The Myth of the Energy Crisis
--------------------------------------------------------------------------------
August 8, 2008
Opinion Editorial
By Paul Prentice
The news is full of stories regarding the energy “crisis”, making the case for and against drilling for new oil. The Limited Government Forum in Colorado Springs welcomes such a robust debate. We frequently hear that “we can’t drill our way out of it”, along with suggestions that we develop a “long-term energy plan”. A number of the anti-drilling arguments invite rebuttal.
First, anti-drilling advocates say that such a complex, geopolitical issue can’t be boiled down to a simple matter of supply and demand. Well, it is a matter of supply and demand. But it is not a simple matter. The wealth of information that is distilled into market prices through the forces of supply and demand is quite complex, as any student of economics knows only too well. Geopolitics is no more immune from the Law of Supply and Demand than anti-drilling advocates are immune from the Law of Gravity.
Second, they repeat the canard that it will take years before oil from new drilling would make it to market. Really? Oil companies are on record that new supplies from offshore California would be on the market within 1-2 years. Furthermore, commodities markets are forward-looking. Expectations of future supply-demand conditions are reflected in current prices. World oil prices have dropped $30 per barrel just on rumors that future supply might outstrip demand.
Third, consider the logic of developing a long-term energy plan. Apparently, long lead-times are unacceptable for drilling but just fine for government planning. Besides, just who will develop the “plan”?
I would like to raise the level of the debate by suggesting that there is no energy “crisis”. There never was and there never will be. According to the First Law of Thermodynamics, energy can neither be created nor destroyed, it can only be converted from one form into another. This is also known as the Law of Conservation of Energy.
What we face is a choice of fuels to convert one form of energy, such as stored chemical energy, into another form, such as electrical energy. This is what we do when we burn oil or natural gas to create electricity. We convert the chemical energy bonded into a hydrocarbon molecule into thermal energy and then into electricity. Fuel is the scarce resource, not energy itself.
Economics is the science of how people choose to allocate scarce resources, that have alternative uses, to their “best” use. The energy “crisis” boils down to a matter of economics. Crude oil is a scarce resource. How do we choose how much to produce? Once produced, how do we choose how much to allocate to gasoline, heating oil, diesel, jet fuel, and other petro-chemicals? Further, if we chose to produce electricity, how much do we produce from oil, natural gas, coal, hydro, wind, biofuels, or solar? These are all economic questions – how to allocate scarce resources, that have alternative uses, to their “best” use. And, how do we know what is the “best” use? This is also an economic question. The answer is, “The best use is the one that provides the greatest satisfaction for the greatest number of people.” But how do we achieve that best use?
The answer is, “In a free society we achieve that through free markets.” A fundamental economic axiom is that human creativity and inventiveness respond to the incentive of price. In a free society, market prices tell us how much to produce, how much to consume, and how much to conserve, of our scarce resources. In a free society, market prices allocate resources to their best use. The alternative to market prices is command-and-control through central planning. If central planning provided a superior economic outcome, then the Soviet Union would have been the strongest economy on earth.
Yet the American economy was vastly stronger. In America, by and large resources are guided by the invisible hand of the marketplace to their best use. If government command-and-control was superior to free markets, North Korea would be an economic powerhouse while South Korea would be an economic basket-case. Yet it is the North Koreans who are starving to death, while the South Koreans prosper. Go figure. If governments were better than markets, people would be fleeing across miles of shark-infested water to get from Miami to Cuba, but it is vice versa. Again, go figure.
I submit that the major problem with energy is not markets, it is government interference in markets. Taxes, regulations, mandates and subsidies all distort markets and prevent the necessary price signals from allocating scarce resources to their best use. Of the world’s crude oil reserves, 94% are controlled by governments and only 6% by markets. What we need is not more government command-and-control, we surely need less. In spite of government, high prices are starting to do their job. Recall that human ingenuity responds to the incentive of price. With high oil prices, consumers are demanding less and searching for alternatives, while producers are supplying more from existing wells and are anxious to drill new wells. With high oil prices, alternative fuels and renewables become more economic for both producers and consumers.
Viewed this way, we do not have an energy crisis to be managed by government. Rather, we have an economic problem to be best solved by free markets. In a free society, prices and human ingenuity will provide the optimal energy portfolio, not a central planner. Prices will tell us how much energy should be converted from oil, coal, natural gas, hydro, wind, biofuels, or solar.
Which path we choose, markets or governments, will determine our prosperity. That choice will also determine our liberty, because economic liberty cannot be divorced from political liberty. If we choose government command-and-control over free markets, we choose less prosperity and less liberty.
Which will it be – governments or markets? To restate Albert Einstein’s definition of insanity, “Why do we insist on the same solution again and again – central planning – and expect a different result?” It is due to a shocking lack of economic literacy.
Dr. Prentice teaches free-market economics to MBA students at UCCS, and is a Board member of the Limited Government Forum
http://www.i2i.org/main/article.php?article_id=1505
--------------------------------------------------------------------------------
August 8, 2008
Opinion Editorial
By Paul Prentice
The news is full of stories regarding the energy “crisis”, making the case for and against drilling for new oil. The Limited Government Forum in Colorado Springs welcomes such a robust debate. We frequently hear that “we can’t drill our way out of it”, along with suggestions that we develop a “long-term energy plan”. A number of the anti-drilling arguments invite rebuttal.
First, anti-drilling advocates say that such a complex, geopolitical issue can’t be boiled down to a simple matter of supply and demand. Well, it is a matter of supply and demand. But it is not a simple matter. The wealth of information that is distilled into market prices through the forces of supply and demand is quite complex, as any student of economics knows only too well. Geopolitics is no more immune from the Law of Supply and Demand than anti-drilling advocates are immune from the Law of Gravity.
Second, they repeat the canard that it will take years before oil from new drilling would make it to market. Really? Oil companies are on record that new supplies from offshore California would be on the market within 1-2 years. Furthermore, commodities markets are forward-looking. Expectations of future supply-demand conditions are reflected in current prices. World oil prices have dropped $30 per barrel just on rumors that future supply might outstrip demand.
Third, consider the logic of developing a long-term energy plan. Apparently, long lead-times are unacceptable for drilling but just fine for government planning. Besides, just who will develop the “plan”?
I would like to raise the level of the debate by suggesting that there is no energy “crisis”. There never was and there never will be. According to the First Law of Thermodynamics, energy can neither be created nor destroyed, it can only be converted from one form into another. This is also known as the Law of Conservation of Energy.
What we face is a choice of fuels to convert one form of energy, such as stored chemical energy, into another form, such as electrical energy. This is what we do when we burn oil or natural gas to create electricity. We convert the chemical energy bonded into a hydrocarbon molecule into thermal energy and then into electricity. Fuel is the scarce resource, not energy itself.
Economics is the science of how people choose to allocate scarce resources, that have alternative uses, to their “best” use. The energy “crisis” boils down to a matter of economics. Crude oil is a scarce resource. How do we choose how much to produce? Once produced, how do we choose how much to allocate to gasoline, heating oil, diesel, jet fuel, and other petro-chemicals? Further, if we chose to produce electricity, how much do we produce from oil, natural gas, coal, hydro, wind, biofuels, or solar? These are all economic questions – how to allocate scarce resources, that have alternative uses, to their “best” use. And, how do we know what is the “best” use? This is also an economic question. The answer is, “The best use is the one that provides the greatest satisfaction for the greatest number of people.” But how do we achieve that best use?
The answer is, “In a free society we achieve that through free markets.” A fundamental economic axiom is that human creativity and inventiveness respond to the incentive of price. In a free society, market prices tell us how much to produce, how much to consume, and how much to conserve, of our scarce resources. In a free society, market prices allocate resources to their best use. The alternative to market prices is command-and-control through central planning. If central planning provided a superior economic outcome, then the Soviet Union would have been the strongest economy on earth.
Yet the American economy was vastly stronger. In America, by and large resources are guided by the invisible hand of the marketplace to their best use. If government command-and-control was superior to free markets, North Korea would be an economic powerhouse while South Korea would be an economic basket-case. Yet it is the North Koreans who are starving to death, while the South Koreans prosper. Go figure. If governments were better than markets, people would be fleeing across miles of shark-infested water to get from Miami to Cuba, but it is vice versa. Again, go figure.
I submit that the major problem with energy is not markets, it is government interference in markets. Taxes, regulations, mandates and subsidies all distort markets and prevent the necessary price signals from allocating scarce resources to their best use. Of the world’s crude oil reserves, 94% are controlled by governments and only 6% by markets. What we need is not more government command-and-control, we surely need less. In spite of government, high prices are starting to do their job. Recall that human ingenuity responds to the incentive of price. With high oil prices, consumers are demanding less and searching for alternatives, while producers are supplying more from existing wells and are anxious to drill new wells. With high oil prices, alternative fuels and renewables become more economic for both producers and consumers.
Viewed this way, we do not have an energy crisis to be managed by government. Rather, we have an economic problem to be best solved by free markets. In a free society, prices and human ingenuity will provide the optimal energy portfolio, not a central planner. Prices will tell us how much energy should be converted from oil, coal, natural gas, hydro, wind, biofuels, or solar.
Which path we choose, markets or governments, will determine our prosperity. That choice will also determine our liberty, because economic liberty cannot be divorced from political liberty. If we choose government command-and-control over free markets, we choose less prosperity and less liberty.
Which will it be – governments or markets? To restate Albert Einstein’s definition of insanity, “Why do we insist on the same solution again and again – central planning – and expect a different result?” It is due to a shocking lack of economic literacy.
Dr. Prentice teaches free-market economics to MBA students at UCCS, and is a Board member of the Limited Government Forum
http://www.i2i.org/main/article.php?article_id=1505