May 25, 2006 11:25AM

Fear Not, Tom Friedman

Yesterday's New York Times op-ed page had a couple of rather interesting pieces on global warming that merit some thought. The first, by Thomas Friedman, discussed how American capitalists -- motivated as much by the hunt for profit as they are by the quest so save the world -- are undertaking a "distributed Manhattan project" to develop economically attractive alternatives to fossil fuels. No centralized government program is necessary, thank you very much. The second, by environmental writer Gregg Easterbrook, described why he has switched sides in warming debate, moving from skeptic to cautious activist. Both are far more sensible than the usual screeds on those subjects published by the Gray Lady.

The Friedman piece was spot-on. Thousands of rather brilliant minds and billions of private dollars are being devoted to ambitious alternative energy R&D. While government sprinkles money here and there, the real work is being done by venture capitalists and entrepreneurial visionaries. If anything emerges from that creative soup, it will be primarily due to the fact that capitalism is the most powerful engine of technological change and innovation ever created by man. Waiting for the Congress or the Department of Energy to come up with something would be a triumph of hope over experience.

Friedman worries, however, that it won't be enough. "If we want to see these alternatives move from little start-ups to large-scale commercial ventures, 'we need to get the price mechanism right.' When you're talking about oil, you can't just say 'Let the market work' because there is no free market in oil: the producers have a cartel, and governments -- like ours -- subsidize oil so we don't pay the full cost." Friedman proposes a price floor for gasoline ($3.50-$4.00 per gallon) and green purchasing practices for the federal government.

Fear not, Tom Friedman. The alternative energy revolution (if one is to come) will indeed be televised. First of all, to say "there is no free market in oil" is to say "I don't know a damn thing about oil markets." One would be hard-pressed to find a freer market on this planet than the one that trades in oil. There are a multiplicity of buyers and sellers who are free to sign long term contracts or to buy and sell in futures markets and spot markets with little regulatory interference. Secondary markets are likewise robust. Prices in wholesale markets are established by supply and demand and the only reason they don’t translate directly to the consumer is because governments are fond of taxing the hell out of the product at the retail level.

To the extent that there is governmental interference in those markets, it has been to artificially raise oil prices above what the market would otherwise deliver. Were it not for OPEC price fixing through production quotas, world oil prices would normally float around $5.50 per barrel according to Francisco Parra, a former Secretary-General of OPEC.

Now, you may not buy that number, but the overall point is hard to argue. Production costs in the Persian Gulf are so low -- and economically recoverable oil is so plentiful -- that only government conspiracy prevents a torrent of this stuff from hitting the market. Subsidies to the oil sector do indeed exist, but they do not affect marginal production costs, which is to say they do not affect consumer prices.

In sum, the claim that oil prices would be higher were it not for governmental favoritism has it exactly backwards. Competitors need no further help.

Gregg Easterbrook's piece makes the point that there are few credentialed scientists left who publish in the peer-reviewed literature who are willing to argue that industrial emissions aren't warming the planet. Fair enough. But the bulk of the so-called "skeptics" (like MIT's Richard Lindzen or UVA's -- and Cato's -- Pat Michaels) never argued that point in the first place. Instead, they have argued that warming will likely be modest and of no particular consequence. Easterbrook acknowledges that this might well be true, but that he would prefer to hedge his bets with some sort of emission control policy.

Again, fair enough. Particularly risk averse people are more inclined towards this sort of thing than those less worried about such things, and there is no "correct" answer to the question of how much one should hedge against risks given that our risk preferences are all different and risk preferences are subjective.

But bear in mind that, over the past several years, the market has essentially slapped a huge tax on hydrocarbons. If environmentalists were asked back in 2002 if they would declare victory and go home with the passage of a $50 per barrel tax on oil as a means to tackle global warming, I'm pretty sure the answer would have been "yes -- hell yes!" Well, that's essentially what has happened. It may well be that the market has already delivered Easterbrook's greenhouse insurance policy.