Is energy the true currency?: Market traditionalists

The afternoon oil went negative

On April 18, 2020, the price of West Texas Intermediate crude went negative. Sellers paid buyers to take delivery. The energy content — 5.8 million BTUs, enough to heat a house for two months — had not changed. The molecules were identical to the ones trading at $60 eighteen months earlier. What changed was the market’s assessment of those molecules given storage capacity, demand, and expectations. The energy economists see a malfunction. We see the system working as designed.

The price system does something no thermodynamic model can: it aggregates distributed information about preferences, scarcity, substitution, and time into a single number that coordinates billions of agents. The price of a kilowatt-hour in Texas at 3 PM on a July afternoon contains information about demand, supply, transmission constraints, and opportunity cost. No single human knows all of it. The price knows it.

Since 1990, US GDP grew roughly 100 percent. Primary energy consumption grew roughly 10 percent. Refrigerators use 75 percent less electricity than in 1975. LEDs use 90 percent less than incandescent. The economy learned to do more with less. That is precisely what the energy-as-substrate thesis says cannot happen. The degrowth camp says markets cannot price ecological damage. The EU Emissions Trading System cut covered-sector emissions 40 percent since 2005 — through a price signal. The mechanism works. The political will to set the price correctly is the constraint.

Where we concede ground: The atmosphere has no market. Thirty years of carbon pricing advocacy has covered less than a quarter of emissions below $20/ton.

What would change our mind: A decade-long global energy shock producing permanent GDP contraction that no substitution or innovation could reverse.

Read the full synthesis: Is energy the true currency?