Let the Free Market Dictate the Energy Industry

There should be a bipartisan investigation into the rationalization of our energy regulatory system.

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Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

As an undergraduate, I was shocked when an instructor explained that large corporations did not want free markets, but rather stable and protected markets—that is, protected against their competition. Economists, it turned out, were the ones advocating free markets, albeit with mixed results politically. For corporations, self interest trumped ideology.

By the early 1990s, I had become sufficiently cynical that when I heard T. Boone Pickens, speaking at an energy conference, begin with, "I am in favor of free markets…," I automatically blurted, "But!" And indeed he went on to explain that the government should bolster the natural gas industry by subsidizing the conversion of vehicles to compressed natural gas.

[See a collection of political cartoons on the economy.]

Not much has changed, save that he lost his earlier bet on recovering natural gas prices (though they were higher a decade later, before coming down again recently) and he still argues for government intervention in the free market, now having morphed from a wind power advocate to wanting money for the conversion of heavy trucks to compressed natural gas and the building of natural gas fueling stations, particularly on major highways. This would help the domestic gas industry and reduce our dependence on imported oil.

Which recalls an old friend, who, when Chevron proposed an oil import tariff in response to low oil prices in the late 1980s, said that whenever the federal government helps the oil companies, it feels obliged to offset the political furor by doing something detrimental to their interests. Better, he insisted, to leave us alone. (He could have also argued persuasively that government help often proved counterproductive in its own right.)

Now, though, Pickens has been joined by John Hofmeister the former CEO of Shell Oil (US), who wrote a book entitled Why We Hate the Oil Companies and is promoting the idea of an energy regulatory body that would resemble the Federal Reserve Bank. This, he believes, would address the problem of convoluted regulation of the energy industry, remove the influence of politics and especially public opposition to investment in new capacity, thereby saving us from a looming crisis.

[See a collection of political cartoons on gas prices.]

Hofmeister is apparently unaware of the adage, "Be careful what you wish for, because you might get it." Although the looming crisis is not apparent to me, the Byzantine nature of U.S. energy regulation is beyond question, as are the costs imposed on the industry (and thus the economy). But an independent group of experts to manage our energy investments undermines the very important principle of checks and balances.

What experts he would rely on is unclear, but most of the ones I know have less than stellar track records (author included) and have repeatedly led government astray, into massive kerogen conversion projects, coal gasification, fast breeder reactors, and numerous other errors. (Most experts did correctly oppose price controls on oil in the 1970s.)

On the other hand, despite the uproar (at least in Hollywood) about hydraulic fracturing of shales to produce oil and gas, it has proceeded at a rapid pace—so rapid that the constraint is equipment and personnel, not access to prospective areas. Partly this reflects the ubiquitous nature of shale: If one locale bans drilling, there's always another that is happy to have the jobs, tax revenue, and royalty income.

[See a collection of political cartoons on energy policy.]

But it also results from the manner in which the public responds to threats. Alarm and even panic are hardly uncommon—witness the false link between electric transformers and leukemia or the fear about razor blades in Halloween apples—but reason tends to prevail. As Abraham Lincoln once put it, "You can fool some of the people all of the time, and all of the people some of the time, but you can't fool all of the people all of the time."

A bipartisan body to investigate rationalization of the regulatory system would be a good idea, but as part of the political process, not to override it.

  • Read Gregg Laskoski: U.S. Energy Boom Needs No Artificial Stimulants.
  • Read Pete Sepp: End Discriminatory Tax Policy for Oil and Gas Companies.
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