German Marshall Fund: Oil curse, gas blessing? The Case for a Transatlantic Charter on Energy Trade

The price of oil is too high! This seems to be the unanimous refrain of policymakers all over the world who fear that oil prices, currently over $120 a barrel, could stifle economic recovery. But the price of natural gas, at least in the United States, is too low. At least that is the claim of some policymakers and also U.S. natural gas producers Chesapeake and Encana, which have announced cutbacks in their gas production.

So where exactly do we want energy prices to be? If high enough, they stimulate investment in new and previously unviable ventures, such as deep-water operations or the extraction of oil from tar sands; if low enough, they boost the economy by bringing down manufacturing and transportation costs. Each commodity has its own market because they are not easily substituted for each other. Oil is paramount for transportation and marginal in other sectors of the economy, while natural gas is the exact opposite, being mostly used in industry, home heating, and electricity generation and hardly at all in transportation.  MORE