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Add This to the List of Inflation Drivers
There are more than enough arguments suggesting that for the remainder of 2021, we will experience above-trend inflation. Tight labor markets, money supply growth, over stimulus, higher fuel prices, shortages, increased consumer demand, etc., pick one, or pick them all, most concede that this year will play out with price increases. Whether an inflationary trend continues deeper into the decade or even an upward price spiral is not knowable but worth watching and even hedging against. Based on some of the actions taken by world leaders, including those in Washington, higher long-term U.S. price growth and a weakening dollar may be unavoidable. Some of the actions that may drive prices higher are related to the future of energy; let’s explore.
Energy Policy
In a White House press briefing dated April 22, 2021, related to greenhouse gases, an announcement was made that read:
“The United States has set a goal to reach 100 percent carbon
pollution-free electricity by 2035,
which can be achieved through multiple cost-effective pathways, each
resulting in meaningful emissions reductions in this decade. That means
good-paying jobs deploying carbon pollution-free electricity generating
resources, transmission, and energy storage and leveraging the carbon pollution-free
energy potential of power plants retrofitted with carbon capture and existing
nuclear, while ensuring those facilities meet robust and rigorous standards for
worker, public, environmental safety and environmental justice.”
Most of us were raised to care about the health of our planet and what we leave for the next generation; I certainly was. So, we can understand, even appreciate, why important actions that take a long time to implement are made in advance of any projected “disaster.” Channelchek serves its readers by covering markets and economics, so reviewing one of the economic implications of reducing the demand for petroleum products serves our readership. The above announcement throws up at least two more red flags in the inflation department to consider.
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Inflation Drivers
The first red flag for American’s finances is easy to understand. The U.S. produced 91% of the oil it used in 2016 and was energy self-sufficient; America was actually able to export its excess local production by 2020. For the first time the U.S. managed to take complete control of its energy destiny. The decision has now been made to unwind what took so long to achieve and instead build solar panels, mine for minerals to create battery systems, and cover land to collect sunlight. This is paving the way for exciting investment opportunities, but in the short and medium-term, may lead to higher all-around costs. The White House announcement eludes to high-priced labor, the cost of electricity and everything that we consume that uses electricity in the manufacturing process will cost more to make. This higher cost of production will get passed to the buyers. Everything has a cost, one of the costs of this transition would be increased prices.
The second red flag is a bit more involved and begins in the 1970s. The ‘70s followed decades of the most comfortable and prosperous growth period in the countries history. However, the post-war (WWII) boom stopped abruptly when that decade began. It was a surprise and a shock to most. Young adults who only knew growth and prosperity were suddenly asked to tighten their belts, put schools on austerity, and become two-income households for the first time. A root cause was the country had halted backing dollars with gold (gold standard). The lack of backing caused a lack of confidence which helped drive prices up
The dollar was eventually shored up as it essentially found a new commodity to back it, this commodity was oil. The U.S. and Saudi Arabia reached a deal to price the sale of crude oil throughout the globe in U.S. dollars. Whether a U.S. company is involved in the transaction, or even Saudi Arabia, the standard currency around the world is and has been U.S. dollars. The name given to this is petrodollars. The world has been on this petrodollar system for 50 years, and it has had the effect of creating worldwide demand for the U.S. currency. It can be said with certainty that among the reasons the U.S. enjoys the high of a living standard it does is because our dollar is strong. It is strong because of faith in our economy and because petroleum can’t be bought around the globe without U.S. dollars. This produces a demand, unlike any other currency experiences.
The plan outlined by the White House above has the U.S. electricity generating ability free of carbon emissions by 2035. The plan in the U.S. and Europe for electric vehicles are just as aggressive. What is likely to happen to the value of U.S. dollars these countries successfully free themselves from requiring oil? Even if it’s only a small percentage of current output? Simply put, The U.S. dollar will become less in demand, not as important; it won’t be as strongly backed any longer. This would put downward pressure on its value. As U.S. dollars go down, they won’t buy as much – dollar-based costs for almost everything imported could rise.
Take-Away
If countries around the globe are successful in rebuilding energy systems, there will be lucrative investment opportunities that massive change brings. There will also be many hurdles as there are costs to everything. One of those costs could be a declining dollar. A strong dollar has helped Americans afford their above-average living standards; the challenge could become retaining those standards in the face of change, and minimizing inflation.
Managing Editor, Channelchek
Suggested Reading:
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 The Limits of Government Economic Tinkering
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