Natural Gas and American Left-Populism
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 thanker 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.