American Energy Needs Private Markets, Not Haphazard Government Intervention

The war on terrorism clearly demonstrates the vulnerabilities of our energy markets, given the large amounts of energy we import from political hotspots. Following the September attacks there has been a great deal of pressure to end our dependence on foreign oil. But the war has also demonstrated that the market for energy is global and it would be impossible to extricate the United States from the world’s energy markets. Since the attacks, energy markets have continued to operate, and Americans have seen some of the lowest prices at the pump in recent times. This does not mean that nothing can be done to improve energy markets in the United States. Any steps taken, however, must acknowledge the worldwide market for energy as well as the fact that private markets, not government intervention, will provide the basis for reliable energy now and in the future.

The United States consumes roughly one-quarter of the world’s petroleum-about as much Western Europe, Eastern Europe, and states comprising the former Soviet Union combined. U.S. production is only around 12 percent of the world supplies. Of the amount consumed by the United States, a little over half (around 52 percent) is imported, with around 23 percent of the imports coming from Persian Gulf States. The majority of oil imported to the United States comes from Saudi Arabia, Mexico, Canada, and Venezuela.

Despite the importance of energy to the American economy, the United States consistently has approached energy in a haphazard fashion, opting for regulation and federal oversight rather than market forces in many instances. Past responses to energy crises have been heavy-handed regulation, with price controls, quotas, and production mandates superseding market decision-making in many instances. Regulators in Washington often have more say in critical energy decisions than do energy providers in the private sector.

Many have pointed to the now defunct Enron Corporation’s high-profile Washington presence as a sign of misdeeds, plying Democrats and Republicans alike with political contributions. But in a market so heavily controlled by regulators, where it can be impossible to make a decision without federal or state approval, it should not surprise anyone that energy companies are political creatures.

This does not mean that there has been no progress. Since the long lines and shortages generated by the disastrous energy policies of the 1970s, markets have been playing a much greater role in the energy sector. In 1981, federal regulators dropped price and allocation regulations. Natural gas imports were deregulated by 1984, and, in1989, legislation was passed to totally deregulate wellhead prices.

Nonetheless, there remains much to do to create robust energy markets. While price controls have been lifted for oil and natural gas, electricity remains a highly regulated industry controlled by monopolies established and protected by the government. Alternative fuels and renewable energy markets are largely driven by regulation and tax policy as regulators try to chart a course for the future. While the search for new fuels and renewable sources of energy is important, federal spending on these programs has little to show and tends to be driven by political popularity rather than market-based decisions. On top of these distortions, environmental regulations based on weak science and little cost-benefit analysis tend to unnecessarily restrain competition in our energy markets. In the meantime, this increases the necessity of energy imports.

Even the last year demonstrates the volatility of energy markets. When President Bush first came to office, the United States was facing an energy “crisis.” California was plagued with rolling blackouts, and gas prices across the nation were rising to unsettling levels. The California situation was the result of an artificial market designed by regulators whose failings were magnified by a drought and natural gas shortage. Gasoline prices were climbing upwards as refineries were forced to produce “boutique” fuels blended to meet specific requirements for different regions.

Today, however, the crisis seems to have been avoided, as markets have adjusted to the new realities. Along with the drought subsiding, natural gas markets responded to the high prices by increasing production, which ultimately made natural gas more plentiful and less expensive. Gasoline prices fell as the seasonal requirements for boutique fuels ended, along with the decline in demand due to the economic slowdown and the drop in travel after September 11.

All of this suggests that energy markets do work, which means that real energy reforms require policies that strengthen markets. Suppliers and producers should have the flexibility to explore and develop resources to meet energy demands. This includes the ability to develop new sources of supply, to introduce new technologies to serve consumers, and to avoid unnecessary regulatory burdens that provide no benefit to the environment or to consumers. At the same time, consumers should be able to base consumption decisions on real energy prices. Policies that subsidize or promote particular fuels or technologies make it difficult for consumers to make rational choices in the marketplace.

President Bush and Congress have recognized the importance of energy markets. The president has made energy policy a priority and sent proposals to Congress. However, provisions to open a portion of the Arctic National Wildlife Refuge to drilling have made passage a difficult challenge. But energy is vital to a healthy American economy, and Washington needs to move forward with common sense reforms that strengthen competition and provide consumers access to the widest markets possible. Energy producers must be allowed the flexibility to fuel the economic activities that will pull the U.S. economy out of recession and provide jobs and opportunities for all Americans. Subject to market conditions and technological advancement, America’s resources could provide significant benefits for consumers across the country. However, costly regulatory barriers either prohibit exploration and production or else raise the cost to the point where it is no longer feasible.

Using these domestic resources does not imply the nation is abandoning environmental progress. Technological advances such as 3-D seismic imaging have lessened the footprint of energy production dramatically. Indeed, wildlife preserves such as the Atchafalaya National Wildlife Refuge in Louisiana (which includes over 40 active wells) demonstrate that wildlife and exploration can indeed co-exist. Moreover, it is our prosperity-fueled by energy-that has allowed the United States to become one of the most environmentally sensitive nations in the world. More than any other nation in the world, the United States has the ability to provide sound environmental stewardship while not allowing important natural resources to lie idle.

Energy is a vital input into all the goods and services we produce. Access to low-cost and reliable energy sources has been a significant component of economic growth in the United States. Market-based reforms that expand the availability of energy resources and eliminate barriers to competition will promote a more vibrant energy market. In addition to opening new market opportunities at home, Washington should promote greater access to global markets as well.

In addition, President Bush rightly should be wary of a climate treaty that seeks to ration our use of fossil fuels by capping levels of carbon dioxide emissions. While many valid scientific questions about the threat of global warming remain unanswered, there is a clear consensus on the billions of dollars a climate treaty would cost the U.S. economy.

As the United States struggles to climb out of recession, free and open energy markets can play a substantial role. When the politicians return to Washington, the Senate would be wise to revisit the importance of sound energy policy.


Click Here To Take Action