The Fed’s Plan To Battle Inflation Could End Up Making Energy More Expensive. Here’s How

• The Federal Reserve’s plan to bring down inflation by hiking interest rates could make energy more expensive by making it more costly to invest in new energy projects, experts told the Daily Caller News Foundation.
• “Sensible energy policy may prefer preserving low rates and enduring high inflation as the alternative would be even worse,” Rob West, founder of Thunder Energy, an energy consulting firm, told the DCNF. 
• “It’s already an uncertain time to invest in these projects due to the policies of the administration,” senior vice president for policy at the American Energy Alliance Dan Kish told the DCNF.

Over the last few months, the Federal Reserve has aggressively hiked interest rates in a bid to slow rampant inflation and bring down prices; however, higher interest rates could discourage investment in new energy projects and make energy more expensive, experts told the Daily Caller News Foundation.

With inflation at its highest levels since the 1980s, the Fed raised its benchmark federal-funds rate by 0.75 points at each of its last three meetings, bringing the rate to a range between 3% and 3.25% in September. However, higher interest rates will increase the costs of borrowing money for capital-intensive energy projects, which could lead to reduced investment in energy infrastructure and drive already inflated energy prices up, experts told the DCNF.

“Raising interest rates might not mute inflation, but could actually deepen it by exacerbating the very energy shortages that are driving inflation itself,” Rob West, founder of Thunder Energy, an energy consulting firm, told the DCNF. “Sensible energy policy may prefer preserving low rates and enduring high inflation as the alternative would be even worse.”

The primary reason that the world is currently suffering from an inflation shock is a shortage of energy which has been building up for over five years due to $500 billion of cumulative under-investment in the energy industry, West argued. By further increasing barriers to investment in energy projects, the Federal Reserve may only exacerbate fuel shortages and raise prices for consumers.

The International Energy Agency (IEA) predicted that, as central banks around the world raised interest rates to combat inflation, investment in new energy projects would be hampered, according to a June report.  The agency states that rapidly hiking interest rates will increase the cost of debt for governments, consumers and businesses, potentially delaying investment in energy projects.

The COVID-19 pandemic also caused a significant reduction in energy investment in 2021 and although investment is expected to increase in 2022 it is likely to become more expensive, according to the IEA. Meanwhile, record-high inflation is raising the costs of industrial materials and construction.

“It’s already an uncertain time to invest in these projects due to the policies of the administration,” Dan Kish, senior vice president for policy at the American Energy Alliance, told the DCNF. “Our supplies are already at all-time lows and we can’t afford to discourage energy production in the long term.”

Energy shortages have exacerbated inflation as supply chains are dependent on fuels such as diesel to power trucking, ship and railways, according to the Chamber of Commerce. In order to solve shortages, more energy projects are needed to meet demand; however, since energy projects require a great deal of investment, higher rates would stifle new developments, according to West.

“Each 1% increase in capital costs re-inflates new energies 10-20%, infrastructure 2-20%, materials 2-6% and conventional energy 2-5%,” West stated.

Lower interest rates are needed because there is usually a long 4 to 12-year time lag between committing to an energy project and bringing it online to generate cash flows, according to West. Thunder predicts that the green energy transition will require $1.2 trillion per year of primary energy expenditure from 2022 to 2025, going up to $2 trillion by 2040.

The Consumer Price Index, a key measure of inflation, increased by 0.4% and rose 8.2% over the past 12 months, according to the Bureau of Labor Statistics.

The International Monetary Fund warned in October that raising interest rates could spur a global recession, according to its World Economic Outlook report. Increased interest rates will hike costs globally, creating a more volatile market that may discourage spending and investment.

The Federal Reserve’s public affairs office did not immediately respond to the Daily Caller News Foundation’s request for comment.

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