Supply-Side Stupor: The Energy-Policy Alternative to Saudi Dependency Isn't Arctic Drilling. It's Efficient Use

Article excerpt

AMERICA IS AT WAR. THE ECONOMY IS DOWN. Global prosperity, stability, and environment are at risk. Domestic politics is reverting to gridlock, driven by the coming battle for both houses of Congress. And energy policy, strongly polarized, is back on the agenda.

Have we learned anything since the first oil shock in 1973 that could enable our country to craft an energy strategy to make America secure, stimulate the domestic economy, and foster global development? Is there a way to use energy policy to make the world safer, protect the climate, and rebuild national consensus? Is there an approach that makes sense and makes money, solves or avoids many big problems at once without making new ones, advances technology, increases equity, and strengthens competitive markets as well as grass-roots democracy?

There is, but it requires getting straight what the energy problem is. Until 1976, many thought (and some still do) that the energy problem is simply that we're running out of it. If so, then the urgent task is where to get more energy--more, of any kind, from any source, at any price--to avert the end of life as we know it. This requires government intervention--taxes, subsidies, mandates, new rules--devised by energy experts and politicians who naturally favor familiar technologies and powerful constituencies.

Variations on this theme have been proposed, and many carried out, under every Republican president since Richard Nixon and in part by Democrat Jimmy Carter, who launched the U.S. Synthetic Fuels Corporation. (Oddly, Nixon controlled energy prices and Carter freed them.) Despite devouring many hundreds of billions of dollars, these top-down, supply-centric policies have disappointed. Projecting demand growth and building one's favorite kinds of centralized, costly facilities to meet it--as policy makers do to excess after each drop in supply or spike in price--have proven expensive, financially risky, logistically difficult, and politically unpleasant. With brief exceptions, energy supplies generally have been maintained, but at a rising cost ranging from the Gulf War, global warming, and dismayed stockholders to lung disease, degraded national security, and dependence on the Saudi royal family.

By defining the problem as "we're running out" and the answer as forcing more traditional supply, policy has undercut the real solution that the market has struggled to implement after each energy shock: impartially choosing the cheapest mix of ways to reduce demand or increase supply. The market, being technology-neutral, mainly chooses more efficient use, because it's faster and cheaper. Technology enhances both resources, but it expands efficiency more and faster than it does supply. Thus, invisibly to most policy makers, huge reserves of underutilized efficiency are getting bigger and cheaper, even as reserves of domestic fuels, wrung ever harder by policy, are getting smaller and costlier.

Efficient use is how Americans after the 1979 oil shock cut oil use 15 percent in six years while the economy grew 16 percent. It's part of how Californians cut peak electricity demand per dollar of gross domestic product (adjusted for weather) by 14 percent in six months--a third of customers cut their usage by 20-plus percent--abruptly ending a crisis that the White House claimed would require 1,300 to 1,900 more power plants nationwide.

Supply proponents unfamiliar with the efficiency resource are perplexed when markets choose it and crash their favorite industries with each cycle of price fluctuation and policy response. (That happens pretty often: World oil prices have fluctuated randomly for at least 115 years.) Pushing on supply--pursuing the worst buys first--while the market favors efficiency puts supply industries at risk by amplifying their boom-bust cycle. It also wastes money, loses precious time, and hazards national competitiveness and security.

This mistake can be avoided by asking a different question: Why do people want energy in the first place? …