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Study: The Economic Costs of Our Green-Energy Boondogles Reach into the Billions

The Wall Street Journal has a really interesting piece by Holman Jenkins about how fracking has rocked the world of energy and its may geopolitical implications. Jenkins writes:

A direct confrontation between Iran and Saudi Arabia over Yemen could be shaping up. Iran is on the march in Iraq and Syria. Much of the Middle East is in chaos. That all this could be happening and yet oil pundits are more concerned about oil dropping to $20 a barrel, because of a lack of storage to accommodate our abundance, testifies to a geopolitical somersault the world is still trying to make sense of.

Fracking overnight has relieved Saudi Arabia of its swing-producer dominance. Fracking overnight has relegated the Middle East to a sideshow, albeit a still-important sideshow, in the world economy.

There may be very little those who want to see oil prices go back up can do to make that happen:

Speculating about counterfactuals can be a foolish exercise, but oil traders usually take fright at geopolitical upsets that threaten supplies out of the Middle East. Yemen sits at the narrow Bab el-Mandeb chokepoint through which 3.8 million barrels a day flow from Saudi Arabia’s Red Sea terminals and elsewhere to the world. Yemen’s upheaval comes at the hands of Houthi tribalists backed by Iran, whose military already threatens another key Mideast oil chokepoint, at the exit of the Persian Gulf.

To register panic about all this and drive up prices, however, oil buyers have to be able to hoard oil. That’s becoming all but impossible. A huge amount of surplus production is already sloshing around the world, mostly as a result of U.S. fracking. As a consequence, storage tanks are full to overflowing. Panickers and speculators may well be physically unable to drive up prices significantly if they wanted to.

We can never really predict what’s going to happen in the world’s vast energy markets and which particular energy sources will make the most economic sense years and decades down the road. For all its attempts to lower energy prices, the federal government has never come near to achieving the results produced by the invisible hand of the markets over the past decade or so.

But that doesn’t stop it from trying! The Obama administration has spent billions trying to support green energy (so did the Bush Administration); Reason’s Ron Bailey has some of the latest goals set by the president.

It’s a big question the government support for green energy is effective at all in the fight against carbon emissions, but another question, of course, is whether the environmental benefits can possibly make up for the cost of redirecting economic resources via central planning to specific energy projects.

A few years ago, a George W. Bush Center paper actually looked that this question and estimated that the economic cost can be high. How high?

The author writes:

The worst-case estimate from this exercise implies that, for every $100 billion of resources publicly directed toward clean energy, GDP decreases by over 0.4%.While appearing small on its face, this rate of inefficiency maintained for a generation could create a loss in per capita income on the scale of today’s difference between the United States and Italy. Income losses like this can cause considerable reductions in economic wellbeing while also taking away from other dimensions of human welfare by reducing life expectancies and increasing infant mortalities.

That’s some serious destruction of economic wealth, and it’s especially worrisome when the potential upside — the environmental benefits — is questionable. The whole study is here.

Government interventions in energy markets aren’t new, of course. More than 40 years ago, President Richard Nixon announced “Project Independence,” a wishful plan to wean the American economy off oil and decades of federal involvement by developing “alternative” energies. In spite of repeated failure to achieve such goals, lawmakers continue to throw more taxpayer dollars should be thrown at the wall in the hopes that something will finally stick.

There’s nothing wrong with alternative energy sources at all, but it’s time for policymakers to recognize that allowing the marketplace to determine winners and losers is going to work much better than a politicized, top-down approach.

The failures of our existing central-planning strategy belong to both parties and extend well beyond Solyndra and the Department of Energy’s ill-fated 1705 energy loan program. There was so-called clean coal, the Synthetic Fuels Corporation, the Clinch River Breeder Reactor, the National Ignition Facility, FutureGen, the Partnership for a New Generation of Vehicles, the FreedomCAR . . . (For a non-exhaustive list of energy subsidy boondoggles see this piece by Cato Institute’s Chris Edwards.) 

The right policy is, of course, to end all subsidies to energy companies, green ones and fossil-fuel ones alike. Let the market work. 

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