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by    Mon, Dec 26, 2005, 12:38 PM

Question: Which of the following has contributed the most to George W. Bush’s job rating decline? (a) the Valerie Plame affair, (b) the war in Iraq, (c) the yawning federal budget deficit, (d) FEMA incompetence or (e) high energy prices? Correct answer: (e) High energy prices.

Political junkies and the media are obsessed with Plame but average people aren’t. If the economy is Ok no one cares about deficits. The hurricanes were so last summer. The war hurts but has nowhere near the potency of energy prices. For most Americans the war is images on a TV screen. Only a few even know someone who knows someone killed in Iraq. But everyone buys gasoline every week and pays to heat their homes.

The political process has offered two responses: Conservatives counsel patience to allow the market to work its magic. Congressional liberals counsel a windfall profits tax on Exxon Mobile and grassroots liberals counsel price controls. The liberal’s counsel may be given short shrift: taxing Exxon will not increase oil production one pint and price controls are proven to make matters worse – fast. The conservative response also fails but needs a lengthier critique.

The classic conservative mantra is that price increases will trigger increased supplies because of greater investment in production and newly cost-effective alternative energy sources, and cause a decrease in demand through changed consumption habits and the advent of new conservation technologies. This is all fine as far as it goes – which isn’t far enough.

First, it assumes the existence of a free market for energy. There is no such thing. Yes, OPEC’s power waxes and wanes but when it waxes it is a formidable cartel. Second, most countries where you find large oil reserves hate Yankees and given a choice of customers will choose energy hungry China. Even where current regimes are friendly there is a very high probability of regime change.

Second, it assumes no artificial bottlenecks like those created by environmental permitting regimes. It is both sad and amusing to hear Congressional critics of big oil berating its CEOs for not building more refining capacity while knowing full well Federal and State regulations make it almost impossible to build or expand a refinery.

Third, there is no such thing as an “economy.” There are only “political economies.” And in political economies short term pain by the people is ignored at great peril to those who govern. Put another way “patience” is a sure recipe for defeat.

Finally, markets allocate resources efficiently over time but do not take into account valid political concerns. Americans ship enormous amounts of money to OPEC nations, not one of which is a stable American ally. We wage wars to protect our oil lifeline (which I consider a valid reason for war). We avoid both through energy independence. But that comes at a price. The market cannot factor in those costs, only the political process can do that.

The right market intervention would be for Congress to impose an oil import fee that would set a floor on energy prices at around $35 to $40 per barrel of oil (to hell with free trade). That would assure investors that development of domestic alternative energy sources would be economic over the long run. Whether it is coal gasification, squeezing oil from tar sands, shale oil, nuclear power or bio-fuels the US would shortly meet all of its energy needs from domestic sources. The resulting energy independence would have an enormous value a market cannot calculate.

Yes, consumers would be denied the price benefits of the next cycle of low prices and the federal government would have windfall revenues with which to close the deficit. The latter sounds like a good thing. The former is the price you pay for not having troops in the middle East and not paying tribute to mullahs and leftist thugs like Venezuela’s Hugo Chavez.

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