New School Politics

Energy Folly

Ryan | 26 01 2007

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Aside from healthcare, the other major issue that the President, as well as nearly everyone on Capital Hill, is emphasizing since his State of the Union address is “alternative” energy. And like healthcare the solution being offered is government.

AP Reports:

WASHINGTON (AP) - President Bush is asking Congress to aggressively expand the use of alternative fuels, mainly ethanol, to reduce the need for gasoline and put the brakes on growing U.S. oil consumption.

The president’s proposal aims to cut gasoline use by 20 percent by 2017, mostly by replacing the fuel with ethanol, and by expected improvements in automobile fuel economy.

The proposal in Tuesday night’s State of the Union address rejects requiring automakers to boost the fuel economy of their new car fleets, but leaves open possible future increases if Congress provides more flexibility in the regulation…

The energy proposal calls on Congress to require the annual use of 35 billion gallons of ethanol and other alternative fuels such as bio-diesel by 2017, a fivefold increase over current requirements. The ethanol would be in gasoline blends of 10 to 85 percent.

Motorists now use 140 billion gallons of gasoline a year.

White House aides said the sharp increase in alternative fuels and technological changes, including the use of more gas-electric hybrid cars, will cut projected gasoline demand by 20 percent over the next decade…

The call for sharp increases in use of ethanol will get bipartisan support in Congress, where several bills including one calling for production of up to 60 billion gallons by 2030 already have been introduced.

But corn-based ethanol will fall far short of meeting such an increase.

Bush’s fuels proposal, which is aimed at replacing 15 percent of gasoline use by 2017, envisions a major speedup of research into production of cellulosic ethanol - made from wood chips, switch grass and other non-corn feedstock.

The president’s upcoming proposed budget for fiscal 2008, will include $179 million for such biofuels and $2 billion in loans guarantees for cellulosic ethanol plants, the White House said.

At the heart of Washington’s folly is a failure to recognize their nature as a government especially in relation to the economy. Proponents of government sponsored alternative energy lead us to believe that government can automatically create a source of energy that will be cheaper and more efficient than the type of energy we use today. To the contrary, however, there will be consequences of the plan that exceed far exceed the benefits:

1. There will be a cost of government researching energy. 2. The free market can better allocate resources in the energy sector than the government. 3. There is not necessarily a better source of energy than our present source.

The government cannot magically create demand they need to take savings from the private in order to do so. This plan will require $2.2 billion in the first year alone and already in the first 100 hours of the new congress there was a tax hike on oil companies which will go to pay for it (along with other programs). Capital will have to be diverted from other lines of production to pay for Bush’ program.

But the motive behind congress endeavoring to redistribute investment is because they think that can better allocate capital in the energy sector. (I won’t even begin to address the immorality of the presupposition of this logic–that the government has the right to take the wealth produced and owned by the oil companies–because that in and of itself is reason to strike it down). This assumption is wrong because it fails to recognize the fundamentally different natures of private businesses and the government.

A private business–such as the oil companies–must produce on their own accord in order to survive. In business terms this means they must make a profit or else they simply cannot remain in business. If a company fails to consistantly turn a profit the incentive for people to invest in it will diminish and they will have progressively less capital to fund their opporations. In other words, energy companies need to make a profit–produce a surplus of goods and services over what they consume–if they are to maintain their own existance.

The government is the opposite. While an oil company relies on voluntary exchange to garner its income, the government takes its money. If the government were to take control of the whole energy sector and (as would be suspected) was not very productive, it would not have to worry about not having the money to continue to operate at is present levels like the private company does; it could simply take more money from elsewhere in the economy to pay for it. By increasing government discretion over the energy sector, as Bush’s plan does, you begin to divorce production from incentive and when that happens supply will begin to diminish and it is all of us who will suffer at the gas pump. The choice is ultimately whether to give discretion over the capital in the energy industry to those who produce oil for a living or those who take other people’s money for a living.

There has been a great commotion about “alternative” energy in politics but in doing so they have assumed that there is another type of energy out there that is better than what we have now and moreover that we could easily produce it. The fact remains that there is no evidence of this and that at present oil is the best form of energy. There is a reason that there is such a large demand for oil in the world economy, there is a reason why it is the dominant mode of energy we use: there is the largest demand for it and the extraordinary extent of its demand is only representative of the fact that it is the best, most efficient type of energy. If oil wasn’t our best choice of energy–or if energy companies believed that we were running out of oil–the market would likely have made a radical adjustment and begin investing in those alternative fuels. But as is only 2% of our economy runs on renewable energy, and oil is still our best option. And thus our efforts should be concentrated on optimizing its production, which implicitly means keeping it unburdened by government.