Restraining government

Jan. 1, 2007
Governments historically err on energy policy by governing too aggressively, especially on fuel choice.

Governments historically err on energy policy by governing too aggressively, especially on fuel choice. There are two basic reasons for this. Nothing in their nature makes governments better at fuel choice than fuel users are. And because politics dominates their decisions, governments inevitably make fuel decisions that help favored constituencies at the expense of energy consumers. Governments serve public energy interests best by letting markets work and ensuring that they do so freely and fairly, by setting and enforcing reasonable environmental standards, and by otherwise restraining themselves. Congress and the Bush administration should apply this perspective as they assess a late-2006 set of proposals by a group called the Energy Security Leadership Council.

Oil dependence

The council-a group of retired military flag officers, corporate executives, and government leaders-wants to enhance energy security by lowering US dependence on oil. Its agenda is balanced and thoughtful. Unlike most recommendations born of alarm over oil’s domination of the energy market and origins in politically unstable regions, the council’s prescriptions are not patently antagonistic toward petroleum. They even call for expanded leasing of the Outer Continental Shelf and Arctic National Wildlife Refuge Coastal Plain. The recommendations collapse, however, around a basic flaw. They put government at the core of energy decisions.

They call for strengthened vehicle fuel-efficiency standards, “substantial government incentives” and research spending for biofuels, mandates that vehicles be able to burn 85:15 ethanol-gasoline blends, and tax credits to help “family-owned service stations” install fuel tanks and pumps able to store and dispense ethanol. They include new government support for use of biomass as petrochemical feedstocks and for enhanced oil recovery. They urge “significant financial incentives” for domestic manufacture and use of “highly fuel-efficient vehicles.” They seek a review of US and International Energy Agency policies on strategic oil stocks. Programs like these aren’t cheap. Funding can come only from taxpayers and energy consumers. If the programs have merit, the market will support them. So why raise public spending and fuel costs?

The council apparently doesn’t trust markets. One of its principles states: “Pure market economics will never solve this problem” of oil dependence. Then this: “Government intervention is necessary.” In the cover letter conveying its recommendations “to the President, the Congress, and the American People,” the council further reveals its orientation by asserting, “For more than 2 decades, federal energy policy has been afflicted by paralysis.” That, of course, would be the period of oil and gas markets free of price controls.

The council’s analysis looks back fondly at imposition of corporate average fuel economy (CAFE) standards in the mid-1970s, for example, yet ignores the coincident phaseout of oil price and allocation controls. It thus repeats the common mistake of attributing vehicle fuel-efficiency gains of the period wholly to government energy-use controls and ignoring market effects. Airline and air courier executives on the council’s board should know better. Aircraft manufacturers greatly improved the efficiency of jet engines in the 1980s without CAFE-type regulation. They did so in response to the commercial pressures exerted by elevated jet-fuel prices. “Pure market economics” does indeed solve problems. It solves them better than government interventions do.

Splendid era

The quarter-century since oil-price deregulation has been a splendid era for energy consumers, an era of ample supply and low average prices. Even at recently elevated levels, oil and gas prices are-dare anyone say so?-affordable for most consumers.

The council frets that during the low-price years US dependence on imported oil rose and that vulnerabilities appeared in the global distribution system. Both observations are valid. But so are the observations, which the council failed to make, that oil trading is now much more flexible than it used to be and therefore better able to handle disruption, that large producers able to influence marginal supply fear demand destruction at least as much as they do low price, and that interdependencies between buyers and sellers provide a large measure of security that receives too little notice.

The US has energy problems. But too little intervention by government isn’t one of them.