The Oil-Tight Market: Wishing Away a Fossil Fuel “Energy Policy”

September 21, 2005 10:21PM

By Dr. Martin D. Kennedy With high gas prices and oil climbing above $60 per barrel, many continue to call for a wide-ranging federal energy policy to control prices and increase production. However, the current strength of the economy shows that the entire notion that an “energy policy” is important, or even needed, must be questioned. The recent spike in oil prices—caused by global demand for oil, instability the in oil producing areas such as the Middle East, Nigeria, and Indonesia and a reduction in surplus crude oil—has not shocked the economy into a recession. This is remarkable—and instructive—especially to anyone old enough to have experienced the various recessions since the 1970’s. A jump in the price of oil often precipitated these recessions; $40 per barrel is a sharp spike by historical standards. Today we are above $60 per barrel and unemployment stands at just 5%. What gives? The production side of the American economy is far more efficient than it was just a few years ago. Gross Domestic Product—or the value of all goods and services produced—per barrel of oil consumed, has been increasing over the last three and a half decades. Although America’s consumption of oil, in absolute terms, has not fallen, the quantity of goods we produce for every gallon of oil burned has increased dramatically. We are more efficient at using oil to produce goods, making us less reliant on oil and less effected by its cost. This phenomenon, the result of our transformation to an information and service intensive economy, has made us less susceptible to oil price volatility. Nashville, where music and healthcare are king and queen is able to accommodate a vital economy with little reliance on oil. Given the economic shift away from oil-intensive industries and towards more efficient use of resources, why are there pleas, even from conservatives, for a long-term energy policy? Such appeals for red tape are common from central planners, but not from those who celebrate and benefit from letting free-markets work. Efforts to direct and police the utilization of energy through bureaucratic solutions are reasonable if Americans are actually addicted to foreign oil. In truth, the U.S. is less addicted, less dependent and less affected by price swings now than just a few years ago. A measure of insulation is also provided domestically with respect to the diversity achieved in electricity production. The TVA, for example, operates seven coal fired plants, 21 hydroelectric dams, and 2 nuclear plants. It also has ten solar facilities, 3 wind turbines, and even methane production from the Memphis wastewater treatment facility. Such diversity enables the TVA to respond to movements in price in various markets. The future looks bright for continued diversification of the energy market. Here in the U.S. roughly 72% of electricity is produced using fossil fuels compared to 21% from nuclear plants. By contrast France produces just 8% of its electricity using fossil fuels and a whopping 77% comes from nuclear power. This suggests that in times of extreme price or limited supply of oil, technological ingenuity will provide other options. There are, to be sure, legitimate areas where government intervention is justified. For instance, burning fossil fuel—especially for electricity production—can and does cause damage to third parties. Such examples, however, are limited. Unfortunately, federal energy policy is often less about intervening in legitimate cases to protect the safety of Americans and the health of the environment and more about protecting the bottom line of energy companies with taxpayer-funded government subsidies. The alternative energy lobby, annual beneficiaries of federal pork in the energy policy, should also welcome the increase in oil prices. High prices stimulate interest in alternative sources of energy and increase the benefit for developing technology to reduce oil and gas consumption, as well as providing market incentives for conservation. So, in oil, as in other markets, prices rise and prices fall. This is not evidence of the need for intervention, but rather confirmation that the market is working. Instead of relying on government solutions that restrict the free market and kill competition, it is wiser to encourage the ingenuity of private enterprise. American prosperity, after all, is not a result of central planning and government control of resources, but of allowing markets to work.