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What is it about national energy policy?

by Pete Geddes

I’m convinced that I have discovered a new social law. It seems to have the validity of Newton’s. Here it is: national energy policy causes IQs and body temperatures to converge, with the most rapid convergence occurring in the political arena, especially in a presidential election year.

The Hoover Institution’s Richard Epstein’s recent blog confirms my hypothesis as he dissects President Obama’s recent energy speech at Georgetown University. Epstein make two critically important points. Here they are:

(1) Regarding energy consumption, consumers make decision at the margins.

Higher gas prices provide consumers with incentives to prioritize consumption. At some point ($4, $6, $8 a gallon?) we decide (perhaps) that fueling our SUV is too costly. Hence, we select cars that get better (likely not maximum) gas mileage, drive less, carpool more, and decide to forgo water-skiing for rafting. The amount of oil we demand, whether for use as gasoline, fertilizer, or in plastics, depends on price and not every use of petroleum is equally valuable.

(2) The market process gathers information and prices guide decision-making.

Markets, like DNA-driven organisms, are highly efficient information-processing systems. The prices they generation transmit information and help allocate resources both for individuals and organizations.

Epstein makes the case to let the market process show the way to our energy future. This is a point politicians often miss (or deliberate ignore). The market process of constantly searches for efficiencies subjects ideas (both new and old) to ruthless systematic testing. This is a far more efficient and equitable process than relying on decisions made by politicians and their business cronies.

Venture capitalists have access to ever more and better information. They are the most optimistic investors in the world, earning their living evaluating risks and rewards. If green technologies have the potential to yield attractive profits, then firms will enter the game. Witness Exxon Mobil’s recent $600 million investment in algae-based biofuels. (They are, after all an energy company.)

If a technology is not economically competitive, no amount of public subsidy or special political favors will make it so.

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