Politicians Can Set the True Cost of Energy

It is understandable that the politicians want to stop others from speculating in energy futures. They clearly regard that as their job. People are upset over $4 gas. The honest thing for a politician to tell them would be: You probably need to get used to it. Real gas prices have gone up and down over time. But the economic fundamentals are different this time.

The developing world is actually developing. The conditions that lead to economic growth are now widely known, if still very imperfectly practiced.

Meanwhile, much of the world's oil supply lies in places with troubling governance.

That means that world demand for oil is likely to continue to outpace increases in supply.

Gas prices will always fluctuate, but the trend pressure is likely to be upward. Increased domestic production, while desirable for other reasons, is highly unlikely to alter the trend pressure.

American politicians, however, aren't in the habit of talking about unpleasant truths. So, both sides are telling the American people that inexpensive and abundant power is easily available, if the other side would just quit being obstructionist.

Inconveniently, however, all alternatives to current sources of energy happen to be, at this point, even more expensive.

Nevertheless, our politicians see the energy future quite clearly. In fact, the precision of their clairvoyance is actually quite laughable.

John McCain says that when he is president he will set the country on a path to have 45 new nuclear power plants by 2030. Not 44 or 46. Forty-five is just the right number.

Barack Obama says that if he is president, there will be one million plug-in hybrid cars on the road by 2015. Not 900,000 or 1.1 million, but a million on the dot.

Obama is, of course, the visionary in the race, so his phony prescience is much more expansive. According to Obama, the country will need 60 billion gallons of biofuels by 2030. Ten percent of our electricity will come from renewables by 2012 and 25 percent by 2025.

The central planners of the Soviet Union couldn't get the number, kinds and sizes of shoes their country needed right. The notion that American politicians can divine the precise number of kilowatt hours of electricity the country needs from various sources or the number of cars fueled in particular ways is silly.

No one can know that. It's unknowable.

Instead, it's something markets work out over time in response to price signals.

That adjustment is already underway. In response to higher gas prices, the American people are driving less, buying fewer cars and buying more fuel-efficient cars when they do buy. All without the politicians passing a law or mandate.

There are some useful things the politicians could do about price signals.

The cost of carbon-based fuel does not reflect its environmental impact. Politicians could impose a tax so that it does.

That, in fact, illustrates how politicians could use markets rather than substitute their judgments for them.

The United States has lots of coal and electricity produced from coal is cheaper than from other sources.
However, the environmental effects have basically shut down new coal-power production.

It would be nice if there were a way to sequester coal carbon emissions. However, it hasn't been invented yet.

Both McCain and Obama propose that the American taxpayer subsidize clean-coal research. A carbon tax, however, would produce government revenue rather than spend it, make alternatives such as wind and solar more cost competitive, and give the coal industry reason to make clean-coal research a much higher priority on its own.

For the most part, politicians set the price of electricity in this country. But rates are set to insulate consumers, particularly residential ones, from the true marginal cost of peak power. This leads to overconsumption of electricity and disadvantages alternative sources for peak power production.

If the politicians would do their minor part in getting the price signals right, markets would take care of the rest. There's no need to spend billions of taxpayer money on the energy futures speculations of our political class.
So, the politicians need to enact a carbon tax, price electricity at its marginal cost, and get out of the way.

If they would also then shut up, it would be doubly beneficial.

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