Market Forces and the Energy Industry

The Real Energy Situation

All That Gas!

By VIJAY V. VAITHEESWARAN

Energy is simply too important to be trusted to the marketplace. That is the unquestioned first principle of energy policy today. And to judge by the grotesquely pork-laden energy bill that Congressional leaders are polishing up right now, Republicans and Democrats see perfectly eye-to-eye on this matter.

Just consider the arguments offered by those who say markets and energy don't mix. It seems the oil's running out -- so we must subsidize domestic supply in order to keep our SUVs humming. Oh, it appears we've got a big shortage of natural gas too -- and we'll never meet our green goals without subsidies for clean-burning gas.

Sept. 11, we're told, made it clear that we need a crash government program for energy "independence" to avoid a 1970s-style supply crisis. After all, this month marks the 30th anniversary of the Arab oil embargo, which, everyone remembers, drove our economy to its knees and left us with shortages and long lines at gasoline stations.

What a load of hogwash. Energy is vital, but interstate trucking, banking, telecommunications and air travel -- all industries subject to vigorous market forces -- are critical to the economy, too. Food is even more necessary to life than energy. However, every country in the world save North Korea has vigorous competition among grocery stores, open-air bazaars, street-corner bodegas and the like. Besides, there's absolutely no energy supply crisis in America today.

The oil is not about to run out. In fact, there are more proven reserves today than there were three decades ago. As for drilling in the Alaskan wilderness, there's too little oil there to impact global markets or the price at our pump. Oil independence is unachievable for a country that consumes a quarter of the world's oil but which sits atop barely 3% of the world's reserves. Yet the independence notion is invoked to justify the energy bill's massive subsidies for ethanol, an environmentally unfriendly gasoline additive much favored by corn farmers and the politicians who crave their votes.

There's far more natural gas left in the world than there is oil. Still, Congress wants to throw tax money at a pipeline to bring Alaska's considerable reserves of gas to the lower 48 states. There's no need. Recent price spikes have already spurred plans for various projects to get liquefied natural gas to America. And if prices actually stay high, the industry will build a pipeline from Alaska without subsidy.

Similarly contorted arguments -- remember the big Northeastern blackout caused by the supply problem? -- are being used to justify handouts for research into clean coal, liability insurance for nuclear power and tax credits for wind. Never mind that the lights did not go out as the result of a deficit of electrons. Human error, computer glitches and a failure to invest in the grid -- not any lack of electricity supply -- appear to have been the culprits.

The farce in Washington ignores the main lesson from the Arab oil embargo: Market forces matter, even in as distorted an enterprise as energy. In fact, the entirely predictable workings of the market thwarted the embargo -- oil that the Arabs sent to European countries outside the embargo was merely diverted to America. As for those long lines at gasoline stations during the '70s, the culprit was the anti-market energy policy adopted by America beforehand. Price controls, bureaucratic edicts on oil allocation and laws that tried to distinguish between "old" oil and "new" oil led to those painful shortages, not the embargo.

Let's get the government out of the game of rewarding politically connected suppliers and picking technology winners, and back to its only legitimate role in energy: being a vigilant policeman on the regulatory beat. If we scrapped the subsidies and fixed the other market distortions that benefit energy incumbents, we might even spur a wave of innovation in new technologies that heralds a clean energy revolution.

Both parties in Congress have let down the nation by coming up with such an energy bill. If President Bush has any faith at all in the power of markets, he must veto this monstrosity the moment it lands on his desk.

Mr. Vaitheeswaran is the environment & energy correspondent for the Economist and author of "Power to the People," just published by Farrar, Straus and Giroux.

Updated October 27, 2003