Incoherent energy policy worsens the inflation outlook

Most of the exit polls from the midterm elections found that, not surprisingly, the state of the economy — especially inflation — remains a top concern for most voters. Unfortunately, high inflation is likely to continue for the foreseeable future, despite efforts by the Federal Reserve to bring it down through higher interest rates and tighter money. Lingering supply side constraints, robust household balance sheets, and fallout from the Russian invasion of Ukraine make the Fed’s job even more difficult.

As has been well documented, rising energy costs account for a huge part of today’s inflationary spiral. The price index for all forms of energy is up 20 percent from a year ago, while natural gas has jumped 33 percent and the cost of electricity has risen 18 percent. Average diesel prices are up 58 percent from a year ago, while stocks are well below typical fall levels.

Though the disruption of oil and gas flows resulting from the Russian invasion of Ukraine, and moves by the West to embargo Russian energy sales, are partly responsible for the hyperinflation in U.S. energy costs, inconsistent and incoherent domestic energy policies shoulder most of the blame. As the world’s number one producer of both oil and natural gas, and the fourth largest producer of coal — along with huge reserves of these resources — there’s no reason U.S. energy costs should be rising at such a rapid clip.

The latest war against conventional energy began during the 2020 presidential campaign when then-candidate Joe Biden promised to “end fossil fuels.” In addition to canceling the Keystone XL pipeline on his first day in office, President Biden has added or proposed to add nearly 100 pro-alternative and anti-conventional energy policies. As recently as Nov. 6, stumping for New York Gov. Kathy Hochul before the midterm elections, he promised “no more drilling.” 

In addition, Biden has consistently lambasted the coal industry. True, coal-fired power generation has been declining for more than a decade, dropping from 43 percent of the total in 2011 to 22 percent last year in response to cheap natural gas, subsidized renewable energy and stricter environmental regulations. But the Biden administration has sought to accelerate coal plant retirements through the imposition of a new regulatory onslaught. 

Indeed, earlier this month the president said all of the country’s coal plants should be closed because they’re too costly to operate and can’t be relied upon as a dependable energy source for future generations. These comments didn’t sit well with Sen. Joe Manchin (D-W.Va.), who retorted that the president’s statement was “outrageous and divorced from reality” and ignored “the severe economic pain the American people are feeling because of rising energy costs.”  

The Biden administration is badly in need of a dose of reality when it comes to energy policy.  Natural gas is no longer cheap. The nation’s power grids are under severe stress because of a lack of investment in transmission and the replacement of base-load power like coal with intermittent sources like wind and solar. And American households and businesses face daunting energy bills this winter, in part because no resolution of the Russia-Ukraine conflict is on the horizon.

Fortunately, as many as 40 U.S. coal-fired power plants that were slated for closure over the next year will remain on line for up to five years. Generating  nearly 17 gigawatts of power, these plants will help ensure grid stability and reliability. What is more, despite environmental concerns, coal isn’t going away any time soon. In fact, global coal consumption will reach an all-time high this year. This is also good news for America’s coal industry, as exports have jumped about 15 percent over the past year, with Europe the primary destination.

In 2018, the North American Electric Reliability Corporation (NERC) warned that “an accelerated retirement of coal-fired and nuclear plants could lead to power outages, temporary shortfalls in surplus generation, and transmission problems.” This is still the case, especially in view of the global disruption to energy flows because of Russia’s war in Ukraine. A sensible, balanced energy policy would recognize that we need all forms of generation in the power mix:  nuclear, coal, natural gas, solar, wind and hydro. Otherwise, America’s national security will be undermined and energy costs will continue to escalate.

Bernard L. Weinstein is emeritus professor of applied economics at the University of North Texas, former associate director of the Maguire Energy Institute at Southern Methodist University, and a fellow of Goodenough College, London.