• Town Talk

The news is full of stories regarding the energy “crisis,” making the case for and against drilling for new oil. We frequently hear that “we can’t drill our way out of it,” along with suggestions that we develop a “long-term energy plan.” A number of the anti-drilling arguments invite rebuttal. 

First, anti-drilling advocates say that such a complex, geopolitical issue can’t be boiled down to a simple matter of supply and demand. Actually, it can.  Geopolitics is no more immune from the Law of Supply and Demand than anti-drilling advocates are immune from the Law of Gravity. 

Second, they repeat the canard that it will take years before oil from new drilling would make it to market.  However, oil companies are on record that new supplies from offshore California would be on the market within one-two years. Furthermore, commodities markets are forward-looking. Expectations of future supply-demand conditions are reflected in current prices. World oil prices have dropped $30 per barrel just on rumors that future supply might outstrip demand. 

Third, consider the logic of developing a long-term energy plan. Why are long lead-times unacceptable for drilling but fine for government planning? Besides, exactly who will develop the “plan?”

No ‘energy crisis’

Actually, there never was nor will there be an energy “crisis.”  According to the First Law of Thermodynamics, energy can neither be created nor destroyed, it can only be converted from one form into another. This is also known as the Law of Conservation of Energy. 

What we face is a choice of fuels to convert one form of energy, such as stored chemical energy, into another form, such as electrical energy. This is what we do when we burn oil or natural gas to create electricity. We convert the chemical energy bonded into a hydrocarbon molecule into thermal energy and then into electricity. Fuel is the scarce resource, not energy itself.

Allocating resources

Economics is the science of how people choose to allocate scarce resources, that have alternative uses, to their “best” use. The energy “crisis” boils down to a matter of economics. Crude oil is a scarce resource. How do we choose how much to produce? Once produced, how do we choose how much to allocate to gasoline, heating oil, diesel, jet fuel, and other petro-chemicals? Further, if we chose to produce electricity, how much do we produce from oil, natural gas, coal, hydro, wind, biofuels, or solar? These are all economic questions – how to allocate scarce resources, that have alternative uses, to their “best” use. And, how do we know what is the “best” use? This is also an economic question. The answer is, “The best use is the one that provides the greatest satisfaction for the greatest number of people.” In a free society the best use is determined through free markets.

Responding to price

A fundamental economic axiom is that human creativity and inventiveness respond to the incentive of price. In a free society, market prices determine how much to produce, how much to consume, and how much to conserve, of our scarce resources. In a free society, market prices allocate resources to their best use. The alternative to market prices is command-and-control through central planning. If central planning provided a superior economic outcome, then the Soviet Union would have been the strongest economy on earth. Yet the American economy was vastly stronger. 

North Korea vs. South Korea

If government command-and-control was superior to free markets, North Korea would be an economic powerhouse while South Korea would be an economic basket-case. Yet it is the North Koreans who are starving to death, while the South Koreans prosper. Go figure. If governments were better than markets, people would be fleeing across miles of shark-infested water to get from Miami to Cuba, but it is vice versa. Again, go figure. 

The major problem with energy is not markets but rather government interference in markets. Taxes, regulations, mandates and subsidies all distort markets and prevent the necessary price signals from allocating scarce resources to their best use. Governments control 94 percent of the world’s crude oil reserves and markets only 6 percent.  In spite of government, high prices are having an effect. Responding to the high prices, consumers are demanding less and searching for alternatives, while producers are supplying more from existing wells and are anxious to drill new wells. With high oil prices, alternative fuels and renewables become more economic for both producers and consumers. 

Government should stay out

We do not have an energy crisis that needs government management. Rather, we have an economic problem best left to free markets. In a free society, prices and human ingenuity will provide the optimal energy portfolio, not a central planner. Prices will tell us how much energy should be converted from oil, coal, natural gas, hydro, wind, biofuels or solar. 

Which path we choose, markets or governments, will determine our prosperity. That choice will also determine our liberty, because economic liberty cannot be divorced from political liberty. If we choose government command-and-control over free markets, we choose less prosperity and less liberty. 

Dr. Paul Prentice teaches free-market economics to MBA students at UCCS, and is a board member of the Limited Government Forum. He can be reached at pprentice@farmsector.com.  A version of this editorial appeared originally as a letter to the editor in the Colorado Springs Gazette.

Prentice writes for the Independence Institute, a Golden-based libertarian think tank. It provides columns for the Denver Daily News.

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