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Recently, Alan Greenspan testified before Congress on growing concerns over natural gas supplies and the potential adverse effects of high energy prices on the recovery of the U.S. economy. Prices have edged upwards and Greenspan notes they are expected to remain high for a while. Some industrial demand has been priced out of the market, and it remains unclear whether this is a temporary phenomenon. The economic impact of energy prices offers a reminder of the importance of energy policy for a strong economy. Yet energy policy remains embroiled in politics, with the Senate struggling to finalize an energy bill that is dominated by special interests rather than economic growth.
Greenspan’s testimony made two important points about energy policy. First, sound energy policy requires a base of diverse energy sources. Today, the United States’ energy supply comes from coal, natural gas, and petroleum, as well as from nuclear power, renewable energy sources, and alternative fuels. Policies that increase reliance on one particular source of energy can lead to price spikes when markets tighten, as in the case of natural gas. Prudent energy policy would rely on market forces to determine the mix of energy sources used in the economy, allowing relative scarcity and prices to guide energy consumption decisions. Unfortunately, much of the energy bill under debate in the Senate focuses on artificial restraints on fuel uses or mandates to require a particular portfolio of fuels. These mandates distort energy markets while replacing cheaper energy sources with more costly sources such as wind and solar power.
The second important point noted by Greenspan is the role of global energy markets. Because of a much larger world market, crude oil supplies are not threatened by the same price spikes as natural gas. With oil produced in Europe, South America, the Middle East, Africa, and Asia, volatility in one market can be offset by shifting purchases to other markets. This is not to say energy security is not an important issue, but it must be acknowledged that the United States has been a net importer of energy since the 1950s and in 2001 imports accounted for 27 percent of all energy consumed in the United States. Energy security requires a large and vibrant global market, as well as the ability to utilize domestic energy resources. Yet regulations continue to restrict domestic exploration and the Senate is facing strong opposition to efforts to improve domestic supplies of energy, such as permitting exploration in the Arctic National Wildlife Refuge.
Another threat in the Senate will be attempts to add amendments to the energy bill that call for reductions in greenhouse gas emissions. Many environmentalists have used global warming theory to call for restrictions on the use of fossil fuels, claiming that burning fossil fuels and other human activities are increasing greenhouse gases and pushing temperatures higher. However, the theory of climate change is far from settled, and there is not a consensus in the scientific community on the issue. Scientists such as Sallie Baliunas, for example, attributes the Earth’s warming and cooling throughout its history to changes in solar activity and notes that 20th century temperatures were not excessive when put into historical perspective.
Despite the scientific uncertainties surrounding the issue, environmentalists continue to pursue global warming in the Senate and floor fights are likely in the coming week. Perhaps this is because enacting climate change policies provides environmental advocates a sweeping array of opportunities to restrict individual energy use, from higher fuel efficiency standards for cars and SUVs to subsidies for alternative sources such as solar energy or fuel cells. For consumers, there is good reason to be wary of such efforts, because the costs can be substantial. Implementing the Kyoto Protocol, for example, would cost American consumers more than $400 billion annually, according to the Energy Information Administration.
Sound energy policies are critical to a strong economy. Yet the Senate remains deadlocked on energy as special interests fight for subsidies, mandates, and other giveaways in the legislation. Senate Majority Leader Bill Frist (R-Tenn.) has vowed to complete the legislation before the August recess. With all the special interests involved this may prove difficult. A more feasible approach may be to focus on promoting a stronger market for energy, not costly new government programs or mandates. Efforts to amend the bill to cover global warming or fuel efficiency standards should be avoided, as should policies that expand government rather than the market in an attempt to address future energy concerns.