Friday, August 05, 2005

Thomas Friedman on the energy bill

I like Thomas Friedman. Though I don't always agree with him, I greatly respect his very thoughtful, rational columns: what a stark contrast to his fellow columnists (three separate links there). He's not afraid to promote globalization as the key to prosperity for everyone, and he's won the Pulitzer for his excellent commentary on the fight against extremist Islam. Again, I don't always agree with him, but he's a shill for no one.

His latest column criticizes the massive energy bill:
Too Much Pork and Too Little Sugar

Wow, I am so relieved that Congress has finally agreed on an energy bill. Now that's out of the way, maybe Congress will focus on solving our energy problem.
He had a good start with the title but unfortunately fell into the fallacy trap of thinking government must solve certain "problems."

It is wholly unnecessary, inappropriate and unconstitutional for the federal government to set a national energy policy, especially when the free market already has a mechanism to promote the most efficient use of scarce resources: price. If people can afford higher energy prices, and if they want it badly enough, they will pay. High prices encourage suppliers to start providing more, which will lower prices to where more people will buy the product, which will maximize the suppliers' revenue at a certain point. If suppliers don't or can't, then people will simply cut back on their energy use. They'll cut back on home heating, how much lighting they keep on at home, and driving. The decreased demand will cause prices to drop and stabilize.

People don't need to cut back a lot to save energy, either. You don't need to buy a 40-mpg compact car or hybrid to achieve significantly better fuel efficiency. Our friend Joe Sherlock has loved his new Toyota Avalon, which even at highway speeds it gets an amazing 28 mpg or so. If you go from an SUV averaging 18 mpg to an Avalon, you've increased your fuel economy by 55%; you'll use about 36% less fuel to travel the same distance. Meanwhile you still have the comfort and safety of a larger car.

Since the 1970s, the federal government has mandated an average mpg for passenger cars. Generally, Americans favor smaller cars, because that's mostly what's available. It's easiest for car makers to offer more smaller cars and fewer ones, because there's only so much you can do to improve engine efficiency and cut larger cars' weight. Nowadays, higher gas prices are an incentive to drive more fuel-efficient cars. MotorTrend and the Detroit Free Press noted the correlation between higher auto prices and surging demand for more fuel-efficient cars, with other factors. Japanese autos are continually popular for longevity and high quality, and they've received some generous rebates lately. But U.S. automakers have had generous rebates too, so I tend to dismiss that. I personally feel that more Americans do want better gas mileage, and when they get new car, they're Japanese more often than not (and frequently made in the U.S.) because those cars have earned great reputations.

CNN disagrees that higher gas prices are having a significant effect, but its conclusions are poll-based, and poll predictions are not always meaningful. On the other hand, it's better to rely on documented changes in buying habits, which the MotorTrend and DFP articles did in addition to their surveys. Like prediction markets, actual sales numbers tell the real story: people had to put their money where theirs mouths were, not just tell a pollster what they think they would buy.

Friedman is correct to point out that increased prosperity across the globe is behind the surging demand for oil. That prosperity would be crushed, however, if the U.S. had a $2 per gallon gasoline tax. That would wreck the U.S. economy via high inflation (technically speaking a spike in the Consumer Price Index, which isn't inflation per se), even if we did start using more ethanol. Then the deep recession would spread throughout the rest of the world, which depends so much on U.S. consumers. No, the last thing we need is another energy tax, let alone one as high as Friedman proposes.

Friedman notes that Brazil uses a great deal of ethanol, but at what cost? Was the initial investment worth the long-term savings? And what about ethanol's worse fuel economy compared to gasoline, and that it takes so much petroleum to produce? Perhaps Brazil does have enough sugar to turn into a major energy source, and it probably has saved money because improved energy self-reliance helped shield it from higher petroleum prices. Neither of these applies to the U.S., though. For one, there isn't enough corn (or sugar, both domestic and imported) to power more than a minute fraction of the $11 trillion American economy. Second, the American economy is still expanding very well despite higher oil prices, proving it can absorb high energy costs.

Stephen Roach is one of many economists who's spent the last few years warning that oil shocks were behind the last several U.S. recessions. Bloomberg's Caroline Baum dispelled that misconception (link courtesy of Don Luskin), explaining that economic soft spots already existed before oil price surges. And MacroBlog in April cited a Wall Street Journal survey of economists, a third of whom in 2004 thought the U.S. would suffer a recession if crude prices stayed between $50 and $59. That hasn't happened, obviously, so they changed their tune: 31% thought the new "crisis price," so to speak, was $80-$89, and 48% thought $90 and higher.

There are many reasons why ethanol for American consumers is not a competitive choice. Follow that link for my previous discussions on ethanol's inefficiency, especially its artificially low price because our taxes subsidize it. Currently the federal government gives $3 billion annually to the ethanol industry, which produced only 3.41 billion gallons in 2004 [updated 10/9/2005 with website and updated number]. Each gallon of ethanol, then, is actually 88 cents more expensive than it appears, and that's on top of its chemical inefficiency. So why do we want the atrocious new energy bill that mandates the annual use of 7.5 billion gallons of ethanol by 2012? Is it rational for us to want to raise our cost of living?

There are many things government should stay out of. There are many things we must force government to leave alone, because the free market will take care of them without bureaucrats having to plan our consumption. Energy is one such thing. Do people no longer think of what happened in the 1970s when the "benevolent" federal government enacted price controls? It "stabilized" prices but created massive shortages. That's because price, as Ludwig von Mises taught us, is how we make rational economic decisions. If we don't allow supply and demand to work, markets have no way of seeing what resources are in high demand but scarce, or what resources are worth producing.

Friedman's conclusion is completely correct, though, especially in observing the massive special interest influence on the behemoth energy bill:
The sum of all lobbies. ...

It seems as though only a big crisis will force our country to override all the cynical lobbies and change our energy usage. I thought 9/11 was that crisis. It sure was for me, but not, it seems, for this White House, Congress or many Americans. Do we really have to wait for something bigger in order to get smarter?
Somehow I don't think Friedman understands why he's so right. That's exactly how the free market works: a supply shock -- a sudden scarcity -- will shift buyers' patterns, and that's ok. High prices encourage greater supply and decreased demand, but more importantly, they automatically push people to investigate alternatives. Scientists and engineers still look at all types of alternate energy sources, but for now the free market doesn't show that they'd be cost-efficient compared to petroleum. Perhaps there will come a time when gasoline will have become so expensive that ethanol, or another energy source, will be competitive; but that day is not now.

Anything else is just big government's theory on what it thinks might happen to the future supply of a resource, and what it thinks is best for the people. Friedrich Hayek is famous for his work on knowledge, including the concept that no single person or group has total knowledge. Knowledge is dispersed throughout society, so why should we trust a bunch of government bureaucrats to plan our needs (and not just energy), particularly when every new energy, transportation and education plan is a bigger boondoggle than its predecessors?


Blogger mwinkler said...

After reading your column on ethanol and the supposed "free market" I really had to laugh! As an American expat living and working in Switzerland for one of the largest investment firms for the Oil & Gas, Nuclear and Alternative Energy markets I think you should go back and brush the dust off your high school physics text book and pay special attention to the chapter on Thermodynamics. The fact of the matter is the "free market" has and will do very little in the way of addressing resource depletion as there is no alternative to Oil & Gas that even comes close to the energy density contained in these primary fuels. Ethanol has an energy return that is in the negative for feedstocks such as corn and only an 8:1 return from sugar cane. There simply is no transportation fuel alternative that will even come close to replacing this natural resource which is finite. Further if you pay special attention to the latest geological research that has become more and more prominent in the US mainstream media you will or have already come across the concept of Peak Oil. Here in Europe we also work within the ideological framework of a free market economy but also reali-ze the need for a degree of government involvement in issues relating to national security, eneregy supply etc. I find it really pathetic when I come across idiotic Americans like yourself who believe that you live in the greatest country in the world due to such an extreme commitment to the "free market". If it were not for the massive government subsidys that have been generously provied to the oil and gas sector, the automotive industry, etc. do you really believe that the US would have such urban sprawl, strip malls, disgusting far out suburban neighborhoods that are built solely around transportation by car? See here in Europe we did not heavily subsidize the automotive industry nor did we destroy our country-side by building totally unsustainable urban and suburban sprawl built around the car. I am curious whether or not you have been paying attention to the simple fact that in the US the government has been heavily involved in subsidizing the oil and automotive industry so your "free market" theory is simply a myth and has never nor will ever exist.

Monday, April 09, 2007 9:10:00 AM  

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