Thursday, March 8, 2012

The Right Energy Policy

Why does the US government need an "energy policy?" The free market is available. Oil companies, owned mostly by average Americans through their pension investments, will develop whatever is needed. Recent natural gas discoveries and production have blunted the environmental argument against the use of fossil fuels. So, why doesn't government just get out of the way?

The Obama crowd seems to believe that if they legislate a drop in demand that will solve the energy problem. I guess, in the extreme, if they were to outlaw the use of cars, fossil fuel consumption would drop precipitously. Outlawing cars probably seems extreme even to the Obama crowd, so they have taken the half way step -- tell everyone what car to buy -- the Volt. Since Americans don't want to buy the volt, the Obama folks sweeten the pie with a $ 7,500 tax subsidy per car (now, urging that the subsidy be raised to $ 10,000 per car).

But Americans don't like the Volt and it's sales are moribund. Americans like the big SUVs and that's what they are willing to pay for. So, why not let them? Why does government know better than individuals?

Obama says that "big oil" gets $ 4 billion per year in subsidies. Is that true? What he calls subsidies are "intangible drilling expenses," which is nothing more than the depreciation scheme available to natural resource producers of all stripes. Should you be able to deduct the wearing out of plant and equipment? Most people would say yes. Should you be able to deduct the wearing out of an oil field? Most people would say yes. In any event, it is the average American who mostly owns big oil, so Obama should say "we are subsidizing average Americans with $ 4 billion a year in depletion write offs....let's stop doing that and raise the taxes on average Americans by $ 4 billion." That is what he is really advocating. Soak the middle class by pretending to go after "big oil."

But, at the end of the day, why not let capitalism do its thing. By tinkering, by restricting the ability of the oil industry to develop oil and natural gas to meet domestic demand, the Obama policy leads to volatile energy prices and US dependence on the good wishes of countries like Russia, Iran, and Venezuela. Why is this a good idea?

What free markets do best is to allocate scarce resources and provide for alternatives when some resources become too expensive. That would be the correct energy policy -- no energy policy at all.

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