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A Free Market Energy Vision (Part I: Worldview)

[Editor note: This is a revision of a previous post at MasterResource last year. Part II highlights a federal free-market energy bill created for discussion by the Institute for Energy Research. Part III examines the Cato Institute's (Jerry Taylor and Peter Van Doren) federal energy priorities.]

Energy is the master resource. Without it, other resources could not be produced or consumed. Oil, gas, and coal could not be replenished without the energy to manufacture and power the requisite tools and machinery. Nor could there be wind turbines or solar panels, which are monuments to embedded (fossil-fuel) energy.

And just how important are fossil fuels relative to so-called renewable energies? Oil, gas, and coal generate the electricity needed to fill in for intermittent wind and solar power to ensure moment-to-moment reliability. So renewables, ironically, codepend on nonrenewable energy given that battery storage to firm the flow of electricity is prohibitively expensive.

As a component of all products and services, energy is the fourth factor of production in addition to the textbook triad of land, labor, and capital. Ubiquitous energy must be affordable, convenient, and reliable for economic progress, which requires that public policy respect consumer preference and allow energy producers to meet the demands of the marketplace. Enter private property rights, voluntary exchange, and the rule of law to facilitate the global exchange of energy and its innumerable subcomponents.

Government Intervention

Global energy supplies are primarily the product of government, not the free market. In state-run economies, political elites make the decisions that otherwise would be made by the multitude. Win-win voluntary exchanges are supplanted by bureaucratic command. Without incentives to minimize costs, and without competition between firms for the same resources, wealth is redistributed and wasted that otherwise would go to better uses.

Government intervention with privately held resources also has unintended negative consequences. For example, a state law (such as in Texas) may force electric utilities to buy wind power, solar power, or another politically correct energy under a state law. A mandate is required because a free marketplace would not support such expensive, unreliable—noncompetitive—supply.

Oil and gas producers may be unable to access offshore reservoirs because of government constraint. In such cases, supply is not produced, and higher-cost substitutes elsewhere must substitute. Consumers are left with less supply and higher prices. Economists have a name for this: inefficiency.

Government intervention may also give life to uneconomic projects. Such ventures may include carbon capture and storage, a “smart” electricity grid, or even a nuclear plant that requires a federal loan guarantee. Resources that go to these projects do not go to other more economical projects (which may or may not be in the energy sector) as judged by the marketplace. Resources are again misallocated.

Three Failures: Analytic, Market, and Government

Proponents of government intervention cite “market failure” as the reason for regulating or subsidizing energy projects. Negative externalities created by self-interested exchange require the government to modify transactions in ways ranging from a prohibition to a tax.

But there are two other types of failure that also must be considered before rushing to policy judgment.

One is analytic failure, in which the outside evaluator’s prescription for intervention (such as a per barrel “energy security” tax on oil imports or a per ton “climate change” tax on carbon dioxide emissions) overcorrects or undercorrects for the “real” problem. The error might be purely intellectual—or it might reflect the personal prejudice of the analyst. Fallible self-interest in the marketplace has a counterpart in the ivory tower.

Secondly, there is government failure whereby even the “correct” analytical blueprint is altered and violated in the political process. Special-interest tinkering add to or subtract from the core proposal, and “log rolling” (where extraneous issues are added to the legislation just to win votes) is resorted to.

House passage of a cap-and-trade energy bill last year, and healthcare legislation enacted this year, are stark evidence of sausage making in Washington, D.C.—and something scarcely recognizable in “we the people” textbooks.

Thus, “market failure” does not automatically require a government correction. This suggests a different approach. Knowing that solutions are likely to be as or more imperfect than problems, alleged market failures should be scrutinized to see if they are really serious problems. And if so, can the real problems be addressed by novel voluntary approaches and reforms rather than by government dictates?

Energy Sustainability: Markets, Not Government

Intellectual and political debates over energy have revolved around four “sustainability” issues:

1. Future growth of carbon-based energy (oil, gas, coal, and derivatives) supply in light of the fixity/depletion (physical) view of mineral resources.

2. Air and water pollution from carbon-based energy production.

3. Security of supply, particularly oil imports to the U.S. from the Middle East.

4. Global warming (aka climate change) from man’s use of carbon-based energy.

Whole books on each of these issues from the market-failure viewpoint conclude that mankind is on a perilous path, and government-engineered energy transformation is necessary. But students of energy history and energy policy must ask: Has a political makeover of any industry ever worked well for consumers and taxpayers? Or has it had the opposite effect? Natural makeover from shifting consumer demand, revered in the term creative destruction, is one thing; government carrots-and-sticks to pick winners and losers is quite another.

The argument for allowing free markets, rather than government planning, to address the four sustainability issues can be summarized as follows:

1. Estimated quantities of recoverable oil, gas, and coal have been increasing over time according to the statistical record. Human ingenuity in market settings has and will continue to overcome nature’s limits, leaving in its wake errant forecasts of resource exhaustion. The resource challenge is political: allowing access and incentive so that the ultimate resource, human innovation and entrepreneurship, can expand new energy supplies and multiply its productive uses. Resourceship is a useful term to describe human inguenuity applied to minerals.

2. Statistics of air and water quality in the United States show dramatic environmental improvement and, in fact, indicate a positive correlation between energy usage and environmental improvement. While improvements have been achieved by politicized, command-and-control environmental regulation, the results have come at a higher cost than necessary.

Worse-case events–such as the BP Horizon oil spill last year–inspire reform that drives the improvement process. Problems lead to improvement in a market process where actual damage is subject to restitution (as noted by Julian Simon).

3. Energy security in the electricity market is assured by abundant domestic coal and the fact that almost all of U.S. gas imports are from Canada. Most of the oil needed for transportation comes from domestic supplies supplemented by imports from a variety of countries led by Canada and Mexico. Oil imports from unstable or unfriendly nations, such as Venezuela and those in the Middle East, can be more effectively addressed by allowing greater access to U.S. oil and gas resources for development than by government discrimination against oil imports that cannot discriminate between “good” and “bad” barrels.

Even if the U.S. were to use the powers of government to pare domestic oil consumption, the resulting drop in world oil prices would encourage non-U.S. demand and subsidize foreign industry at our expense. The world oil market will continue to exist and thrive even with reduced U.S. participation, and this will become more so over time.

4. The global warming scare is plagued by open scientific questions, economic tradeoffs, and the reality that carbon-based energy is requisite to economic growth. Carbon rationing (via the Kyoto Protocol) is a failed policy for the developed world and a nonstarter for the developing world. Not only have targeted reductions proved to be elusive, the economic costs of carbon rationing are not unlike those from (postulated) deleterious climate change.

Opinion polls indicate that Americans have tired of false alarms concerning global warming and the human influence on climate. The public is wary of proffered remedies (government-this and government-that) which so happen to hamper the free market’s ability to provide affordable, reliable, consumer-driven energy.

Rather than expand government, public policy should end preferential subsidies for politically favored energies, depoliticize access to public-land resources, and privatize such assets as the Strategic Petroleum Reserve and the federal power marketing agencies. Multi-billion-dollar energy programs at the U.S. Department of Energy can be eliminated. Such policy reform can simultaneously increase energy supply, improve energy security, reduce energy costs, and increase the size of the private sector relative to the public sector.

The Real Sustainability Problem: Statism

To Al Gore, the “planetary emergency” is five-to-six billion people using oil, gas, or coal for most of their energy needs. But the real energy problem is that one-and-a-half billion people do not use modern forms of energy. Rampant statism in place of private property, voluntary exchange, and the rule of law, is behind this problem.

The energy-impoverished use dried dung and primitive biomass to stay warm and cook their meals, destroying their health and shortening their lives. Without electricity or machines, they do not have clean water, reliable lighting, or other means for comfortable, sanitary living. This here-and-now problem demands energy freedom and an end of debilitating energy statism.

The free-market vision stresses that these impoverished should not be subject to energy rationing by government. Solar panels and industrial wind turbines can only generate a fraction of the energy produced by diesel generators or a conventional power plant—and much less reliability. Energy brawn is needed, not second-class energies that may be politically correct to energy planners and an enviro-elite.

More fundamentally, these victims of statism need private-property rights to in-ground minerals and ownership title to energy infrastructure. In this way, they can overcome the so-called resource curse whereby siphoned energy wealth underwrites government control and bad economic policy.

Countries worldwide should reject energy planning from a politically endowed elite. Government planners suffer from a “fatal conceit” that their knowledge and goals must override those of the masses. But on-the-spot energy consumers and energy producers, guided by prices and profit/loss, have much more collective wisdom than faceless bureaucrats commanding from on-high. Top-down planning misdirects and destroys despite the best efforts of even well-educated, well-meaning bureaucrats.

Towards Energy and Economic Freedom

The use of reason and persuasion in place of coercion is a worthy goal. The initiation of force should be a last resort given the ability of free people–consenting adults–to improve their situation and correct problems.

In the U.S. energy sector, market reliance has produced economic coordination, fostered economic growth, and democratized wealth. Government intervention, on the other hand, such as occurred in the 1970s with U.S. oil and gas price controls, has produced shortages, civil strife, and bureaucratic waste.

Markets are not perfect, inspiring some to devise and champion government intervention. But political solutions must contend with analytic failure, implementation problems, and public-sector (taxpayer) costs. Imperfect markets, in other words, may well be better than “perfect” regulation in the real world. The burden of proof, therefore, should be on government intervention, rather than on voluntary transactions premised on private property and governed by the rule of law.

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Robert L. Bradley Jr. is the CEO and founder of the Institute for Energy Research of Washington, D.C. and Houston, Texas and the author of, most recently, Capitalism at Work: Business, Government, and Energy (Scrivener Press, 2009). His next book, Edison to Enron: Energy Markets and Political Strategies, will be published later this year by Scrivener Publishing and John Wiley & Sons.

1 comment

1 Noblesse Oblige { 05.07.11 at 3:14 pm }

People often ask me why does it matter if there are government mandates for energy sources that would otherwise not be competitive in the marketplace. There are two basic ideas that seem to elude many:
1. Even if the government pays for part of something, there is still a cost. That cost must be paid by taxpayers now or in the future.
2. The extra cost sucks capital out of markets that, on average, will be invested in something that will go to produce a positive return, creating jobs and yet more capital.

Because of 1 and 2, at the end of the day we are worse off when government intervenes to pursue its fetishes.

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