Taxpayer-backed banks must continue prop trading or energy will become exorbitant.
Daniel Yergin’s research firm, IHS Cambridge Energy Research Associates, recently issued a report on the consequences of the Volcker Rule for energy markets that will certainly delight deposit-taking banks.
The Pulitzer prize-winning author’s firm has come to the conclusion that the Volcker Rule, as written, will have the following effects:
- Natural gas investment will decline by $7.5 billion per annum.
- Electric power costs could increase by $5.3 billion per year.
- East Coast gasoline prices will increase by 4 cents per gallon or $2 billion
• per year. - Payroll employment will be over 200,000 lower over the 2012–16 period.
- Real GDP will be $34 billon lower.
- Cumulative nominal federal tax receipts over the 2012–16 period will be $12 billion lower.
Yergin’s team has impressive credentials and its analysis, “The Volcker Rule: Impact Assessment on the US Energy Industry and Economy,” weighs in at a substantial 130-plus pages. Boiled down, it says that if energy companies can’t hedge, all the above problems will result. Unfortunately, the fundamental assumption of this report, and similar anti-Volcker hysteria, is that if taxpayer-backed banks don’t provide hedging products, no one will. No investment banks, boutiques, specialist firms, merchant banks, hedge funds, private partnerships – not one other type of institution will fill this market need. All the potential money to be made doing so will simply sit, untouched and moldering, on the table if commercial banks aren’t allowed to snap it up by nasty, taxpayer-coddling bureaucrats.
Given the size of the potential losses that HIS dreams up, this myopia is not simply an understandable, nuanced oversight on the part of Yergin’s wonks. It represents a fundamental misapprehension of how a market economy works. For a firm that bills itself as providing market analysis, such a lack of faith in the information value of prices – and such enormous faith in the crucial importance of implicit government subsidies – is indeed strange.