Issues 2008: Energy Policy (Updated)

With the high price of oil in recent months, dropping now as economic activity slows and demand with it, energy policy has been a hot topic for both candidates. I’m mostly in disagreement with both of them on the subject.

Energy and government have enjoyed an intimate association since Thomas Edison invented the electric power generation and distribution company more than a century go. By the 1920’s power companies were being granted monopolies by city and county governments on the condition that they be willing to run power to anybody who wanted it. Although the reasons for the monopolies have mostly disappeared in urban areas throughout the country, the monopolies have largely remained.

Government has been involved in energy production and distribution in the form of power monopolies, the ownership of power generation facilities, dam construction, subsidies, regulation, and innumerable other ways. Not to mention our foreign and defense policies which have been largely oriented towards ensuring the security of worldwide oil sources for several decades. I think it’s fair to say that, at least in this country, power generation and distribution has never truly been a private enterprise and it is unlikely to become such in the future.

Consequently, energy policy is a perfectly reasonable thing to be discussing in a presidential campaign.

That having been said if there are two things in the discussion of energy policy that rankle me it would be energy independence and energy self-sufficiency both of which are almost purely demagogic claptrap.

Energy independence, defined as a domestic energy market and energy policy completely uninfluenced by other places in the world, is an impossibility. There is a worldwide market for oil and for energy and as long as we are not the lowest cost producers of oil, an extremely unlikely prospect, there is little prospect for energy independence.

Besides, as the world’s largest consumer (and one of the largest producers) of oil we have a substantial influence on other countries’ energy pictures. IMO wanting to avoid being influenced ourselves is largely xenophobic.

Energy self-sufficiency, using only as much as we consume, is within our grasp. All we need to do to achieve that is produce more, consume less, or both. Doing some (or a lot) of both seems to me to likely be easier than achieving self-sufficiency solely by producing more or solely by consuming less.

However, it’s hard for me to see why we should strive for energy self-sufficiency. Trade is good. We are more efficient and more prosperous when we trade with other countries and that’s as true of energy as it is for any other commodity. I’ve occasionally heard moral arguments for self-sufficiency but I think they’re largely nonsense. There is no inherent right to some particular quantity of any commodity whether it’s oil, gold, coffee, or Danish pastry. If we want to spend our money on oil and following the laws of supply and demand that causes the price of oil to go up then we’ll be buying less of something else than we otherwise might have. I don’t see the moral argument at all.

I believe that government should get out of the subsidies business. Subsidizing energy production whether it’s oil, water power, or ethanol for use as a fuel is distorting. If it were economical to be doing those things, no subsidy would be needed and subsiding the activity is pure and simple less efficient than not doing so. A subsidy places the government in the role of picking economic winners and losers while concealing the very price signals necessary to evaluate the worth of the competing solutions.

Subsidies also have a pernicious effect. The expectation of a future subsidy discourages private investment today. Why should you take a risk with your own money if you know the government will step in and use the taxpayers’?

I’ve heard of proposals for prizes for development of new batteries or other energy-related technologies. I think these are harmless as long as they don’t become permanent subsidies but I doubt they’ll do much to change the big energy picture.

Energy generation capacity could receive a genuine shot in the arm by reforming the regulatory environment. To open a new electric plant however it’s powered requires many years of navigating through an ever-changing federal, state, and local regulatory landscape. It’s no wonder that we’re not building a lot of new power generating capacity.

This could either take the form of federal law that supercedes local regulation or my preference, the federal government brokering a grand bargain among states in various regions to systematize and streamline the regulatory environment.

There is one, large scale engineering project which I think we would be prudent for the government to begin: constructing a new, high-capacity energy backbone for the country. Our current old, piecemeal energy transmission capability is barely up to today’s needs let alone tomorrow’s and I see no signs of private capital stepping in to do the job. This is the investment that would make the diverse sources of power generation that we envision for the future practical so we’d better start doing it now. This is today’s equivalent of a post road or canal.

In summary here are the changes I’d like to see in our energy policy:

  • Phase out subsidies.
  • Stop raising the expectations of subsidies.
  • Stop building federal highways.
  • Reduce urban sprawl by capping the home mortgage interest deduction.
  • Systematize and streamline the regulatory environment.
  • Develop a national redundant high capacity energy transmission backbone.

Other contributions

Alex Knapp compares Sen. Obama’s and Sen. McCain’s energy policies at Heretical Ideas. I went through that same exercise here.


I prefer a carbon tax over a “cap and trade” system. The EU experience with a cap and trade system tells us that they have less actual impact but provide plenty of opportunity for political finagling.

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