Benefits Of Deregulated Energy Markets Outweigh Risks, Energy Experts Argue

May 12, 1997

WASHINGTON, DC -- As legislators at all levels of government contemplate increased competition for natural gas and electricity, the deregulation of energy markets so far presents clear evidence that competition results in lower costs to consumers, according to a new article published by Resources for the Future (RFF).

The article, "Energy Trading: The Market's Response to Deregulation," appears in the Spring 1997 issue of Resources, RFF's quarterly publication of news and policy analysis on environmental and natural resource issues. Energy markets analysts Vito Stagliano and Sarah Emerson detail the history and lessons learned from the deregulation of oil markets sixteen years ago and the emergence of futures markets. They also touch on what can be expected by American consumers in current restructuring of the natural gas and electricity industries.

"What has been accomplished so far in restructuring the energy sector is rather extraordinary," write Stagliano and Emerson. "Today, the prices we pay to heat and light our homes and offices, cook our food, and drive our cars are, when adjusted for inflation, about what they were in 1949."

To explain how trading in energy markets affects the average consumer, the authors illustrate how energy prices around the world can affect the price of everyday consumer products. Stagliano and Emerson also point out that energy deregulation does involve some risks, noting that free markets may also bring uncertainty that results in "price volatility." The authors illustrate this price volatility using data from the past winter when consumers in the Northeast experienced unexpectantly high prices for the oil used to heat homes and buildings, and consumers nationwide were subjected to extremely high prices for natural gas.

However, for every problem created by deregulation, Stagliano and Emerson emphasize that free markets are proving capable of devising solutions. For managing price risks, for instance, they explain "hedging instruments" -- financial vehicles that allow large commercial and industrial consumers to lock in energy prices over a period of time and free themselves from the price volatility that characterizes short-term trading.

"Despite the fact that deregulation is unfinished business, what has occurred thus far presents clear evidence that free energy markets result in lower costs to consumers and increased economic efficiency," write Stagliano and Emerson. "If it remains for the political establishment to take this evidence and make it enduring policy, at least a precedent exists for doing so. Markets are risky, and their organization and management are sometimes flawed. But as Winston Churchill used to say of democracy, they are better than all the other alternatives."

Stagliano and Emerson are directors of Energy Security Analysis Inc. (ESAI), a firm that specializes in analysis of physical and paper energy markets. Stagliano was a visiting scholar at RFF from 1995-96 and is one of the authors of A Shock to the System, a primer on restructuring America's electricity industry that RFF published in July 1996.

RFF's Resources is published quarterly and the views offered in it are those of the contributors and should not be attributed to RFF, its directors, or its officers. Resources is available online at http://www.rff.org/homereso.htm.
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For news media interested in contacting Vito Stagliano and Sarah Emerson, call (202) 682-9101.

To speak to experts on energy markets and electricity deregulation at Resources for the Future, contact Michael Tebo in RFF's public affairs office at (202) 328-5019
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Resources for the Future (RFF)

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