Governmental activism has roared back into fashion in the energy-consuming world. In the US, a Republican president and Democratic Congress spar over energy policies that differ on specifics but converge around the assumption that energy choice is a fitting purpose of government. In Europe, progress toward energy-market deregulation is giving way to supposedly weightier concerns. Indeed, the main movement toward market economics now is by countries trimming price subsidies, and those steps relate less to enlightenment than to fiscal pressure.
The reinvigoration of energy governance in major consuming nations has many possible explanations. Some observers see the oil price surge of the past few years as a market failure and summons to govern. To some, the excesses of Enron and rogue traders elsewhere discredited the deregulation of electricity markets if not trading more broadly and the legitimacy of free markets in general.
Transcendent problems
A belief also seems to be at work that transcendent problems have emerged, problems massive and complex enough to overwhelm whatever remediation might be expected from the simple working of free markets, problems only governments can address. Energy insecurity and climate change are popular favorites.
To some degree, too, activism by consuming-nation governments responds to menacing initiatives of producer governments empowered by surging oil revenue. Oil money, for example, has rekindled Russian hegemony. It has given mavericks such as Venezuela’s Hugo Chavez and Iran’s Mahmoud Amadinejad international maneuverability they wouldn’t otherwise possess.
But these are excuses, not good reasons, for governments to yield to their natural urges to govern with abandon. They dodge the question whether consumers fare better in markets working freely or in markets misshapen by intrusions such as fuel-use mandates, consumption limits, and price controls. Yet history answers clearly: For consumers, free markets always are preferable. They’re preferable even when prices are stressfully high because they keep supply flowing to priority uses. Inevitably, consumption mandates raise costs, and price controls create shortage.
US and European energy markets strained under regulation in the 1970s then flourished, to the extended benefit of consumers, after price and consumption controls eased in the 1980s. Elevated prices of the moment in no way repudiate the comfort that followed deregulation where it occurred. In fact, years of depressed energy prices contributed to unprecedented economic growth in much of the world, growth that has blunted the sting of an inevitable price upswing. Nothing—not elevated prices, not tension over energy security, and not climate change—warrants distortions like those of the ’70s.
As governments lunge toward past errors, oil and gas companies can serve national interests by proclaiming whenever possible the superiority of market freedom over regulated energy systems. And they should anticipate three standard counterarguments.
Appeals for market freedom reflect blind ideology, goes one typical complaint. In some cases, this may be true. Yet a preference for market freedom can flow from simple pragmatism born of experience with what works and what doesn’t. Markets act swiftly and efficiently; governments can’t. Therefore, matters such as fuel choice and pricing are best left to markets. Besides, what’s wrong with ideology?
Supporting regulation
Supporters of markets vis-a-vis governments also face accusations that they thoughtlessly abhor governance. This claim is extreme and unfair. To support market freedom is not automatically to oppose government as an institution or regulation as a practice. In fact, most free-market advocates support regulation to limit trading misbehavior, for example, and to guide whatever responses to climate change may be in order. In all issues, though, governments should restrain themselves and orient their actions to market freedom. The point of such a framework is to make governance effective, not to disparage governance itself.
The other standard argument against a preference for market solutions is the supposition that problems can be too big for markets to handle. Yet energy-market distortions create problems bigger than those that the policy mistakes causing them aim to solve. Price and market controls leap to mind.
Energy markets aren’t yet in retreat in the consuming world. But they’re under assault. Energy consumers have reason to worry.
