The EconomistThe Economist

How to avoid energy rationing

27 Aug 2022 · 4 min read

This piece argues against a cap on energy prices, in the hope that in the long run it will allow prices to decrease. Read why the author believes this in this Economist article.

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Across europe, two questions will set the political weather this winter. How high will my energy prices go? And what will the government do to protect me? Attempting to shelter from the gathering storm, French and Spanish politicians, among others, have already capped or otherwise lowered gas and electricity prices. With wholesale gas futures for early 2023 still climbing—up to more than €300 ($299) per mwh, from less than €30 last summer—and Europe’s economic indicators blinking red, more will follow suit. That prospect is enough to drive economists to despair.

Politicians want to protect voters from big bills, but also need to cut energy use, so as to avoid blackouts and reduce Russia’s oil-and-gas revenues. Price caps help voters, but do so inefficiently and reduce the incentive to cut energy use. Until recently, however, economists would have said that their impact on fuel consumption was minor and their impact on gas consumption uncertain. A body of research had found that consumers were largely unresponsive to higher petrol prices: they need to drive to work, and will do so even if expensive. In this analysis, capping prices would not make a huge difference to energy consumption.

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