High‐​Octane Amnesia

This article originally appeared in the Wall Street Journal on April 12, 2005.
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Ever since the 9/11 attacks, a steady drumbeat has grown to reduce U.S. reliance on foreign oil out of fear that imports from the Middle East leave America dangerously vulnerable to the dread oil weapon. That cause has received a shot in the arm with a recent letter to the president signed by four formerly prominent national security officials (James Woolsey, Robert McFarlane, Frank Gaffney and William Crowe), a number of retired senior military officers, Republican majordomo C. Boyden Gray, Democratic party strategist John Podesta, and a host of “outs” from both parties to, well, reprise Jimmy Carter’s energy strategy of the 1970s.

Two words come to mind: Spare us.

The Energy Future Coalition — the operation overseeing this campaign — is really an “Energy Past Coalition” that suffers from a severe case of amnesia. The stated policies that this crowd promotes — sharply increased subsidies for domestic alternative‐​fuels industries and aggressive government‐​mandated conservation — were textbook economic fiascos when adopted 30 years ago and will fare no better were we to enthusiastically re‐​embrace them again.

We might begin our trip down memory lane with a quick read of “The Technology Pork Barrel,” published by the Brookings Institution some years ago. In it, economists Roger Noll and Linda Cohen dissect the last great federal crusade to reduce foreign oil imports — the taxpayer sinkhole known as the Synthetic Fuels Corporation, which was charged with finding economically attractive ways of turning coal into petroleum and then into gasoline. Only one coal gasification plant was ever built (albeit with $1.5 billion of federally guaranteed loans). That facility, the Great Plains Project in North Dakota, went bankrupt and was sold by the federal government in 1988 for $85 million. That, in a nutshell, is all the taxpayer has to show for the Synthetic Fuels Corporation.

A parallel effort to displace conventional fuel use in the electricity sector — the Public Utility Regulatory Policies Act of 1978 (PURPA) — saddled utilities with such ruinously expensive alternative energy contracts that businesses literally threatened to flee service territories unless politicians do something about electricity costs. (The consequence of the political response — electric utility restructuring — still haunts us to this day.) Still, neither PURPA nor the multibillion dollar federal subsidies established to further assist the development of renewable energy have made any real difference. Renewables advocate Amory Lovins represented the liberal consensus at the time when he predicted in 1976 that 30% of America’s total energy consumption would be delivered by “soft” energy (winds, solar, biomass, biogas, etc.) by 2000. The actual figure, depending upon how elastic you wish to define “soft energy,” is somewhere south of 3%.

President Carter’s conservation mania likewise fared poorly. Energy economist Ronald Sutherland calculates that appliance efficiency standards established under the National Energy Policy Conservation Act of 1978 (NEPCA) will cost consumers about $46 billion by 2050 even after we consider the energy savings they provide. Economists David Loughran and Jonathan Kulick likewise report that utility‐​sponsored conservation programs — also encouraged by NECPA — reduced electricity sales by only between 0.3%-0.4% in the service territories where they were employed at an astronomical cost of between 14–22 cents per kilowatt hour. In short, Carter conservation programs have cost more than the electricity they had hoped to conserve.

Unfortunately, when it comes to government intervention in energy markets, past is prologue. Ethanol and other forms of biomass energy — the modern iteration of the Synfuels program embraced by the Energy Future Coalition — are an open joke among economists and generally opposed by environmentalists. Already on the receiving end of about $1 billion of federal largesse per year, ethanol requires more energy to produce than it yields upon combustion and produces more worrisome air pollution than even conventional gasoline. In the electricity sector, biomass fuels generate more pollutants than natural gas‐​fired electricity (the fuel that biomass would likely displace), according to a recent survey of the literature by economists Thomas Sundqvist and Patrik Soderholm.

The coalition also advocates subsidies for hybrid gasoline‐​electric and other “flexible fueled” vehicles and tighter automobile fuel efficiency standards. Regarding the former, a $2,000 federal tax credit is already available to hybrid car buyers. How much more subsidy do these people want? Regarding the latter, the Congressional Budget Office reports that tightening fuel efficiency standards will increase the sticker price of new automobiles beyond what those automobiles will save consumers in reduced fuel consumption over the lifetime of the vehicle.

It’s also unclear whether tighter fuel efficiency standards would actually result in reduced gasoline consumption. That’s because the average fuel efficiency of new Japanese vehicles sold in the U.S. is well beyond today’s regulatory requirement. Japanese automobile companies could conceivably increase sales of SUVs, pickup trucks, and minivans without running afoul of new regulations. In short, tighter fuel efficiency standards might only result in Japanese manufacturers displacing U.S. manufacturers in the light truck market with no net change in the number of light trucks ultimately sold.

However one feels about foreign oil, the belief that government can intelligently pick winners in energy markets or promote conservation in an economically reasonable manner is belied by an avalanche of real‐​world evidence. The best way to weaken al Qaeda is by killing bin Laden and those who support him, not by subsidizing GM to make cars they wouldn’t otherwise make.