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Wednesday, June 08, 2011

Free the private market in energy

Michael Barone writes that the free market is the impetus behind the energy boom arising from the private sector's development of fracking to recover oil from shale. All the government-supported policies to find some other source of energy have failed.
There's stale talk about federal and state laws that promised great change but have produced very little. Electric cars, even with subsidies, are no larger a part of the auto fleet than they were 100 years ago.

Renewable energy sources like wind and solar still produce only a tiny percentage of electricity. That offshore wind farm hasn't gone up in Nantucket Sound, and the Mojave Desert is never going to be covered with solar panels.

Ethanol subsidies have jacked up the price of corn, raising the price of meat here and tortillas in Mexico. But the subsidies haven't done much for gas mileage, and presidential candidates heading to Iowa now call for abolishing them.
In contrast to the failure of the government-supported forms of energy, the private market has had its own breakthrough in the past few years in energy production.
Petroleum engineers working for private companies have used a technique called "hydraulic fracking," injecting vast amounts of water into rock, to release commercially viable amounts of natural gas and oil.

Hydraulic fracking has resulted in a boom in the Bakken oil shale formation under North Dakota and Montana. North Dakota is now the No. 4 state in oil production.

And hydraulic fracking has made commercially viable huge volumes of natural gas previously imprisoned in shale rock in western Pennsylvania and West Virginia.

The U.S. Energy Information Administration has estimated that there is at least six times as much natural gas available now as a decade ago as well as a big increase in commercially recoverable oil.
As Barone writes, this development is despite the Obama administration's policies. It is the private market that can have such innovations, not the government trying to subsidize the creation of innovation.
While government's ethanol subsidies and renewable requirements have made little difference, the private sector's hydraulic fracking has increased our energy supply and reduced our dependence on dicey Middle Eastern oil.

This kicks back against the efforts of government under the Obama administration to restrict energy supply. The administration has shut down much offshore drilling in the Gulf of Mexico (even though Obama cheered Petrobras' drilling off the shore of Brazil) and has been denying permits for oil drilling in Alaska that is needed to keep the pipeline pumping. This on top of environmental groups' successful attempts to prevent drilling on the desolate tundra of the Arctic National Wildlife Refuge.

The State Department has even been stalling on approving the Keystone pipeline from the tar sands of Alberta to refineries in Oklahoma and Texas. Environmental groups object to drilling techniques Canada allows.

It's unclear why we should feel called on to second-guess the internal regulations of a competent and environmentally-conscious nation like Canada. And it's incomprehensible why we should want to keep out a plentiful supply of oil from a dependable and friendly neighbor.

There is a lesson here for public policy generally, including health care. No centralized government expert predicted the vast expansion in energy supply from hydraulic fracking. It was produced by decentralized specialists in firms subject to market competition.

Just as Friedrich Hayek taught, no central planner can know or foresee enough to produce the beneficial results regularly produced by competition in free markets regulated in accordance with the rule of law. And no central planner can accurately predict the course of innovation that can be achieved in decentralized markets. That's something you might want to keep in mind when someone tells you that Medicare costs can be controlled by 15 members of an unelected board created by Obamacare. Better results and lower costs can be expected with the kind of market competition set up by the 2003 Medicare prescription drug law.

No one can tell you just how that will happen, just as no one was telling you three years ago just how hydraulic fracking would expand our energy supply. But it did. That's what market competition can do -- and government control can't.
Exactly so. But liberals still have great confidence in getting together the best and the brightest in some government agency and picking the winners and losers in our economy. Remember when everyone envied the ability of Japan's economy to do just that? Thomas Friedman still wishes we could be more like the Chinese in having the government direct economic innovation. They just don't get it and Barone is right to draw the connection between the private market and economic innovation. That's why you won't see liberals celebrating this innovation in energy development. And they'll stand in the way of the possibilities of new jobs in energy that haven't gotten the Obama administration stamp of approval.


Terrye said...

I agree with just about everything Barone said...however, I do think the need for so many conservatives to blame higher corn prices on ethanol is a little misleading. For one thing, these are not subsidies we are talking about...they are tax breaks. For another thing there was ethanol back when corn was $1.85 a bushel. It is not as if it just got started. And corn used for ethanol is still used for feed. The by product of the ethanol production is mash..and cows love the stuff. I know, I used to run a dairy farm.

Corn is high for the same reason that wheat, soybeans, oats, cotton, gold and oil is high. They are all commodities and their prices are driven by the same market forces..the idea that corn flakes will cost less if the government just gets rid of ethanol tax breaks seems a stretch to fact if corn producers lose a market, they will probably just cut production and grow soy beans instead.

Pat Patterson said...

Ethanol still gets a subsidy based on the blending of nearly $6 billion a year via VEETC. Though there really is no support in Iowa for maintaining this subsidy or the tax breaks its expiration this year is not a done deal. Oddly enough Iowans do want the tariff on imported corn to continue which will keep ethanol profitable.