Federal Intervention in Energy Markets Isn’t SAFE

The proponents of laissez-faire in energy markets keep winning argument after argument, but their critics keep moving the goalposts. For decades, Americans have been warned that they needed to wean themselves from oil because the U.S. would always be dependent on hostile foreign regimes. Now that new technological developments and further discoveries have shown that North America has centuries’ worth of fossil fuels, the argument is shifting. Now the alleged danger—“proving” that we still need the federal government to shift American energy consumption away from traditional sources—is volatility in prices.

Consider the recent report on “The New American Oil Boom,” issued by the cleverly named group, Securing America’s Future Energy (SAFE). The following excerpt from its own summary gives the flavor:

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline.

[T]his shift in domestic production is substantial, and has profound positive implications for the domestic economy.…However, these benefits are tempered by the realities of the global oil market, especially in light of continued instability in oil-producing regions, and soaring demand from China, India, and other emerging markets. Most importantly, the paper examines the myth of “energy independence,” underlining that even dramatic increases in domestic production cannot fully insulate the country from the costs of oil dependence, such as high prices and continued volatility, capital flows overseas, and the burden to the military in securing global oil supplies.

[W]hile encouraging policymakers to support increased domestic oil production, SAFE presents a number of long-term policy recommendations. To complement the benefits of the oil boom, vehicle fuel-economy standards, and a long-term transition away from petroleum based fuels in the transportation sector are essential steps the country must take towards breaking oil’s stranglehold over our economic and national security.

Contrary to the report, it wouldn’t be “safe” at all to allow the federal government to steer the U.S. energy and transportation markets. The arguments in the report fail to understand the resilience of a market economy, and the dangers of government intervention.

First of all, the reason the market gravitates towards fossil-based energy sources—particularly for vehicles—is that they are far cheaper and more convenient than alternatives, at least with current technologies and consumer preferences. Talk of “price volatility” is silly in this context. It is much better to have a fossil-price bounce around between low and medium, rather than switch to an alternative-energy price that is consistently high. If it really were the case that in the long run, consumers would end up paying more on average for fossil-based energy, then it wouldn’t take government measures to effect a transition. The market would naturally move to the cheaper (on average) energy sources.

The people pushing the SAFE line apparently don’t understand how market economies use futures and other derivatives markets to anticipate future interruptions in supply. The basic function of speculators in a market is to do just that—to provide a “shock absorber” as it were, and smooth out price volatility. So long as the government stood back and let people in the energy sector and the financial do their respective jobs, without threats of punishments whenever somebody made an “unconscionable” amount of money, then market prices would give the proper information as to where investments should go, for future energy development.

As a final observation, the SAFE argument about military action is also nonsensical, from an economic viewpoint. Without taking a stand on the diplomatic and strategic motivations for various military operations by the U.S. government, we can safely say that it is simply not true that U.S. consumption of oil is based upon large military expenditures. After all, if you are a foreign dictator and seize control of vast stockpiles of oil, what are you going to do with it? Drink it? Of course not. The whole point of seizing oil reserves is that you now get to pocket the money when you sell it on the world market.

People have been decrying America’s alleged vulnerability to OPEC nations for decades. So far, the world hasn’t collapsed on that score. Had Americans back in, say, 1980 implemented a full-scale switch to electric cars and wind power, the U.S. standard of living would be far lower today than it is. Ironically, faulty government policies themselves—in the form of uncertainty over future penalties on carbon emissions, on-again-off-again bans on offshore drilling, and of course the Keystone Pipeline decision—contribute to the volatility in the petroleum markets, and make oil prices higher than they otherwise would be.

The market economy has many in-built mechanisms for properly anticipating supply interruptions and guiding entrepreneurs to make the most profitable long-term investments. There is no reason to think that government officials can steer the economy more wisely than the combined knowledge of everyone in the worldwide market.



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