Just Say “No” to the Energy Plan

This essay appeared on National Review Online. Copyright 2001 National Review
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So the great energy fight of '01 is on. Conservatives are doggedly rallyingaround the newly released Bush energy plan while liberals are attacking itwith relish. Unfortunately, the fight is nine parts political theater to onepart policy -- and that "one part" of policy is so pregnant with economicmischief and counterproductive rhetoric that it's beyond me whyconservatives are so determined to play the role the administration iscasting for them.

First of all, why are free-market types cheering the introduction of a"comprehensive national energy strategy"? After all, conservatives didn'tcheer a "comprehensive national Internet strategy" when one was proposed byAl Gore, a "comprehensive national industrial strategy" when one wasproposed by Clinton Labor Secretary Robert Reich, or a "comprehensivenational health-care strategy" when one was proposed by Hillary Clinton.Conservatives as a general matter believe that the government ought to leavemarkets alone and that "comprehensive national economic strategies" arethings that old Soviet commissars and young French socialists are in thebusiness of promoting, not free-market American presidents.

"Energy's different," they say. Excessive regulation and environmentalopposition have shut down energy production and delivered us into a messthat only a "comprehensive national energy strategy" can sort out. Really?

Without the guidance of a "comprehensive national energy strategy,"investors are currently pouring billions into the energy sector. Forinstance, we're currently in the midst of a power-plant construction boom,with some 90,000 megawatts of new electricity capacity scheduled to come online by 2002 and a staggering 150,000-200,000 megawatts by 2004. This willnot only burst the electricity-price bubble but will probably produce anelectricity glut in the near future. Similarly, so many billions areflooding into the natural-gas market today that futures contracts are beingmade at half the price of today's wholesale spot price. And high gasolineprofit margins are inducing foreign refineries to enter the American marketfor the first time in decades and bringing new investment in domesticrefining capacity as well. Barring some unforeseen supply disruption in therefining sector, gasoline prices will actually begin to decline slowly butsteadily as the summer wears on.

What about all those "Not-In-My-Back-Yard" activists supposedly blocking thenew wires and pipelines necessary to get energy from producers to consumers?You can certainly make an argument that the real problems in the energysector are delivery problems, not production problems, but it's unclearwhether NIMBY is at the root of it.

Incumbent utilities have little incentive to build new transmission linesthat would make it easier for ratepayers to buy cheaper power fromcompetitors in neighboring service territories. Nor do utilities have anincentive to invest in new power lines when the profits allowed them by theFederal Energy Regulatory Commission are too low to make those investmentsparticularly worthwhile. And with transmission rules still up in the air andunsettled at both the federal and state level, regulatory uncertainty islikewise dampening investment.

Similarly, there is little evidence that investors have been inhibited fromincreasing pipeline capacity when profit opportunities present themselves.The Energy Information Administration notes that pipeline capacity "hasgrown with end-use demand, and as new supplies have developed, new pipelineshave been built to bring this gas to markets." The Gas Research Institutelikewise concludes that "growth in pipeline capacity is not a constraint ongrowth in gas supply. If supply is available, history has demonstrated thatthe pipelines will be built as needed. It is simply an investment andengineering issue."

If government's not in the way, why then did energy prices shoot up in thefirst place? Well, energy markets, like most commodity markets, are subjectto boom and bust cycles. Energy prices after adjusting for inflation havebeen plummeting more or less for 15 years. Investors took money out ofproduction and exploration budgets because profits were hard to come by. Thebust suddenly ended last year, catching almost everyone by surprise, and theboom is now on. Investors are scrambling to expand supply, but capitalinvestments take time. Let me make this simple: High prices = high profits =increased investment = price declines. It might take some time to get fromhere to there, but government's record in speeding up the process isabysmal.

Regardless of President Bush's gloomy rhetoric, this isn't the beginning ofAmerica's descent into the long dark economic night unless the feds cansomehow come to the rescue. There's plenty of energy around for suppliers toget their hands on and plenty of reason for people to conserve in the faceof high prices. Rather, we're experiencing the economic equivalent of alow-pressure front that will soon pass (indeed, already is passing) as longas government doesn't do anything foolish in the meantime.

So how does the administration's plan rank on that front? While there areliterally about a hundred proposals that call for the government to"consider" this, "examine" that, and "investigate the possibility" of theother thing, the concrete proposals within the plan's 170 pages are few andfar between. Let's look at the highlights:

Drilling on Federal Lands. Even if you're happy digging up the tundra,there's little reason to think that drilling in ANWR will do much to bringdown energy prices. Industry's best estimate is that ANWR could produceabout 1 million barrels of oil per day at its peak. That's a 1.25 percentincrease in global production that, all things being equal, would reduceworld oil prices by about 10 percent, from $25 per barrel to $22.50. Whilethat's nice, it wouldn't do much of anything to deliver America from thepower of the OPEC cartel, particularly since OPEC's likely reaction would beto cut its own production to maintain world crude prices at today's levels.

The administration would also like to increase industry access to variousfields on federal lands in the lower-48 and in the Gulf of Mexico, primarilyto get at natural gas deposits. That's fine, but again, it's not as if,without those new fields, existing gas wells would run dry.

None of this is to say that the federal government shouldn't be a morereasonable economic steward of public lands. But it is to say that theadministration is overselling the benefits that those policies will deliverto energy consumers.

Federal Eminent Domain Power For Electricity Transmission. As noted above,there are lots of reasons why utilities aren't investing much in newtransmission. NIMBY is only one of those reasons -- and perhaps not even themost important. Having the feds step in and force private property owners tocut deals they don't want to make with power companies seems antithetical toan administration that likes to talk about its commitment to privateproperty rights.

The administration's energy plan calls for the feds to adopt incentive-basedrate making for transmission investments in lieu of the presentrate-of-return regulatory regime. This ought to help some, but a better ideais to remove rate caps on transmission charges entirely. Still, let's waitto pull out the federal guns on private landowners at least until we knowthey're absolutely needed.

Tax Incentives for New Energy Production. If you've got an energy lobbyistin Washington, has Dick Cheney got a sack of money for you! Everyone's awinner: oil; gas; hydrogen; hybrid and fuel-cell vehicles; superconductors;landfill methane; coal (make that "clean" coal, the adjective that is derigueur whenever the word "coal" is used by this administration); ethanol;nuclear fission; nuclear fusion; solar; wind; bus, truck and automobileengine manufacturing; fuel cells; biomass; industrial cogeneration plants;and producers of energy efficient this and that. With this blizzard of newfederal research and development initiatives, accelerated depreciationallowances, production tax credits, consumption tax credits, and subsidiesfor energy businesses competing in foreign markets, don't expect the taxcode to get any more comprehensible or your tax burden to get any lighteranytime soon.

It's unclear why we need to bribe investors with tax money to take advantageof profit opportunities, and government's track record at turning dubiousideas that don't attract private investment into wonderful new economic toysis pretty bad (remember synfuels?). But hey, corporate welfare is what makesthe political world go around.

Energy Welfare. If you're poor, might soon be poor, or live in theNortheast, the Bush administration feels you pain. More tax money to thenotoriously wasteful Low Income Energy Assistance Program; more tax moneyfor the Weatherization Assistance Program; and more money for the NortheastHeating Oil Reserve. For this we elect Republicans?

Regulatory Fine-Tuning. This is a story of the good, the bad and the ugly.The good: repeal of the antiquated Public Utilities Holding Company Act(PUHCA), which dictates both the organizational structure and permissibleservice territories of electric power companies; and expedited renewal ofpermits for construction of the Trans-Alaskan natural gas pipeline. The bad:rumblings about increasing Corporate Average Fuel Efficiency (CAFÉ)standards for automobiles, standards which are simply back-door taxes on bigcars, SUVs and mini-vans; further federal prohibitions on energy"inefficient" (read "cheap") appliances; and a directive to federal agenciesto pursue international agreements to address global climate change (haven'twe had enough of that for a while?). The ugly: tighter regulation of powerplant emissions of sulfur dioxide, nitrogen oxide and mercury. Is moreenvironmental regulation of power plants really necessary or really helpfulat the moment?

So what exactly have we got here? The political equivalent of a sugar pill.The Bush energy plan won't do much good, but it won't do too much harmeither. And that's pretty good for government work.

On balance, we'd be better off if the administration had not opened this canof political worms. Had the administration simply focused on tinkering withregulations where necessary and revising federal land-use rules wherepolitically possible, we would not need to put up with so much chaff for solittle wheat. Instead, we're now in the midst of an empty but stillwhite-hot argument about whether we should more heavily subsidize thisrather than that. We're also subjected to a bizarre debate about whether"the nation" (as if we have some command-and-control, Soviet-style economy)should invest more heavily in supply or whether "the nation" should investmore heavily in conservation.

And to make its case, the administration is finding it useful to dredge upludicrous arguments, such as the horrific implications of importing oil orthe apocalyptic consequences of having investors go about their businesswithout some detailed, comprehensive federal energy planning document toguide them.

Free-market types have no business in this intellectual ghetto. Nor do theyhave any business promoting most of this interventionist, corporate-welfareagenda.