Volts podcast: Lauren Melodia and Kristina Karlsson on energy inflation and how to tame it

In this episode, Lauren Melodia and Kristina Karlsson of the
Roosevelt Institute explain why it’s counter-productive to
increase domestic oil and gas production when energy prices rise,
and how building out clean-energy infrastructure is the actual
best way to address the price volatility of fossil fuels.


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transcript)


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transcript)


Text transcript:


David Roberts


Americans are struggling with two related problems: one, there’s
general inflation, which means pretty much everything is
expensive; two, there’s energy price inflation, which means that
energy in particular (specifically, oil and gas) is expensive.


This has led some politicians, mainly
Republicans-and-Joe-Manchin, to propose a dual solution: cut back
on government spending (to tame inflation) and increase domestic
oil and gas production (to tame energy prices).


This approach is wrong-headed and counter-productive on both
counts. The reasons why are laid out in a new issue brief from
the Roosevelt Institute, the first in a series called “All
Economic Policy Is Climate Policy” (which, hell yes).


Lauren Melodia, deputy director of macroeconomic analysis at the
Roosevelt Institute, and Kristina Karlsson, the institute’s
program manager for climate and economic transformation, argue
that fossil fuel prices are inherently volatile, and that
volatility has serious macroeconomic effects; on the flip side,
electricity prices — specifically renewable electricity prices —
tend to be far more stable and manageable.


It follows that government spending to build out clean-energy
infrastructure is itself anti-inflationary; it removes a source
of price instability and replaces it with stability.


This argument is my favorite kind — it put words to something
that’s been rattling around in my head for years — so I was
excited to talk to Melodia and Karlsson about the volatility of
fossil fuels, why we’ve come to accept it as an inevitable fact
of life, and why it is, in fact, a choice that we could make
differently.


With no further ado, Lauren Melodia and Kristina Karlsson from
the Roosevelt Institute. Welcome to Volts. Thanks for coming.


Kristina Karlsson


Thanks for having us.


Lauren Melodia


Thanks so much for having us.


David Roberts


You have written this report about energy and inflation. It's one
of my favorite kinds of reports, in that, after I read it, I was
like, "Oh, well, duh, of course that's true." But it's like it
hadn't occurred to me before. It's one of those things where just
hearing it stated clearly, I think is very eye-opening. So let's
walk through a little bit, the pieces of it, and then we'll get
into what it means for policy. So to start with, something I
found interesting and didn't really know, which is that these
traditional measures of inflation, which are gently sort of like
bundles of products through which inflation is measured and
tested, exclude energy.


Typically, energy is not included in them because energy is sort
of inherently volatile and is swinging up and down all the time.
And so the idea, I think, is if we include that, it's going to
sort of obscure what we're trying to look at. So we'll set that
aside and look at another bundle of products, and if they are
going up, then it's real inflation. This is sort of how things
are typically done. But as you say, this can be somewhat
misleading since energy price volatility plays a huge role in
inflation, and, specifically, is playing a huge role in current
inflation.


So explain briefly sort of the role of energy prices in the
inflation we are currently experiencing.


Lauren Melodia


Sure, absolutely. I mean, I think that there's two ways that
they're at play, despite the fact that the Fed or certain macro
analysts might not want to think about energy prices in the
overall inflation rate. One is simply that people spend a lot of
money on energy. And so even if the core CPI, Consumer Price
Index, or other indicators show that there's price stability,
people are experiencing rising gasoline prices. And we've seen
over the past year, that really fuel the conversation around
inflation.


David Roberts


Consumers definitely don't hold energy as some separate category,
right. Like they experience it as inflation when prices rise.


Lauren Melodia


Exactly. So if we're talking about rising prices in society and
trying to ground that conversation and connect with consumers,
people who are consuming the media, your constituents, these are
the prices that people are going to be talking about. The other
way that they really do influence kind of the overall economy is
that these energy price volatility, the changes in energy prices,
actually do have a huge impact on our economy overall even if we
don't want to be thinking about them when it comes to inflation.
And that simply is because energy is foundational to business
operations and household consumption.


If there's a spike in gasoline prices or other energy prices, it
is something that people just have to deal with. You can't delay
consuming energy, you have to pay the higher price, and it means
that you're going to have less money to spend in other parts of
the economy. So we've seen actually, historically, that ten out
of the last twelve economic recessions in the United States were
actually preceded by a spike in crude oil prices. Meaning that
you've got this rise in prices there, people have to pay it, they
can't pay for other things in the economy, and it leads to kind
of a slowdown of economic growth.


David Roberts


I want to sort of put an exclamation point on this because I feel
like it's super important to understanding the rest of it is.
It's not like cars or bread or something, where if the prices
rise you can buy less of it or switch to an alternate product.
Energy is a non-negotiable. You have to heat your house, you have
to run your business. So rises in energy prices just mean you're
spending more on energy, which automatically means you're
spending less on other consumer categories.


Lauren Melodia


Yeah, absolutely. One of the concepts we try to really highlight
here is the concept of energy insecurity. When the price of
energy rises and people just have to pay it, it means that they
can't pay for other basic necessities, not to mention other
things that fuel economic growth and productivity. Those other
things where we've got people out there working, making those
things to produce and sell to consumers who have disposable
income to spend.


David Roberts


Right. And can you quantify sort of how big a role energy
volatility is playing in the current inflation relative to ...
we've seen all these other consumer goods rising in prices, too.
So is there some way sort of dividing the responsibility?


Lauren Melodia


Yeah, I mean, people are aware of gasoline prices rising a dollar
or two in their communities. The way that inflation is calculated
is based on the change in price of an item, but it's weighted
based on how much people spend on that item. So energy prices are
one of the biggest ticket items for the average household. The
average household is spending roughly 11% of their annual budget
on energy consumption. And so that gets weighted in the
calculation of what inflation is. So inflation, the number that
we hear monthly when the numbers come out is rather abstract.


Like last month it came in at 8.3% over the past year.


David Roberts


Right.


Lauren Melodia


But we can attribute 2.1% of that to energy prices alone, and
largely gasoline price increases.


David Roberts


Yeah, you said in the report, gasoline price increases
specifically responsible for 75% of energy inflation. So gasoline
is the big ticket here. And just, aside from the economics of
inflation, gasoline is also probably the single consumer price of
which US consumers are most aware, most hyper aware. They see it
advertised to them every day. So insofar as part of inflation is
sort of the psychology of it, the consumer psychology of it, that
is also a big piece.


Lauren Melodia


For sure.


David Roberts


So you say, you lay out a couple of reasons why fossil fuels are
not accidentally volatile, but sort of intrinsically volatile.
Could you lay those out insofar as this is not like a solvable
problem? So explain why fossil fuel — what is it about fossil
fuels that make their price fluctuations kind of out of our
hands?


Kristina Karlsson


Absolutely. I think you started that question with the exact
takeaway. This problem is not solvable, so long as we are
continually reliant on fossil fuels. And that comes from a few
things. I mean, the most obvious place to start is that these are
hard to find hydrocarbons buried deep underground. They require
significant investment in production up front, and they also
happen to be located in different places around the world that
sort of tie us into a default geopolitical web. And as we can see
right now, with Russia's invasion of the Ukraine, geopolitical
conflict has a huge impact on our domestic oil prices.


And that has been the case for a very long time, not just in
current situations. And I think that's very well exemplified in
that graph that we share, where we show that ten of the past
twelve economic recessions are preceded by an oil spike. A lot of
those oil spikes come from geopolitical conflict. And beyond
that, I mean, beyond just the fact that there's conflict in this
international market, the fact that it is international, and that
we are one player in a much bigger market than we would be for
other types of goods that we consume, is another part of this
volatility.


I mean, when we are faced with situations like we are in now,
where international conflict is driving changes in our domestic
prices, we have very little ability to mitigate those supply
chain blockages by boosting our own domestic production.


David Roberts


I wanted to ask about that specifically. This, I think, is a lot
of people's initial instinct or intuition, and not just a lot of
random people, but a lot of members of Congress in both parties.
This idea is, like, if this international volatility, these
international problems are causing oil prices to go up, it makes
intuitive sense to people, I think, that if we just produce more
of our own oil and gas, we will to some degree protect ourselves
from that volatility. And that just turns out to be...


Kristina Karlsson


Not the case.


David Roberts


... very straightforwardly wrong. Explain why.


Kristina Karlsson


Yeah, I think there's two things, I think, one, even if we
increase our domestic supply, the way that — especially crude oil
— is priced is through an international sort of price cartel,
which is OPEC. They have a strong price setting power, and any
changes that the US makes will still be influenced by the prices
that are coming from that organization.


David Roberts


Right. And if they want, they want to set prices, and if the US
boosts its production, such as to lower prices more than OPEC
wants them lowered, OPEC is perfectly capable of dialing back
production in other places ...


Kristina Karlsson


Exactly.


David Roberts


... to get the price they want.


Kristina Karlsson


We can't beat them.


David Roberts


Exactly. Theoretically, there's some limit. If we were a big
enough producer, if we had like 50% of the world's, or 80% of the
world's oil, or something like that, there's some size we could
reach where we could have a bigger influence.


Kristina Karlsson


But we don't want that.


David Roberts


But a. we don't have it and b. probably couldn't get it even if
we sort of maxed out.


Kristina Karlsson


Exactly. I mean, and the second reason, which is even in this
imaginary world where the US becomes the mega producer of crude
oil, it's not going to help domestic consumers, because our
current domestic producers are very heavy exporters at the
moment. Most of our domestic production is actually being
exported, even in times of elevated demand at home, even when
we're having price crises at the pump in the US, we can't make
oil companies choose to sell their product domestically,
especially if there's a profit incentive for selling abroad. And
that's exactly the case.


David Roberts


Yes. Like taking care of like "Oh, our people, our domestic
people are suffering. Let's divert some of our oil and take care
of them." It's just not really a thought process that like your
Exxon execs ...


Kristina Karlsson


They get a lot of undue patriotism put on them because, in these
moments, when this is really hitting the fan, we can see where
their priorities are. And this ties to the nature of fossil fuels
again, which I think will contrast with renewables later on, is
that these energy products are transportable overseas. The reason
that they are exported so much is because we can. And early on,
when natural gas came online in the US it was supposed to be the
solution to US energy independence. That was all well and good
until liquefied natural gas happened.


David Roberts


Yes. I want to lay this out a little bit because the conventional
wisdom, and I think probably a lot of people still have this in
their heads, I think, insofar as they're paying attention to
energy, the conventional wisdom is: yes, oil is this sort of
perfectly fungible international market, and the domestic supply
is almost irrelevant to the prices. But natural gas is different.
It's harder to transport, it's harder to send overseas. So
insofar as we're boosting domestic production, we are satisfying
domestic demand. But as you say in the report, the sort of growth
of the liquid natural gas technology and industry means that more
and more natural gas is starting to sort of mirror oil.


Kristina Karlsson


Absolutely.


David Roberts


In being international, an international market.


Kristina Karlsson


Right. I think, we can observe sort of similar skyrocketing
trends in exports around the same time between liquefied natural
gas and crude oil, which is when the crude oil export ban was
lifted and during the time that liquefied natural gas technology
was really coming online. And now we're at the point where we are
the number one liquefied natural gas exporter in the world, and
we are actually exporting faster than domestic production at the
moment.


David Roberts


Oh, wow.


Kristina Karlsson


Which is very concerning.


David Roberts


So we're exporting more than we're producing.


Kristina Karlsson


Yeah, we have reserves, but we are exporting at a pace that is
higher than our domestic production, and that is actually causing
us to draw down inventories, at this moment, when we are really
struggling, to maintain our export commitments.


David Roberts


So then this idea, because there's a lot of congresspeople who
are real hot on the idea that building more LNG terminals is the
way ... like, that's how we can get our "freedom gas" to Europe,
so they can stop using the "autocrat gas" and start using the
"freedom gas." But that, again, fundamentally mistakes how
international markets work. Like the market is fluid. Once the
LNG is out there circulating in the natural gas market, it's just
part of the gas market. It's not marked. You don't have a little
"F" on the "freedom gas," and a little "A" on the "autocrat gas,"
it just all becomes gas that you buy on an open market.


Kristina Karlsson


Exactly. I mean, it's important to remind ourselves also when we
play out these potential scenarios, if we invest further in our
own fossil fuel dependence, even if the sake is to export
"freedom gas," we are now further entrenching ourselves to our
vulnerability to price fluctuations from gasoline, which are
still not going anywhere, is just further and further entrenched.
The more infrastructure we bring online, the more we are tied to
international dynamics.


David Roberts


Right.


David Roberts


And there's no getting through that, right? There's no level of
domestic production at which you outrun that effect.


Kristina Karlsson


Right. And even if we had the capacity for that level of domestic
production, the oil and gas companies in the US would not give it
to ourselves. That's the key part.


David Roberts


Much like OPEC, they would fiddle with their production based on
prices and profits, right. I mean, that's sort of how they work.


Kristina Karlsson


Exactly.


David Roberts


And say a little bit, in terms ... this gets it at some of why
sort of fossil fuels are intrinsically volatile. But there are
two other pieces. One is say a little bit about speculators. I
don't think I had really fully understood this until I read your
helpful summary.


Kristina Karlsson


Yeah, well, I think it's important to understand that speculators
basically are betting on price changes and making money off of
those bets, in the most simple of terms. So it makes sense that
speculators love volatile prices because there's a lot to bet on.
And oil and gas or commodity futures market is extremely big and
powerful. And especially starting in 2000, the Commodity Futures
Modernization Act started to really open the floodgates on this.
And it was a direct affront to the Commodity Futures Trading
Commission, which is tasked with keeping a handle on this. And
since then, it's been a huge part of how energy prices are
determined.


Dodd-Frank tried to reel this in some. But the great thing about
it being an international market, is if commodity traders want to
continue to do business, they can start private commodity trading
desks housed in other places. And that's exactly what happened
after Dodd-Frank. And during the past year, the top three or five
of these private commodity trading houses, many of them almost
doubled their profits in 2021, during a time when people's energy
burdens were as high as they could be, when people are tipping
into energy insecurity. And they're particularly effective during
times of like crisis when energy demand is at its highest.


And we talk about the Texas storm example, where people's energy
bills were at $15,000. Part of that comes from the energy
companies, themselves, price gouging. But another part of that is
that these speculators, on top of that, are taking advantage of
these times of desperate need.


David Roberts


Yeah.


David Roberts


And whatever you might say about energy prices being tied to sort
of foreign events or foreign conflicts or economic fluctuations
in other countries, we can't control that, but at least it's
legible. Whereas once they start being dependent on speculators,
then they're just volatile with no rhyme or reason, which is even
worse.


Kristina Karlsson


Right, exactly. And speculators can make money if the price is
going down or up. That's another thing. So it expands the
volatility, and I will say and the other part is that it's
vulnerable to climate events.


David Roberts


Right.


Kristina Karlsson


So the ironic thing about burning fossil fuels, maybe it's not
ironic, maybe it's obvious, is that burning fossil fuels is
terrible for climate change. In fact, it drives it. And then we
have extreme weather events, we have extreme temperatures, and
those weather events and those extreme temperatures jeopardize
fossil fuel infrastructure, which means that fossil fuel
companies are paying to fix pipelines that have frozen or they're
limiting their supply for two months while there are wildfires
going on. And the fact is that we're just burning our way into
our own demise in this way.


David Roberts


Yes, we're exacerbating the natural volatility, you might say. So
as you conclude, and here I'm quoting, "effectively managing
energy price inflation, while retaining a fossil fuel based
economy, is nearly impossible." And this, I think, again seems
obvious once you say it out loud. Of course we can't control
fluctuations in the prices of international commodities, the bulk
of which come from other places and are traded on an
international market. Like, we are subject to that market, and
there is no recourse, there's no secret weapon, there's no
increasing domestic production ... doesn't get you out of this.
Releasing oil from the strategic petroleum reserve.


Kristina Karlsson


Like the secret space.


David Roberts


Yes, we tried that, and it was like a blip.


Kristina Karlsson


The tool that we typically turn to when it comes to managing
inflation ...


David Roberts


Well, I meant to ask about this. I'm so glad you remembered that.
Why won't just the conventional response to inflation, which
we're seeing play out now is just for the Fed to boost interest
rates, why won't that get at this?


Kristina Karlsson


Well, I think there's two layers. I think one, that is a very
blunt tool that's meant to basically slow down the productive
capacity of the entire economy, because it's running too hot, or
our demand is too high. So it's already a pretty blunt tool, and
I would argue that probably it isn't the right tool for the
moment period, but it's not able to deal with specific supply
chain issues already. We know this. But the fossil fuel supply
chain, especially, is out of the hand of our domestic government
to deal with because of all of the reasons that I just stated.


So it's already the wrong tool for dealing with supply chain
blockages. And then supply chain blockages in the fossil fuel
markets are even more so out of our reach.


David Roberts


Right. So just to sort of put a pin in this part, insofar as your
economy is dependent on fossil fuels, you are stuck with a level
of volatility that has real macroeconomic effects. Yes, some of
which we're living through now, in part. So let's pivot then to
my favorite subject, electricity. One of the initial points you
make, and this is even sort of, in here we're just sort of
bracketing renewables, we're just talking about electricity in
general. You make the point that electricity prices historically
have been much less volatile for two big reasons. So tell us why
historically electricity prices have been more stable.


Lauren Melodia


Yeah, that's a great question. I mean, there's two main reasons
that we point to in this report, acknowledging that the
electricity industry is super complicated. The production and
transmission of electricity, also, beyond the scope of what we
can really outline here. But all that said, the first thing is
that the electricity grid draws on a variety of sources. So
whereas most cars run on one type of gasoline that you can buy at
a gas station, or your home furnace can be powered by one type of
oil or gas — when you use electricity, you're plugging into a
grid that is drawing on power generated from a wide variety of
sources.


And so it has built in these mechanisms to kind of balance the
desire for consumers to have electricity whenever they want it
and all of these different sources generated in all of these
different places. So it's just structurally set up to kind of
deal with giving people — drawing on a lot of options, not
getting stuck in dependence on one fuel source.


David Roberts


Right. So if coal, for whatever reason shot up, you can shift to
natural gas, or vice versa, like, you can move around what you're
drawing on in order to keep prices stable.


Lauren Melodia


Exactly. Yeah. The other big reason, that we bring up in the
paper, is just that the electricity industry is much more
regulated than the gasoline industry or utility gas industry. I
think part of this is because of the uniqueness of how
electricity is generated and transmitted. I mean, I think very
early on, as it was being developed into this product for
consumers, it was clear that we needed the government to be
involved in setting what the prices were going to be, because
otherwise the cost of entry into the market is so big that
undoubtedly there was going to be one company locally that kind
of had a monopoly.


David Roberts


Right, a natural monopoly.


Lauren Melodia


Exactly. Yeah. And so this is something that utilities in
general, very early on, as they were being developed, were
understood to be a natural monopoly. So we needed there to be
government regulation to protect consumers and make sure that
they had just and reasonable prices and equal access.


David Roberts


Yeah. And for all the complaints electricity heads have about
electricity sector regulation, which are many, it has, sort of at
the macro level, kept certain parameters on the whole thing, kept
a certain degree of stability around the whole thing.


Lauren Melodia


Absolutely. I mean, our electricity sector today, it's not
running exclusively on renewables, like we argue in the report.
It should be. It is drawing 60% of power generated through fossil
fuels. And yet, even given that you look at volatility, the
average price change in electricity compared to utility gas or
gasoline over time, and the prices go up and down far less, and
they don't swing as widely or as often.


David Roberts


Yeah, it's a very striking graph in the report, if listeners want
to go track it down, showing the volatility of oil versus gas
versus electricity. And electricity looks practically like a
straight line relative to the other two, which fly up and down,
all over the place.


Lauren Melodia


Yeah.


David Roberts


So electricity manages to stay relatively stable, even drawing on
fossil fuels, which, as we discussed, are volatile, it has this
sort of effect of suppressing that volatility and creating
stability. So sort of the next piece of the argument is that even
beyond that sun and wind, solar and wind power, specifically, are
less volatile.


So explain a little bit about that.


Lauren Melodia


Yeah, well, Kris really got into kind of the nitty-gritty of the
extraction and the conflict around pulling fossil fuels out of
the earth and producing energy sources with them. But wind and
solar look almost the opposite to that. They're commonly
available everywhere. Sure, there are some areas that might have
more sun, more wind, but we're not dealing with geopolitical
situation, where there's a handful of countries that have access
to this resource that the rest of the world relies on. Now of
course, we know there's been a lot of discussion about the
minerals needed to produce the technology to access the sun and
the wind, but we believe it's possible to figure out how to
fairly and justly distribute those minerals.


We're hopeful that we can produce that technology globally and in
cooperation. And therefore, once it's set up, you have common,
unlimited access to solar and wind. So the thing about the fossil
fuel industry is that there's this fuel that constantly needs to
be extracted and transported all over the world. And with sun and
wind, once you have the technology to capture it, it's just
commonly available. You don't have to be transporting it around
the globe.


David Roberts


And free.


Lauren Melodia


Yes, absolutely.


David Roberts


I want to dwell just for a second on this supply chain question,
because this is a common argument made on behalf of sun and wind.
There's no fuel costs. It's all raining down on us for free. You
don't have to dig it up. And so once you build the technology,
the costs are all technology, not fuel. And so once you build the
technology to harvest it, you have basically an eternal, reliable
source of free fuel. But there are supply chain issues around the
technology. So as you say, there are minerals and metals involved
in terms of the sort of chips involved.


China has almost all the rare mineral processing. So in terms of
the supply chains for getting that technology, there are
currently at least geographical concentrations. There are sort of
players that are sitting in a similarly sort of cat-bird seat, as
people who are sitting on top of oil and gas. But as you say,
that's a solvable problem, right? The fossil fuel volatility is
not solvable. Supply chain volatility is, in theory, solvable,
right? Like we've built diverse, international supply chains for
lots of things in the past and could do so, again, with this.


Lauren Melodia


Absolutely, I mean I think that the dependence on fossil fuels
sets you up to have a permanent need to be negotiating global
production and distribution, whereas with renewables, there's an
upfront investment. I think that there's a lot of government and
international coordination that needs to take place but it's not
to the same degree that we have with the fossil fuel industry.


David Roberts


Right. More like a constricted passage that we're trying to get
through, but there is an other side.


Lauren Melodia


Right.


Kristina Karlsson


Exactly.


Lauren Melodia


There's no other side with fossil fuels.


David Roberts


And worth mentioning, because we mentioned it about fossil fuels,
is that insofar as you can prevent climate change, which sun and
wind do, you prevent more volatility in your supply chains in
that sense, too. Those are both, I guess, long term effects, but
worth noting. And also another in terms of mirror, like you
talked about how oil price spikes precede recessions because of
this — energy is not something you can choose not to buy, so
everybody's stuck with the price rises. But you have sort of the
mirror effect with renewables, in that they are constantly
reducing household energy expenditures, which free up more money
to spend on other things, right?


Lauren Melodia


Yeah, absolutely. I mean we don't have the best ... we have a lot
of historical data when it comes to fossil fuels, both the
production and on the consumer end. We have a lot less of that
with renewables. But there are a lot of studies that other people
have done, that we highlight here, really looking at, "What does
it cost to produce renewables now? What's the impact on it on
your electricity bill today?" Really trying to parse those
details out. And again and again we see that renewables are
trending downward in terms of the cost of producing them.


So that is something ... there's a long-term trend in them going
down, whereas with natural gas we see it trending up. So that's
something that can be passed on to consumers.


David Roberts


Right. And so I wonder if you think, and this is, I guess,
somewhat speculative, but as we become more of a renewables based
economy, do you think that will reduce the number of recessions?
I mean, do you think that will have the effect of mitigating some
recessions?


Lauren Melodia


I think that there's a lot of potential there. I mean, I think
that with the recessions we've seen now that have been preceded
by oil price spikes, a lot of that has to do with it being
produced elsewhere, and so prices go up, and we're paying for gas
that is being captured by producers abroad. But the renewable
energy landscape is its domestic production, so everyone can
produce it technically. Some countries more than others. Some
will have an easier time ramping up. The United States,
obviously, one of them. But the idea here is that it's something
that doesn't have to be transported because it's commonly
available everywhere, and so it's going to be domestically
produced largely. Which means that even if there is a price
increase, the producers of it are getting that price here in this
economy.


David Roberts


Right. It's still in the economy.


Lauren Melodia


So it has less of a kind of domino effect, in the sense that it's
not just a bunch of money getting sucked out of the US economy to
oil producers abroad, but it might be getting sucked out of
consumers pockets into their local energy production companies.
But those companies, the people that work there and own the
business, also live in the United States, and they'll be putting
that money back into the economy here.


David Roberts


Right. You're having money circulating the economy, whereas every
one of these price spikes of fossil fuels, and I just don't know
that people really sort of fully have internalized this, but
every single price spike in fossil fuels just has the effect of
draining shitloads of money out of the US economy and might as
well be lighting it on fire, right? These are just rents we're
paying. We're not getting more for our money. We're just getting
the same thing for our money. So it's just being drained of
blood.


Lauren Melodia


I think the other thing that comes into this is, like, Kris was
talking about the speculation kind of betting on prices going up
and down. Renewable prices, electricity prices are much more
stable. And so you can plan your life around that. You can't
have, like, "Oh, the price of gasoline went up. We don't know
why. We don't have any control over it." There's a lot less of
that dynamic at play. So when you have stable energy prices, it's
something that you can plan for. It's not something that's going
to catch you off guard, and then you can't pay your rent. You can
have long-term contracts, consumers can have that.


There can be much more education and awareness about what to
expect.


Kristina Karlsson


Right. And we do argue also that for those in our economy that
are the closest to being energy insecure, or who are lower-income
— and we found more so Black and Latinx — the volatility from
fossil fuels can really put you over the edge, and you can't plan
for that. And so we say that this transition could also have the
potential to be an improvement in energy equity at least.
Obviously, we make some stipulations about how the policy design
would have to make sure that those consumers had access to
renewables. But if we do this in a public-investment-led way, if
we move away from tax credits and more towards subsidies, if we
make sure that renters who don't have control over what their
landlord does in their building, for example, are able to have
access to renewables, then this sort of price stability will have
an even greater impact on those who spend the majority of their
household budget on energy, not the majority of their whole
budget, but who spend more so than other groups of consumers.


David Roberts


So you can enhance the equity effects. But I think it's worth, I
think, emphasizing what you said at the beginning, which is
insofar as vulnerable populations suffer more from price
volatility, they will disproportionately benefit from price
stability, right. So there's an inherent equity effect in all
this, in shifting from volatile to non-volatile sources of
energy. You're going to have a large equity effect, even
bracketing everything else.


Lauren Melodia


Right.


David Roberts


So let's then talk about what to do with these insights. So the
conventional wisdom is that inflation comes from overheated
demand running out ahead of supply, and thus, that government
spending, like the initial Recovery Bill that Biden and Congress
passed, insofar as it accelerates consumer demand, is just going
to exacerbate inflation. Sort of the conventional wisdom is that
Biden and Democrats are sort of partially responsible for this
because of the big spending they did when they first came in. And
I think Jeff Bezos sort of expressed the conventional wisdom the
other day, when he said that Manchin saved the Democrats from
themselves by preventing them from spending even more.


He literally used the phrase, "Manchin saved them from
themselves." It haunts me.


Kristina Karlsson


He cannot pivot into being a pundit now. I cannot take that.


David Roberts


Can just one billionaire not. Just don't.


But the conventionalism is that in times of inflation, the proper
government response is austerity — to spend less until supply
catches up with demand.


Kristina Karlsson


Right.


David Roberts


But to operationalize what y'all are saying, would require
spending a bunch of government money, like accelerating the
transition from fossil fuels to renewables. You can just sit back
and wait for the market to do it. But if you want it to happen in
time to have the effects we want, short-term effects, that is
going to require a big, new public spending. So how do we
reconcile this intuition that public spending will drive
inflation with this counterintuition that the energy transition
will suppress inflation?


Kristina Karlsson


Well, I think you picked up on one of the main goals of this
paper. This is one of the issues that we're really trying to
confront, which is that climate scientists, climate activists, so
many people have been calling for a big, public investment in
this transition and are being sort of bombarded with inflation
hawkery, saying that "We can't afford it right now, it'll drive
us over the edge." I mean, I think conventional wisdom is
misapplied in this current moment for a few reasons. I think
we've already mentioned that the inflation that we're dealing
with is coming from several supply chains.


And as we said, our tools for dealing with that type of
inflation, instead of overall overheating inflation, are
different. But two, it's not just government spending, all
inflationary. I think you have to really understand what you're
spending your money on. And that's the big argument of this paper
is that if you spend your money on building infrastructure that
will stabilize energy prices, which as we can see, are a huge
driver of the inflation we're seeing right now, then you are
actually eliminating a major source of inflation. And the amount
of spending that we do in the time period that it would require
will be much shorter than the amount of time that we've actually
been dealing with fossil fuel-driven inflation and fossil
fuel-driven volatility.


So I think our argument is, "Of course it's worth it, and the
stabilizing effects of switching to renewables will be able to, I
don't even want to say offset, because I don't want to cosign the
idea that this will lead to additional inflation.


David Roberts


So a. we have the stabilizing effect of moving off fossil fuels
onto renewables, but you don't even think that government
spending equals more inflation is true to begin with?


Kristina Karlsson


I'm saying in this current context. I don't know that the
conventional wisdom is properly applied to the context we're in
right now. There's a lot of debate over whether or not we are
truly overheating, or if we're really just dealing with some
supply chain blockages that come from recovering from the
Pandemic.


David Roberts


Right.


Lauren Melodia


Yeah, I think that if you're studying kind of what's driving
inflation, a lot of economists are in agreement: that right now
the inflation we're experiencing is much more on the supply side,
and therefore, we don't see signs of overheating in the economy.


David Roberts


Right. And so it makes sense that spending on the supply side
would ease that, right? I mean, that spending on the supply side
would ease rather than exacerbate them.


Kristina Karlsson


Yeah, I think you could think of a clean-energy spending bill as
a supply smoothing policy in our energy supply chain.


David Roberts


This all makes intuitive sense, but do we have ... it's one thing
to have an intuition, and it's another thing to have some numbers
in your back pocket. I'm just wondering how well we're able to
model these kind of things. And I wonder to what extent is sort
of some of the conventional wisdom, that you guys are disputing,
kind of embedded in the models. Do you know what I mean? So,
like, modeling itself is misleading us. Do you feel confident
enough to be throwing numbers around to policymakers if they ask,
like, "How much would this ease inflation?" Do you know?


Lauren Melodia


Well, one of the studies that we highlight in this paper, this is
not our own modeling, but looked at what a rapid transition to
renewable energy production would look like on overall costs to
consumers, not a change in the rate of inflation. And they found
that a rapid transition to wind and solar today, along with the
technological advancements in subsequent years and the economies
of scale of really bringing that online, would save consumers
about $2 trillion a year on the price of energy.


David Roberts


That seems like a large number.


Lauren Melodia


So that's not really about inflation per se. It's really just
"what are people paying?" But I think it drives home the point
that you make this investment now, we have to make this
investment now. It is a government-led investment. It is totally
different than the idea of just like throwing dollar bills out
into the world to get spent in different ways. This is a very
coordinated, planned utility grade investment. Switching to
solar, switching to wind, building out the EV charging
infrastructure, public transportation, relying on electricity.
All of that kind of coordinated investment could save consumers
$2 trillion a year.


David Roberts


Which they would probably enjoy whether or not there was
inflation.


Lauren Melodia


Yes.


Kristina Karlsson


I mean, I would argue also that predicting inflation ten years
from now in a renewable universe is probably not the right way to
prove this quantifiably. In my opinion. I think we're talking
about energy inflation. The inflation that we're likely to see
over that year, over the next ten years could come from many
different sources. I think, if we wanted to say, "Inflation
stemming from energy prices will be reduced," the best way to get
at that answer is by displaying stable prices, because inflation
shows you the change in prices. So I think by talking about the
stability of renewables and the stability of energy prices, we're
also really getting at the fact that energy inflation, which
tracks price volatility from energy, will be reduced.


I think guaranteeing policymakers that we are going to be in a 2%
inflation universe, if we switch to renewables, is probably not
the best way to get there.


David Roberts


But I mean, insofar as energy volatility has played a big role in
inflation in the past, I mean, like, something close to half of
current inflation. If you could promise to take that chunk off
the table ...


Kristina Karlsson


We can do that.


David Roberts


That's not a small thing. To wrap up, this makes total sense to
me. Looking out, in terms of long-term economic strategy. It's
interesting. It's sort of one example of a thing you see a lot in
energy discussions around fossil fuels, which is it's only now
that alternatives are available, that we're able to sort of turn
and clearly see what the choice of fossil fuels is doing to us,
right. Because if there's no alternative to fossil fuels, then
fossil fuel price volatility is just a feature of the universe,
right. It's just a background condition, which is sort of how
we've been treating it. As you note, we leave it out of these
inflation measures because we've just sort of ...


Kristina Karlsson


Made our peace.


David Roberts


Made our peace with it, right. Like accepted. Like, "This is how
it is, we're stuck on this freaking roller coaster, and we have
no control over it. Oh well, let's bracket that and look at
everything else." But now that fossil fuels are increasingly a
choice, we can see, "Oh, like wow, that has really sucked to be
stuck on that roller coaster for decades."


Kristina Karlsson


With no seatbelt.


David Roberts


"That's been unpleasant. Let's, let's get off that." So, so
anyway, long term, like strategically long term, this makes all
the sense in the world to me. But of course, there's strategic
long term, and then there's, like, the midterms. So I wonder
whether you think that some bold move ... I guess, what I'm
asking you is, do you think that a big public spending program on
renewable energy would have effects fast enough to materially
affect current politics? Or is this kind of a mid- and long-term
thing we're talking about?


Lauren Melodia


Well, I think there's a couple of ways to think about that. I
mean, on some level, nothing that happens with managing inflation
today is going to, overnight, change price volatility between now
and the midterms. But what we do have is a really active climate
movement that's been demanding change, because we absolutely need
it. And they're not getting action, and they're being told it's
because there's inflation in the economy. And it's our job, it's
our point with this paper to arm activists with the information
they need to push past that argument. Because I think one of the
ways that we really can affect the political climate, is to see
action on this issue in particular, which is so popular.


We want to see change. We have a plan. We're organized. We know
what we need. We know how to get there. And inflation is not the
excuse to delay it. It is the reason to act now.


Kristina Karlsson


Absolutely. And I think, politically, progressives need to show
that we're going to do the thing.


David Roberts


That's not typically been our strong suit.


Kristina Karlsson


I'm hopeful that now would be a good time, and I don't think
there should be any tabling this for a little bit later or after
the midterms for the sake of political wins, because I think that
might actually be harmful. I think pushing on climate investment
as soon as possible is probably a political good, also.


Lauren Melodia


Absolutely.


David Roberts


Yeah. I just wonder ... the case, as you lay it out, makes sense,
but I wonder about the Democrats ability to sell it, or to tell
that story in a way that is meaningful to the public, especially
with one of their most prominent members out spewing the dumbest
of conventional wisdom on this subject.


Lauren Melodia


Yeah, they might have a hard time doing what they need to do, but
it doesn't mean that we shouldn't stop fighting for it.


David Roberts


Right. And so it goes. Well, thank you so much for coming on. And
like I said, this is, like, on some level, I feel like I knew
this, on some vague level, but it's so nice to just have it put
out. And to me, this is, I just think, one of the great
underutilized arguments in favor of the energy transition, which
is just that being tied to fossil fuels sucks. It's unpleasant.


Kristina Karlsson


We made your hunch citable.


David Roberts


Yes, a citable hunch. This is why I'm in the business, is to have
my priors reinforced by experts. Alright, so thanks for doing the
report, and thanks for coming on today.


Lauren Melodia


Thank you so much.


Kristina Karlsson


Thanks so much. Bye.


David Roberts


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