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World energy markets

J Brauer | © Stone Garden Economics

Russia is swooning. So are Nigeria and Venezuela. I am not referring to their questionable polities, but to the decline in world energy prices on which these, and other, states depend so heavily for export earnings (i.e., foreign exchange earnings to finance their imports from foodstuffs to luxury handbags) and for government revenues. With the Chinese economy having slowed down considerably, with India’s economy still being uninspired (and uninspiring), Brazil’s economy falling by the wayside, and Europe’s economy once again going off to the deep end of the pool, worldwide demand for energy is down. At the same time, the shale oil revolution, especially in the United States, and an increasing push into renewable energy, especially hydropower, has expanded supply. Economics 101 tells us that when demand declines and supply increases, average prices must fall. And so they finally have. The “divine laws of supply and demand,” as one Saudi oil minister once deliciously referred to them, are at work.

Of course, “energy” is a rather broad term covering many subsectors, fossil fuels, reneweables, and nuclear power being the large categories. Japan relied for 30 percent of its electricity generation when, on 11 March 2011, an offshore earthquake resulted in a tsunami that incapacitated a nuclear power plant north of Tokyo. By May 2012, all of Japan’s 50 or so commercial nuclear reactors were offline, driving up fossil fuel imports, and prices. Today, Japan has restarted a number of its reactors and the discussion over its energy future seems as heated and confused as ever. China is pursuing an aggressive program of building nuclear power plants—about 50 of them simultaneously—even as there may be cheaper, and less potentially hazardous, ways of converting out of fossil fuels to lower air pollution levels that are said to lead to the premature deaths of up to half a million of its citizens a year. That death toll far exceeds the total population of Australia’s capital—Canberra. Tony Abbott, Australia’s prime minister, thus was rightly, and in an embarrassingly public manner, chastised for his repeal of Australia’s eco-friendly carbon-tax policies when he hosted the G20 leaders in Brisbane last month.

Following the Japanese nuclear disaster, Germany announced an Energiewende (“energy turn”), committing itself to turn off and eventually decommission all of its 17 nuclear power stations, which at the time provided about a quarter of its electricity supplies. Instead, it turned up the spigot to pour further subsidies into the renewable energy sources market. That’s admirable, to be sure, but the result is that German energy prices are about twice as high as those in the United States, triggering precisely the sort of economic uncompetitiveness Australia’s Tony Abbott had on his mind and rode to election victory last year. Thus, the consequences of Germany’s drastic energy turn may not be economically sustainable: Not only do its energy consumers pay higher rates, they pay over again as taxpayers, and with patently unfair distributional consequences: Via taxation, miserly energy users subsidize heavy energy users. The country’s high energy costs also make its companies squirm and have them look to invest, and to generate employment opportunities, elsewhere in the world. Further, E.On, Germany’s largest energy provider, just announced its intention to split itself in two, with the “new” E.On focusing on renewables (i.e., profiting off taxpayer handouts) while shunting its nuclear and fossil fuel assets into an “old” E.On, presumably to the rescued at some future time by further taxpayer monies.

Evidently, the world needs to come off its carbon (fossil fuel) addiction—August 2014 was the world’s hottest summer ever since record keeping began—but it needs to do so in more considered, less haphazard ways.

The United States, meanwhile, finds itself in a sweet spot. Energy imports have collapsed, thus fewer dollars are transferred abroad to pay for them. Just as the Russian rouble (RUB) has fallen in value as export earnings decline, the U.S. dollar (USD) has increased in value as import expenses have declined. The more valuable dollar makes imports cheaper (and keeps inflation and interest rates low). In addition, domestic shale oil (and gas) production is booming, adding billions of investment dollars and creating tens of thousands of jobs. Lower motoring, heating, and cooling costs will stimulate the economy even further (because more discretionary dollars are available to finance non-energy purchases). And since individuals and companies have, for the most part, adjusted their balance sheets following the 2008/9 financial crisis, things look set for a good two years of sustained economic growth and prosperity. Already, the U.S. stock markets are breaching previous all-time highs, and the mood in the country is the best I have seen since 2008. Even politics appears to “play along” in that following last month’s mid-term elections, a Republican-dominated Congress leaves the President little wiggle room while Congressmen still must fear the President’s veto powers. Thus, the rest of the country may perhaps get on with business.

Not that there aren’t economic and political dangers! Far from it. Congress does need to create permanent solutions to the many failings of federal government. Social security (the pension scheme) remains a looming disaster, as do the social welfare and health care systems: The former is widely abused and the latter remains a costly disgrace, seemingly providing neither health nor care. Immigration reform is as urgent as ever, and reform of the absurd tax code also stays on the agenda.

J Brauer is Professor of Economics, James M. Hull College of Business, Georgia Regents University, Augusta, Georgia, USA. He is also a Visiting Professor of Economics at the EBA Program, Department of Economics, Chulalongkorn University, Bangkok, Thailand.

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