UMass Amherst Economist Isabella Weber Testifies Before European Parliament on Fossil Fuel Profits, Inflation

Isabella Weber, associate professor of economics, testified before a committee of the European Parliament Feb. 14 regarding the role that fossil fuel companies have played in surging energy prices and a cost-of-living crisis in the European Union, following Russia’s invasion of Ukraine nearly two years ago. Weber has become a leading voice on policy responses to inflation and has advised policymakers in the U.S. and Germany on issues of price stabilization.

“It is no exaggeration to say that the profit explosion in the fossil fuel industry in 2022 has been of historic proportions,” Weber told the Parliament’s Committee on Petitions. “Historic profits were used for historic shareholder returns. This comes at a time when the world needs to move out of fossil fuels to fight climate change, and we know that profitability is key to capital allocation.”

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Weber shows that energy imports have been the most important driver of price increases in the E.U., accounting for more than half of inflation in 2021 and 2022. She notes that profits in the European energy sector alone accounted for larger shares of inflation than wages across the entire economy during that period.

When energy prices spike, companies that rely on energy react by raising prices — giving all firms the justification they need to increase prices and spreading the cost shock across the entire economy, generating what Weber calls “sellers’ inflation.” This, in turn, causes real wages to decline which have been dramatic across most European countries. Eventually, wages increase, capturing a larger share of falling inflation. This, Weber argues, is proof that wage increases are the result rather than the origin of inflation.

Her solution to buy time when faced with the shock: strategic price controls.

“The vast majority of economists dismissed price controls as a mad idea or worse before the energy crisis,” Weber said. “But the burden of the energy price shock became so unbearable for firms and households that many European governments introduced price controls in the form of unconventional fiscal policy, where the state covers part of the cost shock.”

In Germany, Weber had a hand in crafting a price-control policy that helped to stabilize gasoline prices. Research indicates that such unconventional fiscal policies have fended off income losses and done so more successfully than transfer payments from the government.

Weber concluded her remarks with a caution to lawmakers that price spikes in essentials like energy have the potential to destabilize economies and societies, and that they must be ready to respond.

“Policymakers should be prepared to act swiftly in the interest of social cohesion and stability,” she said.