Isabella Weber On Germany's Plan to Cap the Price of Gas

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, we've talked a lot, obviously, about the big energy crunch in Europe this year, in Germany in particular, but we haven't really talked so much about what governments are trying to do to ameliorate some of the pain.

Tracy Alloway (0:32)

The specific policy options.

Joe Weisenthal (0:34)

Right, and I think there seems to be an acceptance or widespread view that at least not everyone can be directly exposed to the market rate of energy. It's just too much, it's too damaging to a lot of households, particularly lower income households, but even some of the surges in costs of heating for this year, I mean, an extraordinary increase in costs expected.

Tracy Alloway (0:59)

Absolutely, although I was talking to my mother recently and she's over in Austria, and she says because the weather has been warmer, she hasn't had to turn up the heat just yet. So the weather is bailing some people out so far, but that's not gonna be the case all winter. And as you mentioned, for a lot of low income households, this is just an extraordinary burden to be bearing.

Joe Weisenthal (1:21)

The weather really does matter a lot. It's interesting, actually, I think it was the Dutch spot rates briefly went negative last month, but it doesn't necessarily mean, oh, the crisis is over. It's just a function of how much supply or how much storage capacity there is right now and some warmer weather, and so you can have these situations and you particularly get them with gas or other forms of energy that can't be stored indefinitely. Where one day you could have negative prices, but still be facing a very big potential shortfall and higher costs for everyone.

Tracy Alloway (1:51)

Exactly. And one of the policy options that is on the table and looks like it's currently making its way through various corners of the government, it might even be decided by the time that we actually release this episode. We're recording this on November 1st. It is a price cap on gas, or in German, a Gaspreisbremse, which I believe translates to, my German is terrible, especially for someone who's half Austrian, but I think it's like gas price breaks or gas price stopping.

This is the great thing about German policy. Every time there's a new decision, you get a new word to play around with.

Joe Weisenthal (2:28)

It's also a new word that is kind of almost English sounding and then something else, so you can sort of figure it out 75%. Anyway, a little bit of a sidetrack, but yes, there is this proposal in Germany to subsidize a significant chunk of gas consumption for households and businesses, but obviously that raises all sorts of questions. And in particular, if there's a fundamental shortage of the underlying commodity, if there's a fundamental scarcity of the molecules, it's one thing to say, okay, we're gonna subsidize the price, but that doesn't necessarily solve the problem of, yes, but do we have adequate gas?

Tracy Alloway (3:02)

Right, and of course, this was one of the big criticisms of the Biden administration's decision to release oil from the strategic petroleum reserve. It was that you are in effect subsidizing the price and you're not actually bringing down demand at a time when the commodity is more scarce. So this is an interesting alternative policy here.

Joe Weisenthal (3:23)

So the other aspect of this, which is really interesting, is that economists as a class seem to really hate price controls. When it comes to inflation, when it comes to high prices, expand supply side capacity, let the market do its thing, let high prices be the cure for high prices or let the central bank try to reduce demand to bring things into balance.

When the subject of price controls comes up, economists get like extremely, the majority of them get extremely anxious and yet there is this political reality that on some level it appears governments in Europe and I guess in the US have some role to play in ameliorating severe acute price shocks.

Tracy Alloway (4:03)

Oh, people have strong opinions when it comes to price controls. But as you mentioned, there is a history of politicians actually using them even here in the US, which is something that came up very briefly on that previous episode with Josh Unger.

Joe Weisenthal (4:16)

All right, so we are going to be diving more into a potential plan in Germany specifically to deal with the high price of gas this winter and we're going to be speaking with someone, actually we're going to be speaking to a past guest and someone who knows a lot about this topic and is directly involved in this. We're going to be speaking to Isabella Weber. She's a professor of economics at UMass, a fellow at the Berggruen Institute and she has been a member of the independent commission for natural gas and heating in Germany working on this proposal. So Isabella, thank you so much for coming back on the podcast.