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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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 bi