The Pickens plan is nothing more than a call to rig the market to direct private dollars toward the fuels that Pickens has invested in and away from the fuels that Mr. Pickens has not invested in. Gee, what a visionary.
The market needs to be rigged because the fuels that Pickens champions — wind power and compressed natural gas (CNG) — would otherwise get little attention from energy producers. Doubt me? Ask the trade association representing wind energy or CNG what happens to their market share were the corporate welfare directed at their industries to disappear.
The claim that Pickens’ wind energy ideas “make a lot of sense” is correct only if your last name happens to be Pickens. Wind energy is a dubious investment for a number of reasons. First, absent subsidies, it’s nearly twice as expensive to produce as coal-fired electricity, and the subsidies on the books, although lavish, have not managed to close that cost gap. Second, wind turbines produce most of their electricity during off-peak hours, when wholesale electricity prices are lowest, and very little electricity during hot summer days, when wholesale electricity prices are highest. Third, because wind speed is variable, wind energy production is variable, and undependable dispatch usually forces wind producers to operate or contract for back-up fossil fuel electricity generation to meet commitments to the grid when their wind facilities cannot. Fourth and finally, because wind energy can only be profitably sited in places where consumers generally are not, the cost of getting that electricity to ratepayers is far higher than it is for conventional power plants, which likewise adds substantially to cost. All of that largely explains why wind energy today only supplies two-thirds of 1% of the electricity market.
Compressed natural gas is relatively more attractive, yet employing it in large quantities in the transportation sector requires all-new vehicles or costly retrofits of existing vehicles and an entirely new fuel delivery infrastructure. Hence, the transition costs aren’t cheap. While natural gas is currently cheaper than conventional gasoline, how long this might be true is unclear, particularly if we assume a massive increase in natural gas demand for motor fuels use. Energy economist A.F. Alhajji calculates that even if all natural gas consumption today were dedicated toward automotive transportation, only 65% of our motor needs would be met.
If either wind or CNG has economic merit, then no market rigging would be necessary; the promise of future profit would be enough to provide all the money necessary to jump-start those industries. If neither wind nor CNG has economic merit, then no amount of market rigging will bestow it. All it will do is take money from relatively more worthy investments.
Economists of virtually all stripes would concede that, as a general matter, leaving the decisions about what to produce to producers and what to consume to consumers will produce more efficient economic outcomes than leaving those decisions to government planners or would-be central planners like Pickens. And that’s doubly true because market actors make decisions (however flawed) based on economic merit, whereas governmental agents invariably make decisions based on political merit. Only by the sheerest of chance will politically attractive ideas also prove to be economically attractive ideas.
That’s the main reason why even Carl Pope, the executive director of the Sierra Club, agrees with me that the best energy plan is to remove everyone’s subsidies and regulatory preferences and let the best fuel win. Unfortunately, the Pickens plan goes in the opposite direction.
If the idea is to promote more environmentally friendly energy or energy from domestic sources, then the most direct and least costly means of doing so is to impose a tax on pollution equal to the damages caused by that pollution, or a tax on foreign oil equal to the alleged social costs of the same and let markets sort out what to do. While I don’t support such taxes because I’m not convinced that there are significant costs associated with either electricity generation or energy imports, those who are so convinced have better places to shop than Pickens’ website for good public policy.