So who should listen to Lord Stern about global warming economics? He doesn’t seem believe that, as demonstrated in the U.S., greater supply of natural gas leads to lower prices.
The Belfast Telegraph reports:
Lord Stern, author of the hugely influential Stern review on the financial implications of climate change, has dismissed David Cameron’s claims that a fracking boom in the UK can bring down the price of gas in the UK as “baseless”.
In an interview with The Independent, the respected economist said he was puzzled by the prime minister’s claim this month that “fracking has real potential to drive energy bills down… gas and electric bills can go down when our home-grown energy supply goes up”.
“I do think it’s a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics,” said Lord Stern, chair of the Grantham Research Institute on Climate Change at the London School of Economics.
Gas is a commodity that can be traded on the international market, meaning that it will be sold to the highest bidder, whether inside or outside the UK. As a result, any shale gas boom in the UK would be unlikely to have an impact on the world price, Lord Stern said…
He’s sadly right. Traditional quantity-based supply and demand is baseless because it denies the human element. In reality, the supply side is determined by the lowest price a significant number of sellers are willing to let the commondity go for, and the demand side is determined by the highest price a sufficient customer base is willing to pay. The best example I’ve seen is the dramatic rise of gasoline prices in the US. Once the price went so high that sales actually started to falter the price stopped going up. Now supplies are more available then ever, but the suppliers have determined how much people are willing to pay so that’s the price. Any savings the make in the raw materials market will be kept as profits, not passed down as price reductions.
When a fiat economy competes against an open market, the adaptability of the open market is at a tremendous advantage. The fiat economy becomes quickly unsustainable. This is true regardless of the commodity – Spanish wind power, electric automobiles, or fracced gas. Lord Stern’s Chair will likely outlive any controls on gas prices.
“I do think it’s a bit odd to say you know that it will bring the price of gas down. That doesn’t look like sound economics to me. It’s baseless economics,” Nice idea
Of course Lord Stern is right. In a country where prices are set by decree, the notion that a boom in anything can bring prices down it at least dubious. They will see to it that it does not happen.