Oh, No! That '70s Show: Against Carterism in energy policy

National Review, March 25, 2002 by Jerry Taylor

Bell-bottoms are back, disco lives, and one of the hottest shows on television is a rip-off of Happy Days. And while we no longer have a southern governor in the White House, we do have a Texas governor who, like his Seventies counterpart, has put a lot of political chips on the table to pass a hotly disputed energy bill. There are some differences, of course, but the story line is the same: Unless the feds do something to change our consumption habits, pattern of investment, fuel mix, and appetite for foreign oil, the American economy is headed for dark days indeed.

Washington has always been convinced that energy is somehow different from other commodities, different enough that it can't be left to the market. Nothing, however, could be further from the truth.

At the forefront of this debate, once again, is conservation. Yet there's no more need to conserve energy than there is to conserve Post-it notes. Despite the occasional spike, energy prices have been declining for a century, showing that energy is becoming more abundant -- not more scarce -- with time. It's often thought of as a fixed and finite resource, but energy is in fact a manufactured product. And as our technology advances, our ability to efficiently manufacture energy advances along with it.

Moreover, market signals provide all the incentive necessary to encourage both conservation and the exploration and development of new energy sources. Economists who study energy markets have discovered that in the long run, demand for energy will reflect its availability -- that is, if energy resources become 20 percent more expensive, demand will decline by 20 percent. Why additional conservation efforts are necessary beyond this is a mystery.

Of course, the flip side of the coin is that when energy prices drop 20 percent, demand will in the long run increase by 20 percent. This drives green types crazy, but obsessing about conservation when prices fall, as they have over time, is no more rational than the crazed general's obsessing in Dr. Strangelove about the conservation of "precious bodily fluids."

What about the environmental costs of energy consumption, costs that are not reflected in prices? Government, we're told, must involve itself in energy markets because that's the most efficient way to reduce pollution.

But growing fossil-fuel consumption is not necessarily incompatible with improved environmental quality. Since 1970, for instance, energy consumption has risen by 41 percent, most of it from fossil fuels. But during that same period, sulfur-dioxide emissions (which can cause acid rain) have dropped by 39 percent; emissions of volatile organic compounds (a major contributor to urban smog) have dropped by 42 percent; carbon-monoxide emissions (the main cause of wintertime smog) have dropped by 28 percent; and large particulate- matter emissions (the main airborne cause of lung irritation) have dropped by 75 percent.

There are far more efficient ways to reduce pollution than by restricting fossil-fuel consumption. Widgets put on the end of smokestacks and tailpipes are cheaper anti-pollution investments than are "green" energy sources. The same holds true for greenhouse-gas emissions. Back in 1998, when President Clinton's Council of Economic Advisers issued a report to demonstrate that compliance with the Kyoto Protocol could be achieved without great expense, it was the substitution of natural gas for coal-fired electricity, and a robust international trading regime for greenhouse-gas emissions -- not "green" energy or crash conservation programs -- that turned out to be the elixirs that would keep compliance costs down.

Also, the claim that environmental costs aren't reflected in energy prices is not really true. The costs of complying with anti-pollution laws are passed on to consumers. Are these regulatory costs greater than, equal to, or less than the environmental damages incurred by energy consumption? Harvard's W. Kip Viscusi has examined exactly that question, taking EPA data as an analytic point of departure. Viscusi and his colleagues found that natural gas was probably overtaxed from an environmental perspective, that oil was taxed correctly, and that coal was probably somewhat undertaxed. So environmental costs are already more or less reflected in energy prices.

Leaving the energy supply to the marketplace will ensure that the cheapest sources of energy are exploited first. But here's the rub -- the cheapest source of energy lies in the Middle East, and the geopolitical cost of relying on foreign oil is unpriced in the marketplace. Government, it's alleged, must therefore intervene in energy markets to reduce our reliance on foreign oil.

To paraphrase Jeremy Bentham, this is not simply nonsense -- it's nonsense on stilts. Even if every drop of oil we consumed were to come from Texas, a cutback in OPEC production would raise domestic oil prices just as high as it would if all of our oil were to come from Saudi Arabia. This is because there are no regional markets for oil -- only global markets -- and regional prices invariably rise to the world price. In 1979, for instance, Great Britain was "energy independent": All of its crude oil came from the North Sea. Yet the price spike of 1979 hit Britain as hard as it hit Japan -- a country dependent on imports for its oil. No country can wall itself off from the world market.