The Economist On Kicking The Oil Habit

Lynne Kiesling

Last week’s Economist had several articles on energy policy, including this lead article on US energy policy and the energy bill that passed the House. This article does a nice job of pointing out what’s obvious, but obviously can’t be reiterated often enough, because it persists: US energy policy is a deeply-meshed rat’s nest of distortionary subsidies. Maybe now that influential folks with a wide range of political stripes are pointing this out, Congress might start to listen:

Several independent groups have strongly urged America to move away from oil. The Rocky Mountain Institute, a think-tank concerned with energy efficiency, argues in a newish study partly funded by the Pentagon that America can end its oil imports with aggressive adoption of biofuels, radically more efficient cars and other related policies. The National Commission on Energy Policy (NCEP), a bipartisan panel of energy heavyweights, recently made the case for boosting domestic energy sources, and also advocates a clever “cap and trade” approach to tackling greenhouse gases.

The most stinging attack came in a recent letter to Mr Bush signed by two dozen politically influential figures organised by the Energy Future Coalition, a lobbying group. These folk, an odd mix of national-security hawks and die-hard greens, argue that “dependence on imported petroleum poses a risk to our homeland security and economic well-being.” These worthies want to see “clean, domestic petroleum substitutes and increased efficiency in our transport system.”

Or maybe not. Interestingly, one of the things that kept me busy on Wednesday was preparing some note for a presentation I am giving in a couple of weeks on public choice theory and regulation. This energy bill is a poster child for how dysfunctional political processes can be. And yet we do not ever get any better proposals out of Congress.

So is Congress rushing to embrace innovative ideas to kick the oil habit? Certainly not. In fact, the House of Representatives has just done the opposite by passing an energy bill stuffed full of subsidies for the oil-and-gas business. It includes giveaways for ethanol (a pretty ungreen petrol additive popular with corn farmers) and cheap catastrophic insurance for the nuclear industry. Meanwhile, it does nothing to close a loophole that allows sports-utility vehicles and Hummers to escape fuel-economy standards.

This bill is similar to last year’s failed energy bill, which itself was based on the recommendations of the Cheney energy task force of 2001. But the House managed to add so much more pork—including a $2 billion giveaway to oil companies for deep-water research—to the bill that even the White House now criticises it as excessively costly. Taxpayers for Common Sense, a watchdog group, estimates that the full cost could be more than $90 billion (see chart). The bill now goes to the Senate.

One of the most robust aspects of public choice theory is what I call the Olsonian hypotheis (after Mancur Olson, author of the fantastic Logic of Collective Action): concentrated benefits and diffuse costs lead to differential lobbying, and thus to distortionary outcomes. Using Occam’s Razor, that’s the most parsimonious model I can imagine for explaining, for example, ethanol.

The article ends by noting that

The oddest couple of all—Jerry Taylor of the libertarian Cato Institute and Dan Becker of the deeply verdant Sierra Club—have just issued a joint call for a radically different energy policy: a market-based, “zero subsidy” energy bill. If such coalitions really spring forth, then American energy policy, and the Axis of Oil, would be turned on its ear.

When someone from the Cato Institute and someone from an environmental organization find common cause, you know they’re on to something. The last time we saw this was Cato’s Ed Crane and Sierra’s Carl Pope in July 2002 on that iteration of the energy bill proposal. What did Crane and Pope have to say about that energy bill proposal?

The legislation does nothing to improve the efficiency of energy markets or to remedy any market failures. In fact, it makes matters worse by further distorting these markets with billions of dollars of taxpayer subsidies and other handouts to well-connected energy industries.

This shouldn’t come as any surprise. When politicians lack the courage or wherewithal to solve problems, they reflexively subsidize politically potent industries that supposedly offer solutions. So let’s start at the top: What’s the problem that the House and Senate bills supposedly solve?

Sounds like “meet the new boss, same as the old boss” to me.

Here’s the column in which Becker and Taylor make their case for a zero subsidy energy bill.

It is so wholly without merit that even we — policy analysts from the Cato Institute and the Sierra Club respectively, who rarely agree about anything — can agree that the bill is a shocking abdication of our leaders’ responsibility.

Now, Jerry Taylor is not one for measured rhetoric, but even so that’s a pretty in-your-face claim. I recommend reading the whole thing; I personally find little to disagree with in their claims, except for the direction in which they propose to go in response to the managed competition in electricity (but that’s another post, one I’ve been ruminating on since December).

Their conclusion:

A good energy bill would remove subsidies and market distortions — not add to them — so that energy technologies could compete based on their merits, not their political merit. Unfortunately, that’s asking more than either political party seems willing to deliver. That’s what leads these two odd bedfellows to call for Congress and the White House to start over. Come up with an energy plan that actually takes us forward. And the current energy bill? Put that in the only place it belongs: the recycling bin.

I agree. My problem comes with how we bring that about. Given the existing structure and incentives of Congress, can we actuallly achieve a zero subsidy energy bill? I would like to think so, but human nature and its interface with political institutions suggest otherwise. Personally, I’d be willing to settle for a lower subsidy energy bill; at least it would move in the right direction. Becker and Taylor suggest it’s a lack of leadership in Congress, with which I agree.

5 thoughts on “The Economist On Kicking The Oil Habit

  1. I would add that it is also a lack of knowledge and a lack of understanding.

    The expertise of our elected representatives is politics. It is not, except in rare cases, science or economics. Many of our representatives argue (indirectly, by their actions) that the laws of science and economics are subject to amendment or repeal at their whim.

    Experimental economics is a fascinating field. However, conducting experiments regarding amendment of the fundamental laws of economics with a sample population approaching 300 million is a very risky endeavor, best not left to amateurs.

  2. I agree wholeheartedly, let’s end energy subsidy once and for all. Consumers want Saudi Oil? The oil companies and the Saudi’s can come up with the logistics and security costs themselves.

    Consumers want Iraqi oil? Come up with the hundreds of billions of $ to pay for safety and security. I see no reason for the US to subsidize oil exports from the MidEast to the USA.

    In fact the US has a botched unwritten policy of cheap oil (and cheap food btw) witnessed by years of providing security in the MidEast for oil exporters. Let’s lay it on the table. We are paying a huge price to get oil from the MidEast.


  3. I disagree.

    Temporary subsidies serve a real purpose spurring investment in R&D and infrastructure. Consider, the U.S. has not built one new refinery since 1976 and the oil companies want to shutter some of the remaining ones. In contrast, we now have 85+ sugar fermentation ethanol facilities based on domestic corn production.

    The midwest has also developed an ethanol distribution infrastructure, small-scale enterprise cooperatives, and increased demand for American-made flex-fuel vehicles that use high blends of ethanol.

    With startling recent advances in conversion technologies, this need not be a solely rural phenomenon. Pilot plants (see can now produce ethanol in a fraction of the fermentation time (minutes versus days) from not only corn but also corn stover and other agricultural wastes – plus forestry wastes, and urban wastes including sewage! This alone could reduce landfill usage 70-85% in my state, California. With virtually zero toxic emissions. That’s a start.

    Why can’t the U.S. create a paradigm shift with renewable fuels as we did with the digital revolution? That certainly profited state coffers. By leading the manufacture and export of renewable clean fuels and fuel technologies we can reduce greenhouse gases, clean up our wastes, co-generate green power (electricity), and move toward the Schwartzenneger’s Hydrogen Highway vision through ethanol R&D and infrastructure implementation.

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