Commentary

Energy Alarms

President George Bush and his energy secretary, Spencer Abraham, rang the alarm bells in a speech this week before the U.S. Chamber of Commerce, declaring the United States is now in the midst of an energy crisis as severe as that which rocked the nation during the 1970s. Are we? Well, to borrow a Clintonian turn of phrase, it depends on how one defines the word “crisis.”

Energy prices are indeed going up. Gasoline is about 50 percent more expensive than it was a few years ago, natural gas prices are up 400 percent nationally since this time last year, and wholesale electricity prices on the West Coast are at historic highs. If rising prices meet your definition of crisis, then fine. We’ve got a crisis. But it doesn’t automatically follow that the government should do anything about it. Rising energy prices are the market’s way of telling us energy is increasingly scarce given current demand. High prices represent profit opportunities for energy suppliers, a necessary prerequisite for the delivery of new energy to the marketplace. They also encourage consumers to economize on their use of energy, a necessary prerequisite for the avoidance of shortages. So high prices aren’t just a problem to be solved; they’re a solution to be embraced. The market, left to its own devices, will solve this crisis without any help from Washington.

Of course, the administration rightly suggests there are things we could do to facilitate delivery of new supplies to the market. We could facilitate construction of new gas pipelines and new electricity transmission lines to get energy from where it is plentiful to those parts of the country where it is scarce. We could open up public lands currently off-limits to the energy industry for development. We could make investment in new oil-refining capacity attractive again by easing regulatory burdens that have sapped all the profitability out of that industry.

A policy of loosening the regulatory straitjacket on energy entrepreneurs, however, is one thing. Intervening in the energy marketplace to dictate investment decisions is another. Unfortunately, the administration’s inflammatory rhetoric about crisis threatens to send policy off the economic cliff.

For instance, is it really government’s job to muscle private property owners into granting access to potentially dangerous gas pipelines across their property lines? If pipeline operators can’t pay people enough to accept access, then government shouldn’t step in and force the transaction. The same goes for electricity transmission lines. It’s one thing if we’re talking about community opposition to the use of private property; it’s another if we are talking about using eminent domain to force siting decisions.

Nor is it clear the government should make the construction of new transmission lines a priority. After all, transmission is simply a substitute for generation. We could have a lot of small generating plants and relatively little transmission or a small number of huge generating plants with a lot of transmission. The right mix should be an economic, not a political, consideration, and that means leaving such decisions to the marketplace.

Similarly, the question of whether to allocate the natural resources of federal land Parcel X to the energy industry, the recreation industry or the conservation lobby is a question for the market, not the government, to answer. Auction off the land to the highest bidders and let them decide whether energy development is the best use of the resource. If the American people value environmental amenities as much as the Green lobby contends they do, some of that land might best be used for other purposes.

And since when did Republicans accept the idea that throwing federal tax dollars at uneconomic technologies would somehow transform them into worthwhile investments? The much ballyhooed Clean Coal Technology Program is a multibillion-dollar black hole and has been so for more than a decade. If a technology has promise, tax subsidies are unnecessary. If it doesn’t, no amount of tax subsidy will make any difference.

Moreover, all this talk about supply ignores the equally important matter of demand. The problem in California’s electricity market is that high wholesale prices do not translate into high retail prices. Accordingly, we have an East German energy market.

Mr. Bush and company can bray all they want about the need to encourage energy conservation, but absent price signals, politicians can beg, plead or subsidize all they want without changing consumption patterns one iota. And it’s not enough to argue that the price caps in California are a state matter. The Federal Energy Regulatory Commission is currently engaged in a witch hunt to prosecute power generators who sell their electricity on the wholesale market above prices deemed fair by federal regulators.

Coal fields aren’t disappearing and neither oil nor gas wells are running dry. The recent run-up in gasoline, natural gas, and electricity prices are manifestations of a natural boom-and-bust cycle that periodically affects all commodity markets. The market, left to its own devices, will quickly remedy those shortages. Relieving industry from excessive regulatory burdens will speed the process. Dictating energy investments and reining in prices through regulatory initiatives, however, will slow the market and, as the 1970s should have taught us, take matters from bad to worse.

Jerry Taylor is director of natural resource studies at the Cato Institute. Peter VanDoren is editor-in-chief of the Cato Institute magazine Regulation.