The Business of America/OPEC and the Next President
Stelzer, Irwin M.
THE BUSINESS OF AMERICA OPEC AND THE NEXT PRESIDENT by Irwin M. Stelzer Between the time this piece is writ- ten and the time it is published, America will have elected a President. The winner...
...Unfortunately, none is likely to meet government standards for truth-in-labeling...
...To answer that question, we must first look at how we made energy policy in the past...
...Ronald Reagan's Federal Energy Regulatory Commission (FERC), led by its innovative and tenacious chairman (she eschews "chairperson"), Martha Hesse, has forced open gas markets by pressuring pipelines to move supplies of all producers on equal terms...
...They are sitting on some 7 to 11 million barrels of idle producing capacity, successfully keeping much of it off the market...
...The perfect policy, of course, is unattainable...
...T he specific ingredients of past en- 1 ergy policies are too numerous and detailed to be discussed here...
...and the desire for foods that are risk-free in all quantities may yet starve us all...
...ortunately, there is an alternative to building an energy policy on subsidies, rationing, and other direct government controls—controls that have created a series of shortages and gluts...
...Indeed, these ingredients can be found in most proposals to tinker with the economy...
...Atthe time of Nixon's speech, imports accounted for 35 percent of U.S...
...And it cannot be brought to a halt by an abundance of oil, such as we now have...
...How, then, in light of the fallibility of our forecasting tools and our inability to predict the behavior of OPEC, is energy policy to be made...
...Given good information and proper price signals, customers can be left free to decide for themselves just how much energy to use, and in what form...
...Whether or not OPEC's members and fellow-travelers will agree is, of course, beyond the predictive power of even the most successful economic model...
...It seems that energy forecasters were invented to make economic forecasters look good...
...Risk aversion places such constraints on entrepreneurship as to tempt it to cede the field to government...
...Regulatory reform is already underway...
...National Security and Autarky: A final basis for most energy policy proposals is that national security requires "energy independence," or autarky...
...Atthe time of Nixon's speech, imports accounted for 35 percent of U.S...
...they now account for almost half...
...it would not require imposing on consumers any specific mixture of use and abstinence...
...Given good information and proper price signals, customers can be left free to decide for themselves just how much energy to use, and in what form...
...It can be of a more subtle sort—the sort requiring that summer thermostats be set to a not-so-cool 78 degrees...
...Consequently, he prefers tax-financed subsidies to visibly higher prices, on the assumption that Americans prefer to pay higher taxes in order to pay lower prices, rather than pay higher prices in order to have lower taxes...
...Why risk building an enormous pipeline under conditions never before confronted, if some unforeseeable technical flaw will bring the government's wrath...
...Despite the development of apparently sophisticated modeling techniques—or perhaps because of their development—we seem unable to forecast whether the demand for energy will grow at all, much less by how much...
...To do so, each would have to have emblazoned on its cover: "These recommendations are bas...
...Electric utilities are still inclined to prevent potential competitors from using their transmission lines...
...They lost...
...Whereas the "shortage crisis" is to be avoided because of the macroeconomic effects of the resulting high prices (lower economic growth and wealth transfers from consumers to producers), the "glut crisis" is to be avoided because the resulting low prices adversely affect oil producing regions (Texas, for example) and encourage dangerously increased reliance on foreign oil...
...More recent projections, showing that new capacity would not be needed for years to come, led to construction cut-backsand to serious shortages in some regions of the country this summer...
...After all, the perpetrators of yesterday's failures are waiting in the wings, memoranda in hand, urging a series of policies that range from turning off all nuclear plants to turning on massive, uneconomic research programs in the areas of conservation and renewable energy sources...
...But that has not reduced the demand for still more forecasts—for every seer there's a sucker...
...This can be accomplished by a combination of regulatory reform, removal of impediments to competition, and making energy users pay the full costs they impose on society...
...If we take a distrust of the price system and add to it the notion that we must have government regulations to prevent self-indulgence, we see the THE AMERICAN SPECTATOR DECEMBER 1988 35 beginnings of a regulation-oriented national energy policy, of which rationing is a necessary part...
...Why risk investing in any new technology, if the inevitable "bugs" cause a spate of lawsuits or possible bankruptcy...
...36 THE AMERICAN SPECTATOR DECEMBER 1988 THE BUSINESS OF AMERICA OPEC AND THE NEXT PRESIDENT by Irwin M. Stelzer Between the time this piece is writ- ten and the time it is published, America will have elected a President...
...Even though its members regularly cheat on their quotas, OPEC must be counted as one of the world's most durable and successful cartels...
...Better to let the government do it...
...Regulatory reform is already underway...
...Indeed, that very abundance has produced a new definition of an energy "crisis'!--a supply glut and falling oil prices...
...A somewhat more confusing basis for interfering with markets was offered byanother congressman: "I think that the free-enterprise system is absolutely too important to be left to the voluntary action of the marketplace...
...All energy prices are now affected—infected might be a better word—by the rapacious OPEC oil cartel...
...Better to let the government do it...
...overly elaborate drug testing may inhibit medical progress, and deprive dyingpeople of drugs that regulators decide will endanger their lives...
...OPEC's members have kept the price of oil far above the level that would prevail in a competitive market...
...Thus, President Nixon, launching Project Independence in 1973, told Americans, "Let us set as our national goal . . . that by the end of this decade we will have developed the potential to meet our foreign energy needs without depending on any foreign sources...
...Railroads still refuse to let pipelines, which can move coal in the form of a slurry, cross their rights-of-way providing an alternative to rail shipment...
...To answer that question, we must first look at how we made energy policy in the past...
...The alternative is an energy policy rooted in one basic principle: get the prices right...
...A relatively few years ago, projections showing a growing need for power plants caused many electric utilities to bet their companies on future growth...
...From this it follows that distribution of goods and services in proportion to that (unfairly distributed) income, via the price system, is also unfair...
...The Three Mile Island nuclear accident, in which no one was hurt, contributed importantly to the end of the American nuclear program...
...And it cannot be brought to a halt by an abundance of oil, such as we now have...
...To do so, each would have to have emblazoned on its cover: "These recommendations are based on forecasts likely to prove wrong and wild guesses as to the future actions of a successful cartel...
...Lack of Faith in Markets: The first is the belief that the market mechanism cannot be relied upon as the ultimate determinant of who shall use what fuels where, in what quantities, and at what cost...
...Among them will be several dealing with energy policy...
...All energy prices are now affected—infected might be a better word—by the rapacious OPEC oil cartel...
...On that assumption—that small is beautiful, less is more—the ancient Greeks and Romans enacted statutes limiting expenditures on funerals, per capita entertainment, and dress...
...We attempt to create a risk-free society, one in which innovation is subordinated to safety, progress to risk aversion...
...But by stepping back from the forest of regulations and programs concocted in pursuit of various energy policies, we can spot four major elements that recur in specific energy proposals...
...Proper labeling permits them to decide whether a more efficient (and, inevitably, more expensive) refrigerator suits them better than a cheaper model...
...President Carter once told his countrymen that "too many of us now tend to worship self-indulgence and consumption...
...Oil consumers, for example, impose hidden costs on us all—the costs of defending supply routes and the costs of supply interruptions being the most obvious: an oil tariff is clearly needed...
...Lack of Faith in Markets: The first is the belief that the market mechanism cannot be relied upon as the ultimate determinant of who shall use what fuels where, in what quantities, and at what cost...
...Unembarrassed by the mess they created in the 1970s, theycan't wait to get their hands on the levers of policy, access to which Ronald Reagan has denied them for eight long years...
...Since they first flexed their muscles in 1973, Irwin M Stelzer is director of the Energy and Environmental Policy Center of the John F Kennedy School, Harvard University, and an American correspondent for the London Sunday Times...
...How, then, in light of the fallibility of our forecasting tools and our inability to predict the behavior of OPEC, is energy policy to be made...
...The perfect policy, of course, is unattainable...
...This was entirely consistent with his view that energy policy is the "moral equivalent of war," to be won by establishing a new conservation "ethic...
...But that has not reduced the demand for still more forecasts—for every seer there's a sucker...
...Consumers of conservation devices are, in some cases, imposing costs on energy consumers by insisting on government-financed research and special tax treatment: a sensible energy policy would eliminate these distortions...
...Among them will be several dealing with energy policy...
...One of the leading congressional powers on energy policy, for example, once privately lamented that if Congress didn't give the President standby gasoline rationing authority, "you're liable to see the people of this nation thrown into a rationing plan based on price...
...The winner will find himself deluged with memoranda and position papers...
...Despite the development of apparently sophisticated modeling techniques—or perhaps because of their development—we seem unable to forecast whether the demand for energy will grow at all, much less by how much...
...From here it is an easy step to laws governing the size of our cars, how cool and warm we may keep ourselves, how and of what materials we shall build our homes—all determinations to be made by government, for our own well-being...
...The Three Mile Island nuclear accident, in which no one was hurt, contributed importantly to the end of the American nuclear program...
...But if we set out in the right direction, we at least have some chance of arriving at our desired destination: an energy economy in which resources are used efficiently, consumers have wide choice, able managers can earn reasonable returns for their investors—and energy planners can stay in their universities, law firms, and consulting practices where they can inflict harm only on students and clients...
...To begin with, many in government do not feel that the current distribution of income is "fair...
...Such antipathy to the market as an allocative tool has another cause: the politician's fear that overtly higher prices for energy will result in his ouster...
...With oil prices falling rapidly, and likely to stay low for a while, it has become fashionable to consider OPEC a paper tiger...
...This belief has two bases...
...President Carter once told his countrymen that "too many of us now tend to worship self-indulgence and consumption...
...Consumers of electricity are imposing air pollution and other environmental costs on society: pollution taxes are called for...
...And she has encouraged state regulators to adopt bidding programs for electricity supplies: local utilities must now seek competitive bids from small and large companies that want to meet consumers' growing need for electricity...
...So OPEC has the power, if it can agree on production cuts, to drive oil prices up, if not to previous heights, at least to levels well above those that would prevail in a competitive market...
...T he beauty of an energy policy 1 based on regulatory reform, competition, good consumer information, and proper pricing is that it would not require elaborate forecasts of demand, forecasts which are more rather than less likely to prove wrong...
...Piling up material goods cannot fill the emptiness of lives which have no confidence or purpose...
...The second ingredient of any sensible energy policy is to make sure that consumers pay the full cost of the energy they use...
...Such antipathy to the market as an allocative tool has another cause: the politician's fear that overtly higher prices for energy will result in his ouster...
...We attempt to create a risk-free society, one in which innovation is subordinated to safety, progress to risk aversion...
...ortunately, there is an alternative to building an energy policy on subsidies, rationing, and other direct government controls—controls that have created a series of shortages and gluts...
...the crisis created by the supply glut is that low-cost foreign producers will eventually raise prices or use our dependence on them to force us to accept policies not in our national interest...
...Consumers of conservation devices are, in some cases, imposing costs on energy consumers by insisting on government-financed research and special tax treatment: a sensible energy policy would eliminate these distortions...
...There's little doubt that in the past most forecasts have been wide of the mark...
...Such rationing does not necessarily mean ration coupons...
...This is no simple matter, since prices often fail to reflect all the costs energy users impose on society...
...To begin with, many in government do not feel that the current distribution of income is "fair...
...The first is information...
...But several impediments to competition remain...
...Unembarrassed by the mess they created in the 1970s, theycan't wait to get their hands on the levers of policy, access to which Ronald Reagan has denied them for eight long years...
...With oil prices falling rapidly, and likely to stay low for a while, it has become fashionable to consider OPEC a paper tiger...
...To do so, each would have to have emblazoned on its cover: "These recommendations are based on forecasts likely to prove wrong and wild guesses as to the future actions of a successful cartel...
...If he ignores the special pleaders, our new President can put America's energy economy in order...
...To regulatory reform and increased competition must be added two additional ingredients...
...This is worth doing if only to avoid repeating our mistakes...
...The Anti-Risk Attitude: The third element is the creation of an anti-risk atmosphere that forces private enterprise to cede the field to government...
...Put slightly differently, the crisis created by a supply shortfall is that the world's resources will not be able to keep up with American and world energy appetites...
...Since they first flexed their muscles in 1973, Irwin M Stelzer is director of the Energy and Environmental Policy Center of the John F Kennedy School, Harvard University, and an American correspondent for the London Sunday Times...
...that car pools and mass transit replace private transportation, and bicycles replace cars...
...Unfortunately, none is likely to meet government standards for truth-in-labeling...
...It can perhaps be best explained by analogy to the sumptuary legislation of earlier times...
...and that frosty refrigerators and hand-cleaned ovens substitute human brawn for electrical energy...
...Consumers of electricity are imposing air pollution and other environmental costs on society: pollution taxes are called for...
...These barriers to the free movement of energy in all its forms, and to free customer choice of suppliers, should be eliminated...
...They wouldn't need Washington planners to set "standards" for cars or appliances...
...and that frosty refrigerators and hand-cleaned ovens substitute human brawn for electrical energy...
...they now account for almost half...
...T he specific ingredients of past en- 1 ergy policies are too numerous and detailed to be discussed here...
...The Sumptuary Mentality- The second major element underlying bad energy policy is somewhat more difficult to describe...
...So OPEC has the power, if it can agree on production cuts, to drive oil prices up, if not to previous heights, at least to levels well above those that would prevail in a competitive market...
...Either "crisis" will satisfy energy planners, ever eager to find a problem for their particular solution...
...Piling up material goods cannot fill the emptiness of lives which have no confidence or purpose...
...One of the leading congressional powers on energy policy, for example, once privately lamented that if Congress didn't give the President standby gasoline rationing authority, "you're liable to see the people of this nation thrown into a rationing plan based on price...
...This was entirely consistent with his view that energy policy is the "moral equivalent of war," to be won by establishing a new conservation "ethic...
...Why risk investing in any new technology, if the inevitable "bugs" cause a spate of lawsuits or possible bankruptcy...
...Unfortunately, none is likely to meet government standards for truth-in-labeling...
...The pursuit of self-sufficiency is a reaction to the shortages and massive price increases that have periodically characterized oil markets since the early 1970s...
...These barriers to the free movement of energy in all its forms, and to free customer choice of suppliers, should be eliminated...
...To regulatory reform and increased competition must be added two additional ingredients...
...Ronald Reagan's Federal Energy Regulatory Commission (FERC), led by its innovative and tenacious chairman (she eschews "chairperson"), Martha Hesse, has forced open gas markets by pressuring pipelines to move supplies of all producers on equal terms...
...Consequently, he prefers tax-financed subsidies to visibly higher prices, on the assumption that Americans prefer to pay higher taxes in order to pay lower prices, rather than pay higher prices in order to have lower taxes...
...The second ingredient of any sensible energy policy is to make sure that consumers pay the full cost of the energy they use...
...The Anti-Risk Attitude: The third element is the creation of an anti-risk atmosphere that forces private enterprise to cede the field to government...
...The winner will find himself deluged with memoranda and position papers...
...Whereas the "shortage crisis" is to be avoided because of the macroeconomic effects of the resulting high prices (lower economic growth and wealth transfers from consumers to producers), the "glut crisis" is to be avoided because the resulting low prices adversely affect oil producing regions (Texas, for example) and encourage dangerously increased reliance on foreign oil...
...the crisis created by the supply glut is that low-cost foreign producers will eventually raise prices or use our dependence on them to force us to accept policies not in our national interest...
...it would not require the government to "pick winners"--to guess which technology is likely to provide an efficient supply of energy...
...If he ignores the special pleaders, our new President can put America's energy economy in order...
...Oil consumers, for example, impose hidden costs on us all—the costs of defending supply routes and the costs of supply interruptions being the most obvious: an oil tariff is clearly needed...
...Railroads still refuse to let pipelines, which can move coal in the form of a slurry, cross their rights-of-way providing an alternative to rail shipment...
...Consumers of energy need to know what different appliances cost to operate...
...Why risk building an enormous pipeline under conditions never before confronted, if some unforeseeable technical flaw will bring the government's wrath...
...In the Middle Ages everyone accepted the notion that governments had the right to check what they deemed to be private extravagance, and to restrain luxury for the public good...
...There's little doubt that in the past most forecasts have been wide of the mark...
...overly elaborate drug testing may inhibit medical progress, and deprive dyingpeople of drugs that regulators decide will endanger their lives...
...and the desire for foods that are risk-free in all quantities may yet starve us all...
...oil supply...
...Were there no cartel, this capacity would undoubtedly come into production, easily driving prices down to as little as one-half of current so-called depressed levels—below the $10 per barrel price reached in 1986...
...Electric utilities are still inclined to prevent potential competitors from using their transmission lines...
...The winner will find himself deluged with memoranda and position papers...
...But by stepping back from the forest of regulations and programs concocted in pursuit of various energy policies, we can spot four major elements that recur in specific energy proposals...
...36 THE AMERICAN SPECTATOR DECEMBER 1988 THE BUSINESS OF AMERICA OPEC AND THE NEXT PRESIDENT by Irwin M. Stelzer Between the time this piece is writ- ten and the time it is published, America will have elected a President...
...and it would not require massive subsidies...
...Risk aversion places such constraints on entrepreneurship as to tempt it to cede the field to government...
...In the Middle Ages everyone accepted the notion that governments had the right to check what they deemed to be private extravagance, and to restrain luxury for the public good...
...Put slightly differently, the crisis created by a supply shortfall is that the world's resources will not be able to keep up with American and world energy appetites...
...Among them will be several dealing with energy policy...
...Consumers of energy need to know what different appliances cost to operate...
...Indeed, that very abundance has produced a new definition of an energy "crisis'!--a supply glut and falling oil prices...
...It can be of a more subtle sort—the sort requiring that summer thermostats be set to a not-so-cool 78 degrees...
...Indeed, these ingredients can be found in most proposals to tinker with the economy...
...And she has encouraged state regulators to adopt bidding programs for electricity supplies: local utilities must now seek competitive bids from small and large companies that want to meet consumers' growing need for electricity...
...The appeal of such laws to those modern leaders who feel they know what is best for every citizen is obvious...
...This can be accomplished by a combination of regulatory reform, removal of impediments to competition, and making energy users pay the full costs they impose on society...
...From here it is an easy step to laws governing the size of our cars, how cool and warm we may keep ourselves, how and of what materials we shall build our homes—all determinations to be made by government, for our own well-being...
...National Security and Autarky: A final basis for most energy policy proposals is that national security requires "energy independence," or autarky...
...oil supply...
...This is no simple matter, since prices often fail to reflect all the costs energy users impose on society...
...T he beauty of an energy policy 1 based on regulatory reform, competition, good consumer information, and proper pricing is that it would not require elaborate forecasts of demand, forecasts which are more rather than less likely to prove wrong...
...On that assumption—that small is beautiful, less is more—the ancient Greeks and Romans enacted statutes limiting expenditures on funerals, per capita entertainment, and dress...
...and it would not require massive subsidies...
...They lost...
...If we take a distrust of the price system and add to it the notion that we must have government regulations to prevent self-indulgence, we see the THE AMERICAN SPECTATOR DECEMBER 1988 35 beginnings of a regulation-oriented national energy policy, of which rationing is a necessary part...
...A somewhat more confusing basis for interfering with markets was offered byanother congressman: "I think that the free-enterprise system is absolutely too important to be left to the voluntary action of the marketplace...
...Not so...
...OPEC's members have kept the price of oil far above the level that would prevail in a competitive market...
...The first is information...
...Proper labeling permits them to decide whether a more efficient (and, inevitably, more expensive) refrigerator suits them better than a cheaper model...
...Whether or not OPEC's members and fellow-travelers will agree is, of course, beyond the predictive power of even the most successful economic model...
...This is worth doing if only to avoid repeating our mistakes...
...Either "crisis" will satisfy energy planners, ever eager to find a problem for their particular solution...
...it would not require imposing on consumers any specific mixture of use and abstinence...
...The appeal of such laws to those modern leaders who feel they know what is best for every citizen is obvious...
...After all, the perpetrators of yesterday's failures are waiting in the wings, memoranda in hand, urging a series of policies that range from turning off all nuclear plants to turning on massive, uneconomic research programs in the areas of conservation and renewable energy sources...
...Were there no cartel, this capacity would undoubtedly come into production, easily driving prices down to as little as one-half of current so-called depressed levels—below the $10 per barrel price reached in 1986...
...it would not require the government to "pick winners"--to guess which technology is likely to provide an efficient supply of energy...
...But several impediments to competition remain...
...that car pools and mass transit replace private transportation, and bicycles replace cars...
...Such rationing does not necessarily mean ration coupons...
...A relatively few years ago, projections showing a growing need for power plants caused many electric utilities to bet their companies on future growth...
...Thus, President Nixon, launching Project Independence in 1973, told Americans, "Let us set as our national goal . . . that by the end of this decade we will have developed the potential to meet our foreign energy needs without depending on any foreign sources...
...From this it follows that distribution of goods and services in proportion to that (unfairly distributed) income, via the price system, is also unfair...
...Not so...
...The pursuit of self-sufficiency is a reaction to the shortages and massive price increases that have periodically characterized oil markets since the early 1970s...
...More recent projections, showing that new capacity would not be needed for years to come, led to construction cut-backsand to serious shortages in some regions of the country this summer...
...This belief has two bases...
...It seems that energy forecasters were invented to make economic forecasters look good...
...The Sumptuary Mentality- The second major element underlying bad energy policy is somewhat more difficult to describe...
...But if we set out in the right direction, we at least have some chance of arriving at our desired destination: an energy economy in which resources are used efficiently, consumers have wide choice, able managers can earn reasonable returns for their investors—and energy planners can stay in their universities, law firms, and consulting practices where they can inflict harm only on students and clients...
...Even though its members regularly cheat on their quotas, OPEC must be counted as one of the world's most durable and successful cartels...
...The alternative is an energy policy rooted in one basic principle: get the prices right...
...It can perhaps be best explained by analogy to the sumptuary legislation of earlier times...
...They are sitting on some 7 to 11 million barrels of idle producing capacity, successfully keeping much of it off the market...
...They wouldn't need Washington planners to set "standards" for cars or appliances...
Vol. 21 • December 1988 • No. 12
