “That’s what we’d like, but if it’s going to impoverish billions and prevent people from having electricity, then we’re not really going to do it.” Or are they quite serious that “You know what? Regardless of the consequences to human welfare, regardless of the consequences, we are going to do this because we have no choice.”
And I think one of the — one challenge there is the Biden Administration has kind of tried to — I think it has folks that have both of those opinions within it — both people who say, “Look, let’s do what we can. If we can hit it, great. But we’re not going to impoverish people,” and other people who say, “Well, you know what? This is the overwhelming ethical and moral concern. If it crashes the economy, so be it.” And I think frankly, investors aren’t sure which the Biden Administration is thinking on this. And so as a result, they’ve been a little bit wary of investing in the kind of energy production that we need to ensure we have secure and reliable supplies going forward. And then the third thing — and so on that one, it’s partially kind of a broader vibes really. And it’s partially the Biden Administration not being clear about what it wants.
On the third one, this is really within the Biden Administration’s control. So the president doesn’t have control over every part of the global oil market or of American oil policy because a lot of oil policy is made by the states, and if it’s on private land, if you own your minerals, you are the one that gets to produce it. But there are big areas of the oil system that the president does have control over. The president has very strong control over oil and gas production on federal lands. The president has a very — a lot of control over the permitting system and what projects — how to construct a permitting system that allows projects to be built or that is more difficult for projects to be built. And so when you look at that presidential policy area, leasing on federal lands, and permitting, I think that gives you a better sense of like, does the president really want more oil and gas production? Or is he kind of more on board with the folks who say, “Regardless of the consequences, let’s stop oil and gas production.”
And so far, it seems like he’s more in the camp of “Regardless of the consequences on the economy, on the world, on poverty, let’s just stop oil and gas production.” And the reason I say that is because basically he has slow walked and not issued new oil and gas leasing. Again sometimes he’ll say, “Well, I don’t control the oil and gas markets.” And that’s partially true, but you have to look at, well what are the areas that you do control? One area you do control is federal leasing and there they’ve really not — I mean, they really haven’t pursued any leases to conclusion. They had one that they finally were forced to do and did but was struck down by the courts. And they’ve been kind of wishy washy about whether they even want to get it moving forward.
That presumably may change with — one of the goals of Senator Manchin’s climate spending bill is to get leasing going. So they may in a compromise be willing to do it. But it seems like they don’t really want more production. And of course we had very high-profile things like killing the Keystone XL Pipeline, like rolling back reforms designed to speed up energy infrastructure. So really every time that the president has had his hand on the dial for more energy or less energy, he’s turned it towards less energy. So I do think that is an unfortunate thing.
Now, the second part of your question was, well wait a second what could he do to address it? And I think the easiest thing would be, everywhere that he has his hand on the dial, turn it the other way. So open up more leasing, allow more leasing of oil and gas on federal lands. Of course, that’s not going to lead to immediate production, but two things — one is, if you’re in a hole, first thing to do is stop digging. So the fact that he keeps shutting down production has obviously made the problem just continue to get worse. And I think instead, what he needs to do is allow some of that leasing. It will take a while to pay off, but we’ll benefit from that in years to come.
And then the second thing is that he really — think about all those permitting areas where he could be — instead of rolling back reforms designed to make permitting easier, he could be making permitting easier not just for oil and gas projects but for renewable projects etc. that are all being held up by Biden as well. And I’m hopeful that Senator Manchin will kind of push him to do that, but we’ll see. We’ll see what happens. So far, there haven’t been any very serious proposals on that front. Now the — at least from the administration and even from Senator Manchin’s team. So far, it’s been pretty weak stuff. Hopefully they’ll be proposing more serious reforms going forward.
And then the last thing — and I think sometimes people underestimate how much this can help. Frankly investors are — they are influenced by the president’s words. And so when the president says, “I guarantee you I’m going to end fossil fuels,” that just makes it harder to make long term, decade long, more than decade long investments in fossil fuels. And a more realistic perspective from the president that says, “We take climate change incredibly seriously. We want to hit these goals if we can. We’re going to support technology that’s going to help get us closer towards those goals and maybe even let us achieve them. But if there — but we’re not going to put all economic considerations to the other side.”
We have to make a continuing role for oil and gas. Oil and gas is going to have a continuing role in the future going forward. One of the best ways we can reduce greenhouse gas emissions globally right now is by exporting natural gas to parts of the world that use coal for electricity. Coal is still the largest source of electricity globally. And so basically, that kind of thing — you might just say, “Well, isn’t that just vibes or whatever?” But it really is the — I think it’s very more important than us policy folks realize to how investors think about this problem is whether the president is out there saying that we’re going to stop fossil fuels like that or that there’s a continuing future for them.
Steven Schaefer: And does the Federal Reserve play any role if any in addressing energy prices?
James W. Coleman: Well, this is one of the big challenges is that the federal reserve typically tries to control inflation and the way it does that is by raising rates to make people borrow less money. And that can slow down the economy. And as fewer people are buying things, then the price of goods can slow down a little bit. And that can work okay for wages maybe, for certain other goods, consumer goods. It’s not actually a great way to lower oil and gas prices. And the reason I say that is, typically the way that oil and gas is produced is by borrowing money to make long term investments that lead to more oil and gas production in the future.
And, so, one problem is, when the Federal Reserve raises rates, if oil and gas companies then don’t want to borrow money to produce oil and gas, then, sure, production may fall because people get poorer. I mean, you’re slowing down the economy. People may — and so maybe consumption falls as well. And maybe that temporarily lowers prices, but when you try to have an economic recovery and people start buying more gasoline, well there hasn’t been any produced. And so basically prices just jump up again and kill growth. And so you can get in a long-term cycle where there’s no really strong economic recovery because every time the economy improves, oil and gas prices jump up.
And so the way that in the past — like there’s — we always — people tell stories about how in the Federal Reserve ’79, ’80 raised rates that killed inflation and the economy recovered. There was a painful recession, but the economy recovered. That’s all great. But in 1974-1979, after the Arab oil embargo in 1973, there was a huge amount of oil and gas investment. So when the economy was recovering in the early ’80s from this — in a recession induced by the Federal Reserve, there was a lot of oil and gas to fuel that. That worked really well. Unfortunately, if you look at the years leading up until now, there has not been enough investment in oil and gas. And so there’s a real danger that if the Federal Reserve kind of hurts the economy by raising rates, that it could hurt oil and gas investment as well. So it really might not have that long term benefit of allowing us to have maybe a quick recession but then a recovery fueled by cheap oil and gas.
Steven Schaefer: And do you have any thoughts on the Inflation Reduction Act that recently passed the Senate and how that could impact energy prices?
James W. Coleman: Well, so yes. The Inflation Reduction Act which is kind of — it’s like a tax and healthcare and a lot of energy subsidies — over 300 billion in energy subsidies. That legislation, although it’s called the Inflation Reduction Act, depending on the estimates you look at and even some of the — a lot of some of the nonpartisan estimates are saying, “Well, I’m not sure it’s going to reduce inflation. It might even increase it a little bit right now.”
Anyway so let’s — I’m not sure that’s the right frame to look at it. Let’s look at the individual pieces. I mean, one thing it’s going to do of course is increase taxes on corporations and increase enforcement of tax law. And to the extent that that slows down the economy, yeah. That might help inflation a little bit. The other part of it is, really big subsidies for production of energy — and all kinds, solar energy, wind energy, hydrogen, carbon capture, a lot of new technologies. Now, my concern — I think all those technologies are ones that we need more of going forward. So I’m not against the idea of supporting them.
Let me raise a couple of my concerns. My biggest overall concern is that right now we have very high energy prices. There are significant financial rewards for people who are able to build projects that serve those needs, that provide us that secure reliable energy. So in some ways the kind of conventional economics of the projects aren’t necessarily the problem. The problem is that people can’t get government permits to build the infrastructure that would be required to bring all these new sources of energy online. And so like if you look at — I mean, just think about all these natural gas pipeline projects that have gone through the courts, gone up to the Supreme Court, won in the Supreme Court, and then been canceled as with the PennEast Project or Atlantic Coast Project.
Or think about on the renewable side. In the nation’s biggest grid manager is the PJM operator and basically, they recently asked to have a two-year delay for any new solar projects to hook up to the grid. So think about that. There’s lots of people willing to build solar. They want to build solar projects, but because it’s hard to build new transmission distribution, everything you need to make the grid ready for all these new sources, then they can’t actually build it. So now, let’s think about what’s happened when Congress says, “Hey, all these — everybody wants to build new energy sources. We’re going to give you massive subsidies.” If those folks are still just waiting for their permits, how does that really help the project get built?
And unfortunately remember — let’s go back to what I said earlier. The cleaner energy system that we’re trying to build — not coal and oil anymore. If we want to build natural gas system power lines, the only way that works is if you have long distance transport connecting that so that it can be a little bit of a more liquid market that kind of makes up for the lack of transportation that we have with those sources for all the things we take for granted about how easy it is to ship oil and gas back and forth.
So basically, you need long distance power lines. You need long distance natural gas pipelines. You need liquefied natural gas facilities which take natural gas, cool it most of the way down to absolute zero, and then ship it overseas on a quarter billion dollar refrigerated vessel so that it can be used in Europe or wherever else it’s needed. And so to build those, those take a lot of permits. You’re probably crossing a bunch of states. You’re crossing local communities. You’re going to need a federal permit. You’re going to need a federal environmental review. And unfortunately, we’ve been making each of those steps harder and harder to get through. And so I’m not sure that throwing more money at the problem necessarily solves it.
Now, Senator Manchin says that he got a commitment from Senator Schumer and from Speaker Pelosi. They’re going to consider a permitting bill. Okay. I’m a little worried because so far, they’ve released a white paper. That white paper included a bunch of very small potatoes measures — like nothing very significant to get permitting really going. And some of it actually sounds good, but it isn’t actually as important as it sounds. So one thing it says is, “We’re going to set a deadline for these reviews.” I think it can only be two years. Okay. So that would be great, but you’re talking about setting a deadline for the federal government. There’s several problems with that. One is the federal government just blows deadlines all the time. That’s what they do. Even if they want to do something, they’re still probably going to blow the deadline on that project. If they don’t want to do it, they don’t want to make a decision, or they want to kill a project, they will never abide by that deadline. There’s very little way to force the federal government to abide by that deadline. And typically, if you try to make them do something they don’t want to do, they say, “Oh then I just reject it.”
The other big problem with that is that it doesn’t really address the big concern which is the courts. So a lot of times the reason that these reviews get longer and longer is because the federal government is trying to do enough that the courts won’t strike it down because courts will often strike down reviews. And that creates a couple different problems. One is, if you try to rush it to meet a two-year deadline, the court might say, “Well, this is rushed. Definitely you’re going back now.” And secondly, once you have that reversal from a court, it’s going to be very hard. It’s going to be really — the projects going to be very, very delayed.
Now this white paper said, “Well, maybe we’ll tell the court to order the government to speed things up.” Okay. That doesn’t make any sense. The court was the one saying, “You didn’t yet do enough review.” They’re not going to force the government to come back with something quickly. And in fact the history of courts forcing government to act quickly — there’s very few examples of success of it. It’s never going to happen in the National Environmental Policy Act program.
So in any event — so far, I would just say these are pretty much half measures. They aren’t particularly serious measures to really speed up permitting. But that will be the key. Like this new money for new energy sources would mostly be good if they were able to get built the projects necessary to get these forwards. Okay. Now, there’s a second question which is, some of these subsidies are a little bit poorly targeted. So solar and wind — the solar and wind industry will tell you, “We don’t –” Well, I mean they might not say it in front of Congress. They might not say it on TV. But there are very few solar and wind advocates who feel they need really this much subsidies going forward. Maybe in some cases — offshore wind etc. But they’re happy to take it.
Now, that raises a separate question which is, it’s not really a solution to inflation for the government just to pay extra money for something. Yes. They may — the solar and wind farms may be willing to sell you electricity for free because of how much they’re getting paid by the government to produce that electricity. But you haven’t reduced the social cost of that because all the rest of us have to pay for that. And in fact unfortunately with solar and wind, it’s gotten to the point where, at times throughout the country and increasingly, there are negative electricity prices. So what does that mean? So remember what I said about the electricity system being fragile. To a first approximation, almost never — you can’t really have too much oil. If you have extra oil, store it. You can store it. It’s just more for the future.
And oil markets can be out of balance for long periods of time. I just told you. In 2021, the whole year, we were two million barrels a day short of oil and we got through it. Prices rose but we got through it. There weren’t really big widespread shortages. We totally got through it. The contrast with electricity is extreme. Electricity is fundamentally a much more fragile system.
So everybody remembers the February 2021 storm in Texas. What happened in that circumstance was the grid has to, everywhere and always, stay exactly in balance between how much power is being put onto the grid and how much is being pulled off of the grid. If it ever goes even a little bit out of balance, what happens is the frequency of the grid changes. So the grid — it’s an alternating current grid. It goes back and forth every — 60 times a second. So 60Hz. 60 times every second. Now, if for a brief moment, you have more power being pulled off the grid than put on, frequency drops.
During the winter storm, what really kicked off all the blackouts is we had four and a half minutes where the frequency of the grid fell by about one percent from 60Hz to 59.3Hz. So think about that with just — all it takes is four and a half minutes with this tiny imbalance and the grid between power provided and power demanded. And it took down the whole grid for four days, caused billions of dollars in damage. It was a giant catastrophe.
Contrast that with oil where we can go a whole year two percent out of balance no problem. And so one of the challenges with solar and wind energy — we know they only provide power when they happen to be available. And solar, in the middle of the day, that’s a good time. We need energy during the middle of the day. Typically not our peak which is at night. Wind power, different times but more often in the early morning hours. We don’t need power as much then. Neither of them provide that much power in the early evening, which is when we often most need power.
But the grid is constantly having to maintain balance. When you have these huge fluxes of renewable energy and growing because renewable energy is now 20 percent of our national supply. When you have those huge amounts of renewable energy going onto the grid and off of the grid, that is hard to balance. Grid managers have to balance that all the time. And often and increasingly so much renewable energy is going on the grid that electricity prices are negative. What does “electricity prices are negative” mean? That means the grid manager is going to have to pay to get rid of that electricity. Why would renewable energy producers put energy on the grid when prices are negative? Well, because they are paid money to produce it. They get different kinds of subsidies. There’s different kinds of subsidies around the United States.
So those negative prices basically — in those moments, those renewable energy are providing nobody with any value. They are affirmatively harming the grid. It’s effectively a waste –electricity at that time is a waste product that has to be disposed of and all of us have to pay to dispose of. But we’re paying subsidies to create that waste product that we all of us have to dispose of. So that’s not most of the time. Most of the time solar and wind energy are providing a value to the grid because basically that means other sources can ramp down. But there is a difficulty that if we — as we go too far out of this direction of subsidizing sources, you can impose costs on everybody that really aren’t — that aren’t very efficient and don’t really address inflation in a good way. I mean, at first approximation, the government can give us all gasoline for half the price and pay half the price itself. That would not be a practical solution to inflation.
Steven Schaefer: Are there any actions that Congress could take to lower energy prices?
James W. Coleman: Well, when you have an energy crisis, typically there’s nothing that immediately stops the problem. I would say there’s a couple things they can do. Most important is to get permitting going, to make it possible to build power lines so that renewable energy can be used more effectively, so that we could actually — rather than have that energy be a waste product, that it can be brought to consumers who desperately need electricity so that we could bring — so that we could use more of that product — so that our natural gas — I mean, sometimes natural gas is just flared off. We need more pipelines to bring that to markets that need it. So getting permitting going would be the number one thing they could do.
I think there’s some other things they could do in the long term. So one project I’m currently working on is — think about our strategic petroleum preserve. This is an idea basically driven by the energy price spikes in the ’70s. We need to have some oil on standby that we can use to deal with disruptions in the market. And it’s worked at times. And we can see — I mean, there’s different estimates, but it seems like it lowered prices a little bit now too. But really the private market stores lots of oil. So this isn’t something where government assistance is crucial. But then think about our newer energy sources that we’re going to. Think about electricity storage. Think about natural gas storage of which we don’t have enough of either of them. We need vastly more of both of those. That might be something where the government really could invest in kind of a strategic reserve.
There’s some other things about our strategic petroleum reserve that also could be improved. The Biden Administration has taken some good steps on this. One thing that they’ve done is they’re looking at buying futures for oil in — so basically, when they release a bunch of oil, buying a commitment from oil producers to give them oil in the future. And what that commitment does is it basically gives more certainty to the oil and gas producer, “Oh somebody’s going to want my oil when this –” And it also gives more certainty to the strategic petroleum reserve that they will be able to fill up. So they’re not going to be left empty. So actually I think that’s a good step. But there’s a number of things like that that Congress could be doing to increase the value of our strategic petroleum reserve and expanding it to be a strategic energy reserve that stored more than petroleum, was more geographically distributed, included transport infrastructure, and the other things that we need for a more modern energy economy.
Steven Schaefer: And can state and local policy makers help to lower prices? If so, how?
James W. Coleman: So yes, I mean, they can. Unfortunately they can also make things worse. So I would say that state and local policy makers have roles to play in both directions. And unfortunately, we’ve been seeing a lot of them making things worse. So one thing is, of course, we’ve had increased state opposition to national infrastructure and folks basically saying there was the Planes and Eastern Clean Line that was supposed to take wind power from Oklahoma across Tennessee. And Arkansas said, “Don’t use us as your extension cord. We’re killing it.” There was the Constitution Pipeline which was supposed to take all — we have huge supplies of gas in the Marcellus in Pennsylvania and West Virginia that we could ship across New York to New England where it’s desperately. And New York said, “No.”
We have a lot of projects that are being held up by local policy makers, and there’s just a lot of other just kind of bad policy. So one thing is California — I think it’s funny sometimes people will say, “Well, you know, California’s so — despite how strict California is about its fuel markets, the refiners in California make bigger margins than anybody else.” And the only problem with that statement is the “despite.” Anybody who looks at regulation knows that the more regulations that you have limiting the market and limiting competition, the higher profits for the people that are in that market. That’s why big companies often like complex regulations because they allow them to charge higher prices because they face less competition. And it’s a huge barrier for entry for new companies to try and figure out those regulatory regimes.
So California typically has much higher gasoline costs — everybody knows that — much higher electricity and fuel costs. And it’s not because they are — one reason is because it costs money to comply with their standards. But the other reason is they simply have less competition. And if prices spike in California, people can’t just easily send them more fuel because of their unique requirements that make it more difficult to send. So they’ve basically isolated themselves — led to higher profits for their oil and gas companies and less competition. And unfortunately, they seem convinced that they need to go further with this. So recently Los Angeles is proposing that there should be no more gas stations allowed to be built which is just — in a circumstance where — I would encourage all of you — I know like gas for — I live right by my school. I live in a very walkable neighborhood. But for a lot of folks, fuel costs are a huge component of their budget. Absolutely comparison shop on fuel costs because there’s idiosyncratic reasons but a lot of times there will be cheaper gas stations.
And so let’s — all of us — we can drive prices down by going to the cheaper stations. This is the opposite of helpful because basically it is creating — I mean, it’s great for the existing gas stations. It’s basically — it’s a perfect barrier to entry for new competitors to drive prices down. It seems designed to just — to give a huge benefit to current oil-and-gas gas stations. So I’m sure the gas stations love it, but it’s a terrible idea. So anyway — and generally if there’s something that’s about making permitting easier, great. But a lot of the stuff is about –that you see with local policy is about taking choices away from people.
So another thing that you see often is this suggestion that we should not have — new houses should not be allowed to have natural gas for heating or cooking. Okay. This is all that’s bad about energy policy proposals. So the problem with this is, the theory is that, if we force people to rely on electricity, in the future electricity will be really clean because in the future we’re going to have these moonshot programs that are going to mean we’re all going to have small modular nuclear reactors or everything will be geothermal energy or we’ll have batteries everywhere that are going to make solar and wind 100 percent of the grid. I mean, I can tell you, all of those things are years and years and years away. If we could speed up permitting, maybe they’re going to be sooner. But for now, our grid is — it’s 60 percent fossil fuels, 40 percent natural gas, 20 percent coal. Now and when we — when the grid is under a lot of stress, when things are really cold, it’s mostly natural gas because you can’t rely on solar and wind. Coal can’t ramp up that much. So basically natural gas fills the gap.
So think about that. When it’s really cold, and you need the heat in your house, would you rather have electric heating or natural gas heating? Well, natural gas heating — you send the natural gas to the house, you burn it for heat, it heats your house very efficiently. By contrast, if you have electric heating — remember the grid at this point is basically running on natural gas. So you send natural gas to a power plant, it’s burned for heat, that heat is turned into electricity, that electricity is then sent over long-distance transmission and then distribution lines to your home and then turned back into heat. That is far far less efficient. In fact it uses about two and a half times as much natural gas.
So when you switch folks from natural gas to electricity — and things are different in every individual place. So yeah, if electricity is cheaper in your place, go for it. That’s awesome. But on the margin, if you’re making a marginal decision, when you — and there’s no economic difference, when you make that decision, what you are choosing is for more pollution, a less efficient system, bigger spikes in pollution during those events, more use of natural gas during the event, more need for natural gas pipelines, and the idea that, well maybe if we have a miracle happen on the electricity side in ten years, it will actually — this decision will really pay off.
To me it seems like a very high-risk decision, and I think part of it why it’s driven — sometimes the folks that are pushing hardest for policy changes are not the folks who are like, “Well, climate is important. Let’s do this if it makes sense.” They’re the people that say, “This is a moral concern. Maybe it’s a long shot, but there’s a chance it will work.” That’s not the approach we should be taking with our electricity system is “there’s a chance it will work.” We need to be taking policies that right now produce benefits not in terms — both in terms of environment and reliability and security. And so taking choices away from people doesn’t really do that. If electricity makes sense in your neighborhood where you are given your mix of sources and your cost for insulation, that’s awesome. But it shouldn’t be something that’s mandated by the state or local government.
Steven Schaefer: Well, James Coleman, thank you so much for sharing your expertise and your time with us today. If you’d like to find out more about Professor Coleman’s work in energy law, check out energylawprof.com. That’s energylawprof.com. And on Twitter @EnergyLawProf. That’s @EnergyLawProf. If you’re interested in more content like this, please visit us at regproject.org. That’s regproject.org. Thank you.
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