Washington, D.C. – Two new academic papers from Dr. Isabella Weber and colleagues advance our understanding of 1), how corporations used the incidence of supply constraints and cost shocks to implicitly coordinate and raise prices, and 2), how profit explosions in the oil and gas sector generated a range of negative side effects – in addition to higher costs – including exacerbating inequality and slowing the clean energy transition.
Weber also published a new op-ed in The New York Times where she highlights both papers and makes the case for an aggressive approach to inflation, with a broad set of tools including economic stabilization, buffer stocks, anti-price gouging laws, and more.
“Implicit Coordination in Sellers’ Inflation: How Cost Shocks Facilitate Price Hikes,” shows that recent empirical evidence is broadly consistent with sellers’ inflation and examines how executives were able to turn an economy-wide cost shock into an opportunity to raise prices and profits due to implicit coordination in certain upstream sectors like oil and gas and commodities.
“Distributional Implications and Share Ownership of Record Oil and Gas Profits” finds that the 2022 oil and gas crisis resulted in record fossil fuel profits globally (US$916 billion in 2022) that rehabilitated the oil and gas industry at the expense of the clean energy transition and worsened inequality as the majority of gains went to the wealthy.
The first paper uses AI and natural language modeling to analyze more than 130,000 corporate earnings calls and shows that economy-wide cost shocks have functioned as an implicit coordination mechanism for large corporations to hike prices. Corporate executives express positive sentiments about economy-wide cost shocks, in contrast to cost shocks that only impact individual firms. In normal times, powerful, price-making firms fear losing market share when they raise prices. But the recent emergencies of pandemic and war have opened up a window of opportunity for price hikes to protect markups. This finding confirms prior qualitative analysis of earnings calls that have shown that firms’ pricing decisions have been crucial in the spread of inflation.
The second paper examines the many negative externalities of energy price inflation, even beyond the higher costs at the pump: Windfall energy profits in 2022 overwhelmingly went to wealthy, white, college-educated Americans, enough to increase the disposable income of the wealthiest Americans by 6%, compensating for all of their purchasing power loss from inflation that year.
While energy companies claimed their inflated profits would ultimately benefit the public via dividends, Dr. Weber’s paper shows how this was not the case, that windfall profits did not trickle down.
Further, by informing investment decisions, record oil and gas profits also directed capital allocation toward fossil fuels and away from the low-carbon investments needed for the energy transition. In fact, in 2022 the U.S. received more in fossil fuel profits (US$301 billion) from domestic extraction and global shareholding than total U.S. investments (US$267 billion) in the low carbon economy.
Weber also provides clear-cut policy solutions, such as buffer stocks of upstream commodities and a windfall profits tax, that protect consumers and investors from shocks and the inflation that follows, particularly as increasing geopolitical tensions and climate impacts portend continued volatility in oil and gas markets.
Email press@groundworkcollaborative.org to speak with Dr. Isabella Weber about sellers’ inflation, oil and gas profits and their economic impacts, and the role of inflation in the election outcome.