Archive for June 29th, 2022

What’s the fundamental difference between oil prices and electricity rates?

June 29, 2022

Hint: Who (or what) sets the prices?
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This week, the G7 leaders reached “an agreement in principle to begin the process of imposing price caps on Russian oil.”

The agreement on oil, would aim to limit how much money Russia can earn from each barrel of oil it sells on the global market, reducing the fossil fuel revenues Russia is relying on to finance its war effort.

It would also attempt to stabilize global oil markets — and hopefully bring down prices.

It remains unclear how caps would work, and there is more speculation than specifics. NY Times

Hmm.

Coupled with my recent digging on EVs, the G-7 agreement lit my light bulb, so to speak.

I asked myself: “What’s the fundamental difference between oil prices and electricity rates?”

Well, oil prices are set “by the market” … largely driven by supply and demand … subject to some governmental supply policies (e.g. OPEC supply agreements and capped pipelines) … and short-lived price controls (that invariably backfire).

Electricity rates (i.e. “prices) are controlled by state regulatory agencies… electric companies submit pricing plans that must be approved by government bureaucrats.

Hmm

So, under the umbrella of climate control — less oil, more electricity — governments intend to wrest near total control of energy prices away from “the market”.

Is that a good idea?

The economist side of me says: “Nope”.

I’m surprised that pundits haven’t explored this “wrinkle” in Biden’s “incredible transition” plan.

An unintended second-order consequence or part of the plan.

Draw your own conclusion.


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