Energy bills are a dime a dozen in Washington and many state capitals. They are the multipurpose solution reputedly solving every energy problem; they do everything from raising taxes for oil and gas companies, to subsidizing ethanol and plug-in hybrids, to threatening oil company executives with prison for “price gouging,” to promoting wind power (except, of course, when it might spoil Ted Kennedy’s sailing). Every gasoline price spike yields a cascade of proposed legislation and an outcry from politicians.
Politicians are right in suggesting that America faces certain serious energy problems, but they’ve misdiagnosed both the problems and the cure. America’s energy markets, including the infrastructure that makes trading in energy possible (made up of pipelines, oil and gas terminals, and refineries), are clogged with the debris of almost a hundred years of state and federal regulation. This “regulatory cholesterol” is as damaging to our economy as the “cholesterol” analogy suggests. Remaining within the analogy, the proposals that have been made by politicians are the equivalent of recommending that a heart patient in need of a triple bypass eat more steak instead of undergoing surgery. If we are going to meet our future energy needs, we need to unleash entrepreneurs on the problem. And that means politicians need to get out of the way, not add another layer of regulation.
Regulatory Sclerosis
Markets work best when they are broad and deep. Unfortunately in many energy markets, a combination of limited infrastructure and regulation limit the extent of the market. From the early twentieth century, both federal and state governments have been heavily involved in energy markets. John D. Rockefeller’s Standard Oil helped create a national market for petroleum-based fuels, both standardizing product quality (the inspiration for the company’s name) and building infrastructure like pipelines that broadened local markets into regional and national ones. The company also pioneered many of the innovations in refining technology that helped solve America’s first “energy crisis” in the early 1910s, when demand for gasoline outstripped production. Not surprisingly, this success was rewarded by a sustained assault by state and federal regulators on antitrust grounds, even as the company lost market share in an increasingly competitive market and gasoline prices fell – hardly the signs of a successful monopoly.
The pattern of government intervention was set by the Standard Oil case; energy companies were regularly attacked in the courts and legislatures, even as real fuel prices fell almost constantly, capital investment soared, and innovations in production technology increased production efficiency and fuel quality.
When not attacking energy markets for providing too little competition, politicians assaulted them for providing too much. During the New Deal era, federal and state governments actively intervened in energy markets to limit competition. This reached beyond stifling regulatory proportions when, for instance, Texas and Oklahoma declared martial law in oil producing areas, and used troops to stop competitors from pumping “too much” oil. Ever since, each new batch of energy legislation has included provisions to protect favored interests from the ravages of “destructive competition” through special permits, exemptions, and tax breaks. Many states still have minimum pricing laws that prevent retailers from selling gasoline below a statutorily calculated “cost,” aimed at preventing efficient firms from selling fuel for less than inefficient ones.
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