Energy and economic growth: Interview with Mark Thoma

If you want an objective view of energy, ask an economist, who can tell you what to expect to pay at the pump in the coming years, and why, as well as what to expect from medium- and long-term economic growth and what the real drivers will be. These are questions that are crucial to a pending decision by the US government over natural gas exports, and while we know where big oil stands versus its manufacturing rivals—it’s the economist who can set things straight.

James Stafford: What every regular consumer wants to know is why the price of gas at the pump continues to rise in the midst of a much-lauded oil and gas boom?

Mark Thoma: In the short-run, of course, the price of gas is quite variable. Recent forecasts, for example, indicate that prices will decline a bit over the summer, but at some point they will undoubtedly head back up again. The real question is how the underlying trend for gas prices, which has been increasing over time, will be affected by increases in the supply of energy from shale and other sources. Will the upward trend in gas prices continue? The answer depends upon the relative growth in the supply and demand for energy. I believe the new energy sources and the corresponding increase in supply will temper the upward trend, but the trend will continue due in particular to growth in demand from developing economies.

James Stafford: According to first quarter 2013 figures, clean energy investment is at its lowest since 2009. What do you see happening in terms of clean energy investment over the rest of 2013 and then in the next 2-3 years?

Mark Thoma: With all of the budget pressures we have seen in recent years, I have a hard time imagining increased support for new investment from the government, so any increase will have to come from the private sector. The incentive for the private sector to undertake these investments depends upon the price of energy – as the price of energy rises alternatives become more attractive – but as noted in the answer to the previous question I see the price of energy continuing to rise, but do not expect the dramatic, permanent spikes in prices needed to spur a substantial increase in investment.

James Stafford: Is the ethanol mandate economically feasible?

Mark Thoma: I think the ethanol mandate is economically feasible in the sense that it could persist, but I don’t think it’s the best way to address our reliance on imported energy or the environmental issues associated with energy use. It’s the political feasibility that seems to be most at issue, and the power struggle between states with grain interests and states with interests in traditional fossil fuels will determine the outcome. I expect the ethanol mandate will eventually be overcome, particularly since the discovery of new domestic energy supplies undermines one of the strongest arguments for it, energy independence.

James Stafford: On a broader level, is US energy policy missing the mark by interfering too much to boost renewable energy against fossil fuels? Should the free market reign?

Mark Thoma: When significant market failures are present, the free market does not produce the best possible allocation of resources and government intervention can help. Thus, the question for me is whether significant market failures exist in renewable energy research. I believe that they do, and that, if anything, we are not doing enough to promote new energy technology. This is not unique to renewable energy, such market failures are common and underlie government issued patents, research grants, and so on. However, let me be clear that I am not in favor of government “picking winners” by, say, favoring particular companies or products, but I am in favor of generous support for basic research in this area.

James Stafford: How do you see the US carbon trading market shaping up even though it is not on a national level, but remains the purview of states, most notably California?

Mark Thoma: Presently, there seems to be little momentum for a US carbon market, and I don’t see that changing in the near future. The necessary public and political support simply isn’t there. It will, sadly, probably take a natural disaster or extinction of an important species that can clearly be connected to climate change before any notable change occurs.

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