Friday, 18 October 2013

Energy & Prices: Another Shambles From Ed Miliband's Labour

Regarding the 'energy price freeze' and 'energy price hike' issue - the Prime Minister is right on this one - Ed Miliband is behaving like an incompetent buffoon whenever he talks about the markets. Dozy Ed uses ill-informed terms like 'the right kind of market' and a 'broken market', which only serve to mislead people who can be convinced that politicians can have any genuinely positive control on prices (recall what happened when the old socialist Labour government tried to have prices set - it was a disastrous economy).

These are the three questions that should be asked;

Q1) Are energy prices really too high?

Q2) Are the energy companies making too much profit?

Q3) Should the market be interfered with by the government?

Whichever way you answer 1 and 2, the answer to 3 is a categorical no. If you answer no to Q1 then Q2 is also no, necessitating no market interference by the government (or shadow government) in the shape of a price freeze. If you answer yes to Q1 then it is likely that the answer to Q2 is also yes - the energy companies are making too much profit. Surely, then, the government should get together with Ofgem and regulate the prices to make energy more affordable, shouldn't they?

No, here's why. The primary purpose of a regulating body like Ofgem is not to get in bed with the government - it is to relinquish monopoly control (like that of British Gas in the 80's and 90's) and to protect the interests of consumers by ensuring a freely competitive market. And that is the prime argument against government interference - the free, largely unfettered market has an 'invisible hand' that guards against monopolies and excessive profits (provided there is just the right amount of light regulation*) - it doesn't need any other outside interference. In other words, if the principal goal really is to protect the interests of consumers by helping to bring about the best prices, then Ed Miliband should be after more competition not a price freeze.  In fact, I say this half-jokingly, but if politicians really do believe that energy profits are over-excessive, then why don't they strive to re-nationalise electricity and gas, and reduce the prices for consumers while at the same time generating a profit for the government?  More's the point, if that holds true for gas and electricity why doesn't the government nationalise everything - cars, clothes, beer, food - and make profits galore? I think we all know the reason why - and it is the same reason why, contrary to the photo below, they shouldn't get involved with the free market economy - supply and demand are what dictate prices.

If the energy companies do not have the government in their pockets, and if they really are earning excess profits, then provided there aren't too many regulatory barriers, this should create an opportunity for potential competitors to enter the market and charge less while still making a profit, because the very nature of a free market is that competition drives prices down to the level of the costs of the most efficient supplier. Ironically a price freeze would have two negative effects - it would cause a knee-jerk price rise prior to the freeze, but it would also deter those aforementioned more competitive businesses from entering the market, which then reduces supply, and harms consumers.

David Cameron is right on this issue - if any particular energy supplier seems too expensive, customers should look to switch to other suppliers who can offer a more reasonable tariff. If the government is to have any use in the free market, it is to ensure that Ofgem is doing all it can to protect the interests of consumers by ensuring a freely competitive market. If your own energy supplier seems excessive, then switch suppliers; if all energy suppliers seem excessive then there is either a cartel, or there is state collusion, or it just simply is the case that energy provision has an expense to justify such prices. The first two don't reflect well on the government or shadow government, and the third one does not justify any market interference. Whichever way we cut the cloth, Ed Miliband is talking rubbish here; what's needed is not a price freeze, it is a sensibly regulated but otherwise unconstrained market that generates competitive prices amongst suppliers and customer choice.  

With a freely competitive market economy it's a win-win. If prices remain high in a fiercely competitive market then you at least know that costs of providing energy are high, or demand is excessive, and excessive profits aren't being made; and if energy can be supplied at a more reasonable price by a competitor then you'll see prices go down.

* I say largely unfettered, because, of course, there will always be a small need for regulation in order to prevent cartels, monopolies, information concealment and fraud. Cartels fix prices, manipulate marketing, and set production, which is bad for consumers. Monopolies have too much market power in prices and services, and they prevent smaller firms from competing, particularly if the monopolising company has buying power that is attractive to the shareholders of smaller firms looking to compete, and is able to swallow up the competition.  Information concealment is detrimental to investors and consumers. And no one needs telling why fraud is bad. This is why some regulation is always needed; but make no mistake about it - too much regulation, which is what we mostly find from the left, is always bad for suppliers and consumers on the whole. What's offered from the left as economic medicine is actually in most cases poison.