Politics & Policy

Counterintuitive Energy Truths

Election-time reality check.

Like the deafening din of the cicadas every 17 years, each election season brings “energy-policy” proposals-wealth-redistribution schemes–to the front pages. We now have a congressional conference committee attempting to concoct a House/Senate compromise on yet another energy bill, justified as always on the basis of substantial analytic error and misguided conventional wisdom. That the same-old nostrums every election cycle are promoted with other peoples’ money should give pause, as public officials offer erroneous arguments, perhaps sincerely, while citizens are left to scratch their heads amid attempts to separate wrongheaded assertion from fact. Herewith, a few counterintuitive truths.

#ad#The degree to which we are dependent upon foreign oil, however unstable, is irrelevant because the world oil market can have only one price, which all nations must face. Therefore, an oil-supply disruption raises prices equally for all, whether they import none, some, or all of their oil. Nations that import substantial amounts thus are no more “vulnerable” to the effects of disruptions than those that import little; and subsidies for expensive domestic sources in place of cheaper imports represent, almost literally, money poured down a hole. Nor should domestic sources be penalized disproportionately; that about one percent of that vast wasteland known as the Arctic National Wildlife Refuge should be attributed virtually infinite social value by the opponents of drilling is highly misguided, even apart from the minor prospective effects of oil production there upon land and fauna.

Similarly, embargoes directed at given nations have little effect. Such actions are an attempt to impose a higher price on particular nations, a violation of the one-price principle; the market simply would reallocate oil until a single price prevails. In 1973 the production cut by Arab OPEC raised prices; the enforcement of price and allocation controls created the gasoline lines and other market chaos in the U.S.; and the embargo directed at the U.S. and the Netherlands had no effect at all in that both were able to obtain oil on the same terms as all other nations.

There is no such thing as complete “depletion” of a resource under a system of profit-seeking capitalism with property rights. If the total amount of oil is finite and if there is no technological advance, ongoing depletion of the resource would result in a price that rises over time at a rate faster than the rate of interest, yielding powerful incentives to conserve for the future. That effect has been swamped historically by technological advance, the outcome of which has been a long-run decline in the inflation-adjusted prices of most natural resources, oil foremost among them. This means that the common distinction between “renewable” and “nonrenewable” energy is empty except for the vastly higher costs of the latter: Market forces will not allow the supply of nonrenewable resources to be used up, and human ingenuity under capitalism in any event increases the true economic supply of such resources and their substitutes over the long term.

Nor it is very clear why it is useful to have government programs promoting “conservation,” a term that seems not to have been honored with a clear definition in the public discussion. Presumably conservation means shifting the consumption of some energy resources from the present into the future; but as long as not all such resources are being used today (see above), the market is conserving. Is the market conserving too little? Perhaps; but the rationale underlying that common assumption remains entirely obscure. Quite clear on the other hand are the real adverse effects of many “conservation” policies; a good example is the federal automobile fuel economy standards, estimated by Robert Crandall of the Brooking Institution to result in about 2000 additional highway deaths per year, as people are forced into smaller, less-safe autos. That is the real “blood for oil” campaign, pursued every year by the environmental left as it brays for a further tightening of these standards.

Notwithstanding the poverty of the usual arguments in the public energy-policy discussion, the debate does have its amusing dimensions, as we observe the environmental Left–unelected, unappointed, and unaccountable–demand that firms satisfy their priorities rather than those of their customers. Even more hilarious, or depressing, is the spectacle of corporate executives happy to impose losses upon their shareholders in the vain hope that the environmental Leftists will be their friends. And it is wholly unsurprising that the great state of California should stand at the forefront of the amusement parade. Now that energy policy is being used to engender large implicit subsidies for the Midwest agricultural sector in the form of ethanol requirements for gasoline–at the expense of California drivers–we find some California officials suddenly discovering the virtues of federalism: Please simply set a federal clean-air gasoline standard, and allow Californians to decide how to meet it. Having for years supported policies imposing huge costs on other parts of the country, often for environmental benefits either dubious or nonexistent, it is not shocking that these pleas have fallen on deaf ears. Perhaps a consistent stand for truth instead of allegiance with the obstructionists would have yielded a better long-term outcome for Californians.

Benjamin Zycher is a senior fellow at the Pacific Research Institute.

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