Editorial: A US energy meltdown

May 1, 2006
Washington, DC, has entered political meltdown over energy. For fuel consumers, this is a far greater problem than $3/gal gasoline.

Washington, DC, has entered political meltdown over energy. For fuel consumers, this is a far greater problem than $3/gal gasoline.

From President George W. Bush on down the line, politicians both Republican and Democrat have abandoned economic sense. They’re responding to a strained oil market by trashing oil companies. They’re running away from problems because they’re in great measure responsible for them. They’re proposing more mistakes.

Another investigation

Bush proposes yet another investigation of oil and gas companies because, he says, “What [Americans] don’t want and will not accept is manipulation of the market. And neither will I.” This tough-guy empty-headedness came after Senate Majority Leader Bill Frist (R-Tenn.) and House Speaker J. Dennis Hastert (R-Ill.) sent Bush a letter requesting investigations into possible price-gouging. Gleeful that Republicans had shed their free-market principles, Democrats piled on. House Democratic Leader Nancy Pelosi of California flailed “the Republican rubber-stamp Congress and its failure to stand up to Republican big oil and gas company cronies.” Senate Minority Leader Harry Reid (D-Nev.) called for legislation to punish price-gougers and for a new windfall profit tax. Last year, energy was a contest of political favors manifest in the Energy Policy Act of 2005; now it’s a contest of demagoguery.

Americans need better than this. Their anger over rising gasoline prices is understandable. They enjoyed nearly two decades of dirt cheap oil products and blissful inattention to subpar oil company profits. They consumed energy with abandon. Now that the market has turned, they think the price discomfort must be someone else’s fault, someone like oil companies reporting record profits.

A little information could dissipate some of the anger. Most Americans are capable of understanding that oil demand couldn’t rise forever against a supply system limited by nature and politics. Most Americans can sympathize with the problems hurricanes created last year for that system, problems that linger even now.

But they have to be told. Their government leaders should tell them. Their leaders have a responsibility to understand markets and industries essential to US economic and security interests. Those leaders instead are exploiting their anger for political gain.

Some US politicians don’t understand what’s happening in oil markets. Some do understand but demagogue the issue anyway. And some understand but stay quiet to avoid controversy. Politicians in the first group are ignorant, in the second group hypocritical, and in the third group cowardly. In no case is there any excuse.

A country that consumes as much oil as the US does can’t afford to remain pitiably ignorant about oil. Americans and American politicians demonstrate no comprehension of the size of the American energy appetite or of the huge and inescapable role oil plays in fulfilling that need. This misunderstanding enables overblown hopes about “alternative energy” to replace the serious attention the country must give to future supply of energy from all sources, oil included.

In similar fashion, the lack of appreciation for size of the oil market generates groundless suspicions about price manipulation. Prices in fact derive from continuous decisions around the world by tens of thousands of buyers and sellers of crude oil, refinery products, and derivative instruments such as futures contracts, all based on moment-by-moment assessments of supply and demand. The system is far too big and complex for any entity, least of all oil companies, to control. And when governments try to control prices they only create shortage.

Destructive remedies

Failure to appreciate scale thus breeds fantasies about “price-gouging” and alternatives, which in turn breed destructive remedies. Reid’s proposal for a windfall profit tax is an example. He’d use the money to rebate fuel consumers and to subsidize nonoil energy. So the scheme would reward consumption, cut investment in big and relatively cheap future supply, and increase spending on small, expensive supply. That’s exquisitely wrong.

The general public can be excused for submitting to reflexive anger grounded in ignorance. Real leaders never do that. Real leaders recognize ignorance for the peril that it is and do something about it. The job of energy leadership in Washington, DC, is wide open.