“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 oil and natural gas price controls in the 1970s, has produced shortages, civil strife, and bureaucratic waste.”
Energy is the master resource. Without energy, other resources could neither be produced nor consumed. Even energy requires energy: There would not be usable oil, gas, or coal without the energy to manufacture and power the requisite tools and machinery. Nor would there be wind turbines or solar panels, which are monuments to embedded fossil-fuel energy.
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. Renewable energy is dependent on nonrenewable energy–short of (prohibitively expensive) battery technology assuring the flow of electricity.
As a component of all products and services, energy needs to be affordable, convenient, and reliable. To this end, public policy should respect consumer preferences and allow energy producers to meet the demands of the marketplace. This requires a respect for private property rights, voluntary exchange, and the rule of law to facilitate the global exchange of energy and its innumerable infrastructure components. Such are the key to energy sustainability.
In this election season, all political parties, candidates, and voters should revisit the fundamentals of a market-driven, versus government-engineered, energy sector.
Global energy supplies are primarily owned by governments rather than by individuals, giving rise to ‘energy security’ problems for some nations and regions. In state-run economies, political elites make the decisions that otherwise would be made by the market transactions of millions of people. Win-win voluntary exchanges are supplanted by government-dictated win-lose transactions. Wealth is redistributed rather than created. Pure waste results from the intervention of (political) third parties into what otherwise would be mutually advantageous self-interested exchange.
For example, electric utilities may be forced 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. The same applies to ethanol as a transportation fuel, which without government subsidies and a federal mandate would not be part of the fuel mix.
Oil and gas producers may be unable to access offshore properties because of government constraint. In such cases, supply is not produced, and higher-cost substitutes elsewhere pick up some of the slack. 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, mandated transmission projects for distant renewable energy, 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.
Proponents of government intervention cite “market failure” as the reason for regulating or subsidizing energy projects. Negative externalities created by self-interested exchange are said to require government modification of 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.
Second, 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 in 2009, and healthcare legislation enacted the next 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. Knowing that solutions are likely to be even more imperfect than the problems, alleged market failures should be scrutinized to see if they are really serious problems. And if so, whether the real problems can 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 supply growth of carbon-based energy (including oil, gas, and coal) in light of the fixity/depletion view of minerals.
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 address these issues, most from the market-failure viewpoint, and conclude that mankind is on a perilous path, and government-engineered energy transformation is necessary.
But students of history must ask two questions. One, are the problems really real in a market where human ingenuity works toward solutions? And two, has a political makeover of any industry ever worked well for consumers and taxpayers? Or has it had the opposite effect? Market makeovers from shifting consumer demand, also known as creative destruction, is one thing; governments wielding 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 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 utilization.
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 betterment. But because improvements have been achieved by politicized, command-and-control environmental regulation, the results have come at a higher cost than necessary.
3. Energy security in the electricity market is assured by abundant domestic coal and the fact that almost all 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 ally 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, over time, the market will continue to improve.
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.
The BP/Deepwater Horizon oil spill in the Gulf of Mexico raises an additional sustainability issue: unexpected setbacks that can kill and cause mass property losses. (But the culpability of “green” BP versus the more reality-focused oil industry should be noted.) Short-run problems, however, can result in longer-term gains so long as the firm faces full liability and pays restitution to the victims. Accountability in private property settings encourage companies to square profits, people, and the environment—and avoid the financial losses that come from performance failure.
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. 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
Al Gore years ago declared a “planetary emergency” of five-to-six billion people using oil, gas, or coal for most of their energy needs. But the real energy problem is that more than one 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 generate a fraction of the energy produced by diesel generators or a conventional power plant—and much less reliably. Energy brawn is needed, not inferior, politically correct energies that appeal to government planners.
Property Rights vs. the ‘Resource Curse’
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.
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 to improve situations 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 with oil and natural price controls in the 1970s, 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.
Note: This is an updated, slightly revised version of a July 16, 2010 MasterResource post of the same title.