The possible shortages—not metaphorical, but literal shortages—of natural gas and electricity this winter in New England are the product of our own politicos, their protectionism, price controls, dirigisme, and populism. I already mentioned the issue in a September EconLog post. A Financial Times story just provided an update; the lead paragraph says (Derek Brower and Myles McCormick, “New England ‘Importing European Prices’ in Looming Gas Supply Crunch,” Financial Times, November 17, 2022):
A European-style winter energy crunch is looming over New England in the north-east US, even as American natural gas producers export record volumes and a wave of fuel heads across the Atlantic.
In brief, the problem is the following. Environmental regulation in New England prevented the construction of power lines from Canada and a pipeline from Pennsylvania. A 1920 protectionist law, the Jones Act, forbids non-American ships from transporting liquified natural gas (LNG) from the Gulf coast to the north-east; and there are no American LNG tankers—“American” as defined in the law. So LNG is imported from foreign countries instead. The FT mentioned that a LNG tanker from Trinidad had just moored in Massachusetts, a frequent occurrence this year. Moreover, the price of electricity is controlled by state governments, preventing its increase in response to more costly gas prices, which would generate shortages in the economic sense, including blackouts. Recall that higher prices are the market’s way to signal increased scarcity and prevent shortages.
Note that gas prices have also increased in the US because of arbitrage (buying low, selling high), gas being traded internationally. However, because of the high cost of liquification and transportation of LNG as well as long-term contracts, American prices remain typically lower than European prices.
Despite more than two centuries of economic analysis, most people, from the most humble to the most conceited, apparently understand little about that. A utility executive is reported as saying:
“You would think that charity would begin at home . . . that American fuel would go to American ports,” Joe Nolan, chief executive of Eversource Energy, one of New England’s biggest utilities, said in an interview. “We’re going to have to compete just like everybody else — in the global market.”
Nothing in this sentence makes economic sense. One does not have to compete in the global market, but one will refrain from considering it only if one’s own government forbids it or, of course, if one enjoys leaving money on the table. And trade is not a matter of charity but of satisfying one’s wants at the lowest cost. More than two centuries ago, Adam Smith wrote in his Wealth of Nations:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. … Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. … The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old cloaths which another bestows upon him he exchanges for other old cloaths which suit him better, or for lodging, or for food, or for money, with which he can buy either food, cloaths, or lodging, as he has occasion.
Despite being a former Harvard University professor, the person who is perhaps the best representative of left-wing populism in America and, from this viewpoint, a Trump twin, Elizabeth Warren added to the obfuscation. The Financial Times reports:
As Gulf terminals export record volumes of gas, Elizabeth Warren, the Democratic senator from Massachusetts, this year urged the administration of Joe Biden to curb LNG exports “to keep prices low for American consumers”.
In other words, since Americans are forbidden to import the services of foreign ships to transport goods between American ports, they should also be forbidden to export the LNG they produced. That is only one illustration of how coercive state interventions have consequences that have to be partially corrected by further state interventions. If the state prevents people from trading, that is, exchanging among themselves, something other peaceful activities will need to be forbidden.
Such authoritarian interventions in cascade might explain a strange claim reported in the FT story, without further explanation, about the Trinidad deliveries of LNG at the Massachusetts terminal:
The terminal owner, Constellation Energy, said the US Coast Guard prohibited it from publicly disclosing information about cargoes arriving into the terminal.
It would be interesting to know more about what is really happening there, in what was known as the country of free enterprise.
READER COMMENTS
David Henderson
Nov 20 2022 at 2:33pm
Excellent post.
Pierre Lemieux
Nov 20 2022 at 6:41pm
Thanks, David!
Craig
Nov 21 2022 at 10:07am
Despite being a former Harvard….
DUE TO being…..
FTFY
Craig
Nov 21 2022 at 12:00pm
Just to expound here a bit, I must say that overall I have a decent amount of respect for Ivy League hard science for things like medicine, but overall anything to do with liberal arts? Forget it, they’re just hopelessly liberal and I have grown accustomed to presuming, obviously not irrebutable, a liberal bias the second I am aware of an author’s connections to these institutions.
Vivian Darkbloom
Nov 21 2022 at 11:02am
You wrote “…there are no American LNG thankers…”. But, you are wrong. I an American as defined in the law and I have thanked LNG (profusely) many times. On top of that, there is apparently another LNG thanker from Trinidad! We are all most grateful for LNG. 😀
Vivian Darkbloom
Nov 21 2022 at 11:05am
“I .. an American”. And, human, to boot!
Pierre Lemieux
Nov 21 2022 at 11:21am
Vivian: There is no Jones-Act LNG thanker, although there are “American” LNG thankers, but not American enough for the Jones Act. The latter transport LNG to or from or between foreign countries, where they are not banned as they are between US ports. That’s a well known fact. With due respect, please educate yourself by (1) reading the FT story I linked to above; and (2), more importantly, follow the links, and read, the material I linked to in my former EconLog post on the Jones Act. Colin Grabow’s extensive reports are especially enlightening. Or else document facts that are known only to you.
Craig
Nov 21 2022 at 11:53am
Professor, I fear you are missing the tongue in cheek post, she is having a bit of fun at the expense of your typo!
You write: “there are no American LNG thankers”
And she is correcting you:
” I have thanked LNG (profusely) many times.”
😉
Hence she is an American LNG thanker!
Pierre Lemieux
Nov 21 2022 at 2:26pm
Craig: Thank you for underlining my humiliation for future historians who will read EconLog archives!
Pierre Lemieux
Nov 21 2022 at 2:29pm
Craig: Another hypothesis: A conspiracy to discriminate against (French) ethnic origin!
David Seltzer
Nov 23 2022 at 1:15pm
Craig, “Hence she is an American LNG thanker!” Viv is a cheeky one. Vivian Darkbloom is an anagram for Valdimir Nabokov. Vivian Darkbloom is a character from Nabokov’s Lolita.
Pierre Lemieux
Nov 21 2022 at 2:23pm
Vivian: My apologies for missing your great humor. I should never reply to your posts early in the morning. (I hope I am not developing a Trumpian complex of persecution!)
Pierre Lemieux
Nov 26 2022 at 12:24pm
Vivian: Tank you!
JdL
Nov 22 2022 at 6:53am
“The possible shortages—not metaphorical, but literal shortages—of natural gas and electricity this winter in New England…”
Doesn’t economics teach that EVERYTHING (that is desired by humans) is in short supply? We’d all like there to be more, so that prices fall. On the flip side, if prices are allowed to rise until demand meets supply, nothing is in short supply in the sense that everything is available to those who are willing to pay.
Jon Murphy
Nov 22 2022 at 7:18am
No. Economics deals with scarcity (virtually unlimited wants and limited means), not that everything is in short supply.
Pierre Lemieux
Nov 22 2022 at 11:05am
JdL: To build on what Jon said, “short supply” is not a standard economic term; “shortage” is. Clicking on the first link in my post helps explain what a shortage is.
Thomas Lee Hutcheson
Nov 24 2022 at 4:50pm
It would help if we could persuade people that the lowest cost way of reducing CO2 emissions is not by reducing the supply of fossil fuels but by reducing the demand for them.
Craig
Nov 25 2022 at 10:14am
You absolutely might be correct that the lowest way to reduce CO2 emissions would be to target demand.
However, I would suggest that the concept of the ‘revenge of the old economy’ will be at play either way, whether supply or demand is targeted. Either way the hydrocarbon industries know they are being targeted and are attracting less investment as a result whether you directly target supply or you target them indirectly by taxing their customers.
Pierre Lemieux
Nov 26 2022 at 12:22pm
Craig: Good point! The power to tax is equivalent to monopolizing supply. An energy supply monopoly would have the same impact (lower production, higher price) as an energy tax. (This point is formalized in Brennan and Buchanan’s The Power to Tax.)
BRetty
Nov 24 2022 at 9:33pm
Regarding the USCG soft info blackout:
“… the US Coast Guard prohibited it from publicly disclosing information about cargoes arriving into the terminal.”
This seems to me like an anti-terrorism measure, although a weak one — LNG terminals are very expensive, complex, and a tempting target for anybody who wanted to damage US energy infrastructure. Sadly, this includes potential domestic terrorists of the sort who have damaged pipelines.
A weak measure because I would think ships carrying LNG must always be coming in or docked, so finding a ship to attack would be trivial: there’s one right there.
Securing flows of energy is a job I don’t envy, with a huge attack surface and little redundancy in the system(s). And increasingly few “safe spaces” where threat actors are scarce or far away.
BRetty
Pierre Lemieux
Nov 26 2022 at 12:17pm
Interesting points. It would be nice to have more precise information on which regulation or bullying power the Coast Guard invokes to claim such power (if the information is correct). The general question would be, Why does the state, who grabs more than one-third of what people earn (about 20 at the federal level only), have to suppress commercial information (including related to discussion of the Jones Act!) to fulfill its defense mission?
Comments are closed.