It’s at about this point in a market cycle that public trust in markets begins to fade. Prices of oil products reach levels consumers find annoying. Energy, popularly ignored when prices are low, becomes an issue about which everyone holds strong opinions. Politicians feel pressure to act. Worry grows that, this time, it’s not just a cycle, that supply can’t meet demand, that high prices will last forever. And with clamor growing for government leaders to do something-anything-the assumption begins to circulate that energy is too important to leave to markets.
The assumption is dangerous. It leads to costly mistakes. Energy, in fact, is too important not to leave to markets. In matters pertaining to energy, the alternative to markets is government, which in matters pertaining to energy seldom gets much right.
Markets unpredictable
How can it? Government governs. It legislates and regulates. Legislative and regulatory success depends on the validity of some pat set of expectations about energy markets. Those expectations, from government or anywhere else, nearly always are wrong. Energy markets defy accurate prediction. They’re too big and too complex.
What’s more, before government legislates and regulates it must deliberate. While it does, energy markets change, often surprisingly. Before government can respond to a problem related to energy markets, markets usually cycle through a solution and move on.
The unpredictability and changeability of markets should make government humble about energy legislation and regulation. They don’t when high prices annoy consumers, of course, but they should. And there are other problems.
Fundamentally political, government takes an expedient view of public interest. In fact, it tends to define public interest in terms of what it wishes to do. And its wishes inevitably take their shape from parochial pressures. In energy, those pressures come from individuals and groups with specific types of energy to sell and agendas, usually environmental, to promote. Because of the large amounts of money involved, the pressures can be greater in the formulation of energy legislation and regulation than in many other areas.
Energy legislation and regulation thus become contests of preferences for specific types of energy over others. Government chooses to promote energy forms or consumption patterns advanced by pressure groups with which it agrees ideologically or to which it owes something. Then it conforms public interests to its choices.
The pattern is evident in energy bills passed by the US House of Representatives and soon to be deliberated by the Senate. Energy choices fill both bills. Especially large, yet largely unnoticed by the press and public, are mandates for grain ethanol in gasoline-5 billion gal/year by 2012 in the House bill and 8 billion gal/year in the bill headed for the Senate floor. As argued here last week, the mandates would raise gasoline prices, aggravate air pollution, and cut government revenues (OGJ, June 6, 2005, p. 19). Sensible energy policy would pursue none of those outcomes. But politicians of both major parties want to pass ethanol mandates as generous favors to agricultural interests (see story, p. 26).
An argument that reasonably can be made for mandating ethanol, plenty of which would enter gasoline streams to boost octane in the absence of a mandate, is that the substance would reduce oil imports, however modestly. Partly because of political pressure to enlarge ethanol markets, therefore, imported oil has come to be portrayed as a grievous threat to a country otherwise committed to global trade. The argument neatly suits other energy ambitions embraced by politics but not economics. Public interest thus conforms itself to political wishes.
Susceptibility to political mischief must join the inevitability of failure in dalliances with energy markets as reasons to keep government out of energy choices. Markets handle those choices much better, and public interests are best served when they do.
Public needs
The public needs energy that’s continuously available in quantities required, affordable, safe, and environmentally benign. By those standards, no energy form achieves perfection. Only markets can weigh all advantages and all disadvantages of all energy forms and make valid choices within the dynamic conditions of modern economies.
Government can’t do it. It governs energy best by avoiding direct energy choices, setting reasonable standards for environment performance, and ensuring that markets work.
