Sustainable development, as was argued here last week, has to represent more than mandatory consumption of fuels containing no hydrocarbon. Development depends on economics. Sustainable development therefore must accommodate hydrocarbon fuels in some environmentally sensible combination with others (OGJ, Apr. 2, 2007, p. 17).
Yet what’s sensible? Environmental goals derive from politics and sometimes make no sense at all. The framework for decision-making, however, can be sensible, even sustainable, if consistently aligned with markets. History is clear about this. Politics in conflict with markets always fails.
Unsustainable patterns
Current energy patterns are unsustainable. The reason isn’t that oil and gas resources are depleting or that carbon dioxide is accumulating in the atmosphere. Those are facts with consequences worthy of attention and response, to be sure. A more immediate driver of energy unsustainability, however, is political disengagement from market discipline.
Around the world, governments have swerved in several directions away from attention to markets.
Europe and the US, possibly to be joined soon by Canada, are imposing unsustainable costs on energy consumption. Europe has made urgent response to climate change a regional priority and wants the rest of the world to share its obsession. All climate-change remedies involve heavy taxation of the most competitive energy forms-oil, gas, and coal-and subsidization of others. Canada soon will adopt a climate-change policy; the extent of sacrifice remains to be seen. In the US, climate change lacks the regulatory prominence that it commands in Europe. Still, it’s influencing policy and will do so more now that the Supreme Court has ruled that federal agencies should regulate CO2 as an air pollutant.
The US government has trotted off on its own detour from market economics. It has instituted a lavish system of subsidies for politically preferred but economically baseless energy forms, prime among them ethanol made from grain. Corn and fuel prices are leaping, but politicians so far have managed to keep blame focused inaccurately on oil companies.
Among oil exporters, meanwhile, nationalization has roared back into fashion. For Persian Gulf producers, it never went out of style. Yet not so long ago, some of them, including Kuwait and Saudi Arabia, hinted at encouraging international companies to participate in oil production investments. But times-and oil prices-change, and the talk has subsided. Venezuela and Russia are renationalizing their oil industries following years-decades in the case of the Latin American producer-of reliance on private capital. Both countries have raised taxes on and expropriated assets of international companies. Both use oil and gas to influence politics of international customers.
Governments in the energy-short developing countries of Asia understand cost and the importance of supply and behave accordingly. But the biggest consumption tiger, China, works with an antique craving for control and has dispatched state-owned enterprises to buy producing interests wherever they can, often at excessive price.
In the current energy world, therefore, major consumers seek to tax the cheapest fuels into disuse and replace them with subsidized alternatives. Major exporters foreswear the efficiencies of private investment, let oil revenue camouflage the need to diversify economies, and in still too many cases subsidize consumption. And high-growth developing countries compete with national treasuries for energy investments.
Surviving reversals
These patterns can’t last. Europe and the US can’t raise energy costs without at some point weakening their economies. Asia can’t grow without a prosperous industrialized world. And exporters can’t keep enlarging state enterprises dependent on oil revenue unless oil prices stay high-never a certain bet.
In the global energy system now settling into place, governments increasingly make consumption and investment decisions. And they make them as though they believe current market trends will continue forever. The system wouldn’t survive reversals such as a currency crisis in Asia, a recession in Europe or the US, or a slump in the price of oil, all of which have happened in recent memory. The system isn’t aligned with markets and won’t change when markets do, however they do. It cannot, therefore, for very long sustain development.
