If you had to choose, which would you take: low energy prices or higher, stable energy prices? The answer, believe it or not, is not unanimous.
At first blush, low energy prices would seem more desirable. Low energy prices mean lower production and transportation costs, lower utility bills, and lower producer and consumer prices. Lower prices mean more money to invest in productive capital to turn the growth wheels of the economy. Economists and common sense agree – for once – that lower prices are better than higher prices.
Stable prices are also desirable…even if they are not low. Being able to predict expenditures and know costs is a boon to production planning. Having to guess how expensive energy will be in two to three months only adds to the complexity of running a for-profit business. Guessing wrong can cost millions, and many have lost millions guessing wrong over the past several years.
Ideally, we’d all prefer low AND stable prices. But the world does not give us that option. So we must choose.
The National Association of Manufacturers (www.nam.org) actively lobbies for low energy prices. The majority of NAM members want low prices. But what is good for one NAM member is not good for all. The livelihood and profitability of many companies in the thermal-processing industry are dependent on higher energy prices. When energy prices rise, combustion companies and others working to increase energy efficiency are busy filling orders to meet the increased demand for fuel-saving technologies. High energy prices bode well for these companies, and a sudden drop in that price destroys profits and sometimes companies.
What’s ironic is that many thermal-processing companies that thrive during times of high energy prices are members of NAM and are therefore subsidizing their own destruction. That’s not to say that NAM or low energy prices are bad. For the vast majority of industry, the lower the price of energy the better. When prices go up, some are hurt and some are helped. When prices go down, some are hurt and some are helped. Who changes prices or how energy prices change is the critical issue. There are only two forces that change prices – the inexorable tides of the market or the sometimes-capricious fist of the government. The market is unbiased and immune to political pressure and receives input from the entire market without prejudice. Government, on the other hand, listens to the squeaky wheel and tends to make decisions with less-than-perfect knowledge.
If the government acts to increase or decrease the price of energy, it hurts someone’s business. If it takes no action, it actively hurts no one – although some would say that their passivity inflicts harm. The market, on the other hand, continually increases or decreases the price of energy and is continually inflicting pain and benefit. The question is, who would you rather have inflicting the pain: the government or the market?
Low vs. Stable (High) Energy Prices
May 8, 2007