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the great energy fight of '01 is on. Conservatives are doggedly
rallying around the newly released Bush energy plan
while liberals are attacking it with relish. Unfortunately, the
fight is nine parts political theater to one part policy…and
that "one part" of policy is so pregnant with economic mischief
and counterproductive rhetoric that it's beyond me why conservatives
are so determined to play the role the administration is casting
for them.
First of all, why are free-market types cheering the introduction
of a "comprehensive national energy strategy"? After all, conservatives
didn't cheer a "comprehensive national Internet strategy" when one
was proposed by Al Gore, a "comprehensive national industrial strategy"
when one was proposed by Clinton Labor Secretary Robert Reich, or
a "comprehensive national health-care strategy" when one was proposed
by Hillary Clinton. Conservatives as a general matter believe that
the government ought to leave markets the heck alone and that "comprehensive
national economic strategies" are things that old Soviet commissars
and young French socialists are in the business of promoting, not
free-market American presidents.
"Energy's different," they say. Excessive regulation and environmental
opposition has shut down energy production and delivered us into
a mess that only a "comprehensive national energy strategy" can
sort out. Really?
Without the guidance of a "comprehensive national energy strategy,"
investors are presently poring billions into the energy sector.
For instance, we're currently in the midst of a power-plant construction
boom, with some 90,000 megawatts of new electricity capacity scheduled
to come on line by 2002 and a staggering 150,000-200,000 megawatts
by 2004. This will not only burst the electricity-price bubble but
will probably produce an electricity glut in the near future. Similarly,
so many billions are flooding into the natural-gas market today
that futures contracts are being made at half the price of today's
wholesale spot price. And high gasoline profit margins are inducing
foreign refineries to enter the American market for the first time
in decades and bringing new investment in domestic refining capacity
as well. Barring some unforeseen supply disruption in the refining
sector, gasoline prices will actually begin to decline slowly but
steadily as the summer wears on.
What about all those "Not-In-My-Back-Yard" activists supposedly
blocking the new wires and pipelines necessary to get energy from
producers to consumers? You can certainly make an argument that
the real problems in the energy sector are delivery problems, not
production problems, but it's unclear whether NIMBY is at the root
of it.
Incumbent utilities have little incentive to build new transmission
lines that would make it easier for ratepayers to buy cheaper power
from competitors in neighboring service territories. Nor do utilities
have an incentive to invest in new power lines when the profits
allowed them by the Federal Energy Regulatory Commission are too
low to make those investments particularly worthwhile. And with
transmission rules still up in the air and unsettled at both the
federal and state level, regulatory uncertainty is likewise dampening
investment.
Similarly, there is little evidence that investors have been inhibited
from increasing pipeline capacity when profit opportunities present
themselves. The Energy Information Administration notes that pipeline
capacity "has grown with end-use demand, and as new supplies have
developed, new pipelines have been built to bring this gas to markets."
The Gas Research Institute likewise concludes that "growth in pipeline
capacity is not a constraint on growth in gas supply…. If supply
is available, history has demonstrated that the pipelines will be
built as needed. It is simply an investment and engineering issue."
If government's not in the way, why then did energy prices shoot
up in the first place? Well, energy markets, like most commodity
markets, are subject to boom and bust cycles. Energy prices after
adjusting for inflation have been plummeting more or less for 15
years. Investors took money out of production and exploration budgets
because profits were hard to come by. The bust suddenly ended last
year, catching almost everyone by surprise, and the boom is now
on. Investors are scrambling to expand supply, but capital investments
take time. Let me make this simple: High prices = high profits =
increased investment = price declines. It might take some time to
get from here to there, but government's record in speeding up the
process is abysmal.
Regardless of Bush's doomsday rhetoric, this isn't the beginning
of America's descent into the long dark economic night unless the
feds can somehow come to the rescue. There's plenty of energy around
for suppliers to get their hands on and plenty of reason for people
to conserve in the face of high prices. Rather, we're experiencing
the economic equivalent of a low-pressure front that will soon pass
(indeed, is already passing) as long as government doesn't do anything
too stupid in the meantime.
So how does the administration's plan rank on that front? While
there are literally about a hundred proposals that call for the
government to "consider" this, "examine" that, and "investigate
the possibility" of the other thing, the concrete proposals within
the plan's 170 pages are few and far between. Let's look at the
highlights:
Drilling on Federal Lands. Even if you're happy digging up
the tundra, there's little reason to think that drilling in ANWR
will do much to bring down energy prices. Industry's best estimate
is that ANWR could produce about 1 million barrels of oil per day
at its peak. That's a 1.25 percent increase in global production
that, all things being equal, would reduce world oil prices by about
10 percent, from $25 per barrel to $22.50. While that's nice, it
wouldn't do much of anything to deliver America from the power of
the OPEC cartel, particularly since OPEC's likely reaction would
be to cut its own production in order to maintain world crude prices
at today's levels.
The administration would also like to increase industry access to
various fields on federal lands in the lower-48 and in the Gulf
of Mexico, primarily to get at natural gas deposits. That's fine,
but again, it's not as if, without those new fields, existing gas
wells would run dry.
None of this is to say that the federal government shouldn't be
a more reasonable economic steward of public lands. But it is to
say that the administration is ridiculously overselling the benefits
that those policies will deliver to energy consumers.
Federal Eminent Domain Power For Electricity Transmission.
As noted above, there are lots of reasons why utilities aren't investing
much in new transmission, and NIMBY is only one of those reasons
… and perhaps not even the most important reason. Having the feds
step in and force private property owners to cut deals they don't
want to make with power companies seems antithetical to an administration
that likes to talk about its commitment to private property rights.
The administration's energy plan calls for the feds to adopt incentive-based
rate making for transmission investments in lieu of the present
rate-of-return regulatory regime. This ought to help some, but a
better idea is to remove rate caps on transmission charges entirely.
Still, let's wait to pull out the federal guns on private landowners
at least until we know they're absolutely needed.
Tax Incentives for New Energy Production. Holy moly, if you've
got an energy lobbyist in Washington, has Dick Cheney got a sack
of money for you! Everyone's a winner: oil; gas; hydrogen; hybrid
and fuel-cell vehicles; superconductors; landfill methane; coal
(make that "clean" coal, the adjective that is de rigour
whenever the word "coal" is used by this administration); ethanol;
nuclear fission; nuclear fusion; solar; wind; bus, truck, and automobile
engine manufacturing; fuel cells, biomass; industrial cogeneration
plants; and producers of energy efficient this and that. With this
blizzard of new federal research and development initiatives, accelerated
depreciation allowances, production tax credits, consumption tax
credits, and subsidies for energy businesses competing in foreign
markets, don't expect the tax code to get any more comprehensible
or your tax burden to get any lighter anytime soon.
It's unclear why we need to bribe investors with tax money to take
advantage of profit opportunities, and government's track record
at turning dubious ideas that don't attract private investment into
wonderful new economic toys is pretty bad (remember synfuels?).
But hey, corporate welfare is what makes the political world go
around.
Energy Welfare. If you're poor, might soon be poor, or live
in the Northeast, the Bush administration feels you pain. More tax
money to the notoriously wasteful Low Income Energy Assistance Program;
more tax money for the Weatherization Assistance Program; and more
money for the Northeast Heating Oil Reserve. For this we elect Republicans?
Regulatory Fine-Tuning. This is a story of the good, the
bad, and the ugly. The good: repeal of the antiquated Public Utilities
Holding Company Act (PUHCA), which dictates both the organizational
structure and permissible service territories of electric power
companies; and expedited renewal of permits for construction of
the Trans-Alaskan natural gas pipeline. The bad: rumblings about
increasing Corporate Average Fuel Efficiency (CAFÉ) standards for
automobiles, standards which are simply back-door taxes on big cars,
SUVs and mini-vans; further federal prohibitions on energy "inefficient"
(read; "cheap") appliances; and a directive to federal agencies
to develop pursue international agreements to address global climate
change (haven't we had enough of that for a while?). The ugly: tighter
regulation of power plant emissions of sulfur dioxide, nitrogen
oxide, and mercury. Is more environmental regulation of power plants
really necessary or really helpful at the moment?
So what exactly have we got here? The political equivalent of a
sugar pill. The Bush energy plan won't do anything much, but it
won't do too much harm either in the grand scheme of things, and
at the end of the day, that's pretty good for government work.
On balance, we'd be better off if the administration had not opened
this can of political worms in the first place. Had the administration
simply focused on tinkering with regulations where necessary and
revising federal land-use rules where politically possible, we would
not need to put up with so much chaff for so little wheat. Instead,
we're now in the midst of a ridiculously empty but still white-hot
argument about whether we should more heavily subsidize this rather
than that. We're also subjected to a bizarre debate about whether
"the nation" (as if we have some command-and-control Soviet-style
economy) should invest more heavily in supply or whether "the nation"
should invest more heavily in conservation.
And to make their case, the administration is finding is useful
to dredge up the most ludicrous arguments, such as the horrific
implications of importing oil or the apocalyptic consequences of
having investors going about their business without some detailed,
comprehensive federal energy planning document to guide them.
Free-market types and the conservatives they love have no business
in this intellectual ghetto. Nor do they have any business promoting
most of this interventionist, corporate-welfare agenda.
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