A Free Market Energy Vision

Energy, as economist Julian Simon, Ph.D., emphasized, is the master resource. Without energy, other resources could not be produced or consumed. Even energy requires energy: usable mineral energies require energy to manufacture and to power the requisite tools and machinery. Nor would there be wind turbines or solar panels, which are monuments to embedded fossil-fuel energy.

Fossil fuels upgrade renewable energies to be part of electricity grid. Short of prohibitively expensive storage, natural gas-generated power, in particular, fills in when the wind does not blow or the sun does not shine.

As an input to all products and services, energy must be affordable, convenient, and reliable. To this end, public policy should respect consumer preference and allow energy entrepreneurs 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 subcomponents.

Government Intervention

Global energy supplies are primarily owned by governments rather than by individuals, giving rise to ‘energy security’ problems for some nations with some fuels. In state-run economies, political elites make the decisions that otherwise would be made by the millions. 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 or federal law. A mandate is required because a free marketplace would not support such expensive, unreliable—noncompetitive—supply.

Oil and gas producers may be unable to access prospects 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 a synthetic fuel plant, carbon capture and storage, a “smart” electricity grid, or a nuclear plant. 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.

Nonmarket Failure

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 back in 2010, and healthcare legislation enacted a year later, 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. This suggests a different approach. Knowing that solutions are likely to be as or more imperfect than 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 oil, gas, and coal in light of the fixity/depletion view of minerals.
2. Air and water pollution from fossil fuels.
3. Security of supply, particularly oil imports to the U.S. from the Middle East.
4. Global warming (aka climate change) from humankind’s use of carbon-based energy.

Whole books address these issues, most from the market-failure viewpoint, to conclude that mankind is on a perilous path, and government-engineered energy transformation is necessary. But students of history must ask: 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.

Federal energy planning during World War I, the Great Depression/New Deal, World War II, the Korean War, an the 1970s “energy crisis” are case studies of the predictable and unpredicted consequences of government intervention. Price controls on natural gas, crude oil, and petroleum products create the very problems that planning is advertised to prevent and require more intervention in the production, transportation, refining/separation, wholesaling, and retailing of the same.

How Markets Address Sustainability

The argument for free markets to address the four major 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 has and 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 of 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. While 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. natural 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. The rise and maturation of hydraulic fractionation for oil and gas production has all but eliminated yesterday’s “energy security” concerns.
4. The global warming scare remains plagued by exaggeration, one-sided research, and open scientific questions; unsavory economic tradeoffs, and the reality that carbon-based energy is requisite to economic coordination and prosperity. Carbon rationing is a failed policy for the developed world and a nonstarter for the developing world. Not only have targeted reductions under the Kyoto Protocol and the Paris Climate Accord proved elusive, the prospects of future cooperation short of ruinous carbon taxes and tariffs make the cure worse than the disease.

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

From Al Gore to Joe Biden, the “planetary emergency” is six-to-seven billion people using oil, gas, or coal for most of their energy needs. But the real emergency is the hundreds of millions of people do not use modern forms of energy. Rampant statism in place of economic freedom and individual empowerment is the energy crisis of today.

Freedom, reason, and persuasion–not coercion—is a worthy goal. The initiation of force should be a last resort given the ability of free people to improve their situation 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 occurred in the 1970s with U.S. oil and gas price controls, has produced shortages, civil strife, and bureaucratic waste.

Markets are not perfect, inspiring some to devise and champion government intervention into energy. 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.

Rob Bradley, Jr., Ph.D. (rbradley@iertx.org) is the CEO and founder of the Institute for Energy Research.  

This analysis originally appeared on The Master Resource Blog.