Confusion over the nature of conservation threatens to lead the US into serious mistakes with natural gas. A difficult winter looms—the winter just before a presidential campaign—and pressure is building on the federal government to do something about it. Energy consumers haven't been in this much jeopardy since the 1980s—and not because of market conditions.
Yes, the government should do something. It should let the market work, which might indeed mean uncomfortably high gas prices this winter.
The problem developed because the government limited the market's ability to deliver supply. With further price increases possible, people who should know better hail conservation as some untried cold-weather balm, officially manageable as an alternative to officially constricted supply. One mistake thus threatens to breed another.
Inseparable force
Conservation is a market effect, not an object of official volition. It's an inseparable force of a dynamic in which supply, consumption, and price continuously interact in response to outside influences in pursuit of balance. Efforts by government to influence this dynamic always fail. Market surprises always overwhelm the manipulation. Politicians enamored of manipulation dismiss this observation as ideology. Yet history proves it.
Conservation works within the market dynamic as a damper on consumption. It can't be managed in isolation from other market forces. In fact, as long as natural gas costs something, conservation operates at some level because of natural tendencies to avoid cost. The more gas costs, the stronger the tendency. Prices as high as they have been this year in fact compel much conservation. The effect shows up as curtailed operations of manufacturers dependent on gas as a feedstock and energy source and in rising demand for residual oil, a gas substitute under many boilers. This is conservation. More of it will become evident if prices rise further.
Also as prices rise, supply should increase. In the US it's not doing so to the extent it must to fill projected levels of demand. This is the crisis that has suddenly grabbed the attention of policymakers and provoked a warning about possible economic harm from Federal Reserve Chairman Alan Greenspan.
One reason for supply disappointment is that the US deliberately and severely limits exploration and production. The government refuses to make available for lease much of the federally owned gas resource and discourages activity on existing leases onshore.
In this period of rising gas prices, therefore, conservation occurs freely, though not without economic pain, while supply expansion encounters official limits. This lopsidedness of the market dynamic urgently needs repair.
Of course drilling-averse politicians assert that leasing won't do anything for supply this winter and ask, Why bother? They're right about the timing of supply. But they're irresponsible to use the logic to extend a longstanding mistake, the costs of which are becoming all too real. Better late than never, the US must take the shackles off its potential gas supply.
In the meantime, some will ask, shouldn't the government do something about conservation?
No! Absolutely not! The last thing US gas consumers need is for their government to orchestrate conservation.
The government can't curb consumption more than crimped supply and elevated prices already are doing without aggravating the pain of adjustment. It can only distort the effects of a market certain to follow its own course. This, too, is history. The government imposed conservation during the 1970s with demand tiers and supply allocations. And its manipulations accomplished little more than supply interruption and unnecessary hardship. Nothing about the intervening decades made the government any more adept than it was then at apportioning supply and determining price levels. If those decades taught anything, it is that the market handles those functions best.
Challenging winter
Next winter probably will be challenging because of conditions in the gas market. If the government intervenes with mandatory conservation or—even worse—price controls, ensuing winters can only be worse.
It would be much better for energy consumers and for the national economy for the government to address the supply manipulations that contributed to this problem and otherwise stay out of the gas bazaar. The market is unpredictable—which is why government intrusions never work. But its surprises aren't always bad.