Politics & Policy

Pumping The Bizarre

Bipartisan energy errors.

The tenor of the energy debate now reaching a crescendo on Capitol Hill is increasingly bizarre. The periodic panic over “foreign-oil dependence” is back as is the unshakable faith in the magical power of taxpayer subsidies to deliver a fuel that will replace gasoline in transportation markets without bankrupting the economy. Those ideas have been aided and abetted by the ostensible party of free markets–the Republican party–whose leaders argue not whether the invisible hand ought to be banished but only the manner in which the market ought to be rigged in its absence.

The hostility directed at “foreign” oil is ridiculous. The amount of oil we import has no bearing on the impact of world oil-market shocks on our economy. Even if the United States imported no oil at all (and we did not restrict trade), supply disruptions abroad would have a similar effect on our economy as if all our oil came from overseas. That’s because oil is traded in global markets: Anything that affects supply or demand anywhere affects prices everywhere. Great Britain discovered this in 1979. The North Sea crude the U.K. relied upon for all its oil consumption became just as costly as similar grades of Iranian crude when the Shah fell in 1979, an event that increased prices in energy independent and energy-dependent nations alike.

Not only would energy independence not help us, removing ourselves from international energy markets in a quest for independence would make us more vulnerable to supply disruptions for two reasons. First, it’s easier for terrorists to disrupt energy production if the sources of supply are geographically concentrated rather than dispersed. Second, if a domestic disruption were to occur and a trading infrastructure were not in place, we would not be able to avail ourselves easily of supplies elsewhere.

Why, then, do some politicians (usually Republican) argue that domestic oil is “good” and foreign oil is “bad”? Pure ignorance is one possibility. Cold-eyed political calculation is another. The domestic oil industry is made up of thousands of small producers in a number of southern and western states who are very well organized politically and relatively important economically. Thousands of other jobs rely both directly and indirectly on the health of that sector of the U.S. economy. No politician from those regions or with national aspirations can afford to offend the domestic oil constituency.

If reducing foreign-oil imports won’t protect us from supply disruptions overseas, should we reconsider our reliance on oil altogether? The choice we face is between using a transportation fuel that is usually cheap but occasionally expensive (oil) and a using a transportation fuel that is usually expensive but less volatile (switch grass, electricity, ethanol, hydrogen, methanol, compressed natural gas, liquefied coal, turkey droppings, whatever). It’s not obvious that the latter is economically preferable to the former. And that’s particularly true once you realize that moving away from oil usually means moving away from the international energy trade.

Why can’t the more expensive but less volatile fuels succeed in the marketplace? Why must we subsidize, order, or mandate? The usual rationales are that (a) energy investors and auto companies are short-sighted, (b) we need to level the playing field because we’re subsidizing oil, (c) we need to speed up what the market is already doing in slow motion, or (d) all of the above.

Regarding (a) and (c), it’s time to learn some humility. Prof. Vaclav Smil, in his book Energy at the Crossroads observes that “for more than 100 years, long term forecasts of energy affairs–no matter if they were concerned with specific inventions and subsequent commercial diffusion of new conversion tech-trends–have, save for a few proverbial exceptions confirming the rule, a manifest record of failure.” The lesson is that we should let private investments play out through trial-and-error in the market because spending one’s own money gets the incentives right. Spending other people’s money does not.

Regarding (b), subsidies to the oil industry are small and probably do not lower marginal production costs and, hence, the price of oil. Instead, the subsidies are simply wealth transfers from taxpayers to shareholders. Moreover, the net effect of government interventions in the oil market, such as the Texas Railroad Commission and the actions of OPEC, has been to increase prices for oil relative to what they have been in the free market. The failure of alternatives to oil to compete successfully on price cannot be explained by past or present government policies that made oil cheaper than it would be under laissez-faire.

With oil prices between $50-60 a barrel, the industry doesn’t need any additional incentive to produce more oil, invest in alternatives to oil, or to produce more energy efficient vehicles. Moreover, nothing is gained by this quixotic crusade to limit our reliance on foreign oil as opposed to domestic oil. The bottom line: no energy bill necessary.

Jerry Taylor is director of natural-resource studies at the Cato Institute in Washington, D.C. Peter VanDoren is editor of Cato’s Regulation magazine.


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