Energy in a Changing World; B. B. Greaves

Early in the Industrial Revolu tion, short-sighted men predicted a fuel shortage. When the forests of England had been laid bare, there would be no more firewood for pri vate homes and the small factories springing up across the land. Such short-sighted men again expected a fuel shortage in the middle of the 19th century. Large numbers of whales were being slaughtered and whale oil, used for illumination, was becoming scarcer. Also, the indus trial demand for coal was overtakMrs. Greaves Is a member of the senlorstaft of The Foundation for Economic Education. She Is the au thor of Free Market Economics (2 volumes, Syllabus and A Basic Reader, 1975). ing the quantity that could be read ily mined. Even the noted economist, William Stanley Jevons warned CCthat we cannot long main tain our present rate of increase of consumption; that we can never ad vance to the higher amounts of con sumption supposed ... that the cost of fuel must rise, perhaps within a lifetime, to a rate injurious to our commercial and manufacturing supremacy; and the conclusion is inevitable, that our present happy progressive condition is a thing of limited duration." (The Coal Ques tion, 1865/1866) All such cCdoomsters"wear mental blinders. Those who predicted dire consequences when England's firewood was gone reckoned without the development of huge water wheels to harness the energy in riv ers and streams. They did not 531 532 THE FREEMAN September foresee the use of coal and the inven tion of the steam engine. Thus, they could not anticipate the factory sys tem and large scale mass produc tion. Nor could 19th century doomsters foresee the development of electricity and the new era in production and transport that was to be ushered in with the discovery of oil in 1864 in western Pennsylvania and soon thereafter in Texas. Step by step producers began to shift from coal to oil as their primary source of energy. Then, with the disruption of traditional trade channels during World War I, oil became a major fuel worldwide.

Those who have prophesied doom in the past have their modern coun terparts. Many persons today foresee the exhaustion of domestic oil fields and catastrophe as a result. They also fear our continued depen dence on oil imports and believe we should become self-sufficient in the field of energy. They believe we must explore every possible new energy source, even by using exotic and presently uneconomic methods of production. They urge extraordi nary means to encourage the domes tic development, production and dis tribution of energy. They caution consumers to conserve in every pos sible way. They say we may have to learn to live with fewer automobiles and less electricity. Impatient with their failure to persuade others to their view by peaceful means, many persons now advocate strong government action. They propose to use tax funds to spur the development of new energy sources, to stimulate domestic pro duction, to plan distribution and to discourage consumption. Many a self-respecting politician today feels he is ill-prepared to hold office un less he can offer some proposal for a ucomprehensive" energy program.

Federal Government Intervention Prior to World War I, the U.S. government had little to do with the development of energy and the pro duction and distribution of power. But since then, countless energy related programs have been enacted. Each was designed to cope with some particular situation that seemed urgent at the time. The Fed eral Power Act (1920) set up the Federal Power Commission (FPC) which now regulates and controls interstate aspects of electrical power, petroleum and natural gas. In 1935 public utilities holding com panies were brought under the Se curities and Exchange Commission. The U.S. government is now up to its neck, so to speak, in the energy field. Through the interstate com merce provision of the Constitution, it deals with major energy users such as the railroads, buses, airlines and shippers of fuel. The Natural Gas Act of 1938 gave ~he FPC au1978 ENERGY IN A CHANGING WORLD 533 thority to regulate the ((sale in in terstate commerce of . . . gas for resale." In 1954, the Supreme Court clearly held (Phillips Petroleum Company v. Wisconsin) that the in terstate sale of natural gas came under FPC jurisdiction. As natural gas and oil are often found together, by fixing the. price of natural gas artificially low, the FPC created a bottleneck in oil production also.

Legal distinctions have led to differ ent prices for gas and oil sold in terstate and intrastate. When price ceilings discouraged the production of oil, a two-tiered price system was introduced to spur new production. Higher prices for ((new oil" were allowed, to the disadvantage of (Cold oil" producers. Labor legislation and safety regu lations have involved the govern ment in coal mining and many other energy-related industries. The fed eral government has built dams and reservoirs, developed and distrib uted hydroelectric power through such agencies as the Tennessee Val ley Authority, the Bonneville Power Administration, the Southwest Power Administration, and the like. Among other energy-related gov ernment agencies there are the Of fices of Oil and Gas, Coal Research, Water Resources Research, Land Use and Water Planning, Energy Data and Analysis, the Bureau of Mines, the Mining Enforcement and Safety Administration, the St.

Lawrence Seaway Development Corporation, and various adminis trations-Federal Aviation, Federal Highway, Federal Railroad, Urban Mass Transportation, and so forth. Attempts to coordinate all these energy-related programs have led to various federal government offices-the Energy Policy Office (June 29, 1973), Office of Petroleum Allocation (November 27, 1973), Federal Energy Office (December 4, 1973) and the Federal Energy Ad ministration (May 27, 1975). Then last year the Federal Energy Ad ministration was converted into a full-fledged department with cabinet status. In the hope that the patchwork quilt of energy-related government programs could be shaped into one comprehensive con sistent and efficient scheme, the De partment of Energy was officially established on August 4, 1977-with a $10 billion annual budget, several hundred million more than is spent in a year on drilling and exploring for oil.

Actions Have Far-Ranging Consequences We must remember that no action has just a single consequence. Mak ing one choice means forgoing others. And the effects of an action taken and of choices forgone may be substantial and widespread. When Congress levies a tax, regulates pro duction, tries to control prices or to 534 THE FREEMAN September stimulate certain industries with special privileges, it does much more than it intends. If Congress imposes a legal ceiling on fuel prices, for instance, it may force the nominal price of fuel down temporarily. But at the same time it encourages consumers to buy more, to be less provident and more waste ful of fuel. It also discourages inves tors and producers in the fuel indus try. In the attempt to compensate for these effects, Congress may then pass other laws to subsidize fuel production. These may spur produc ers to special effort for a time. But other consequences will soon become apparent as extra costs appear--- higher taxes, inflation and/or credit expansion. In time almost everyone is contributing to the costs of the governmen t programs through taxes and higher prices of every thing including fuel.

The manipulation of costs and prices also has repercussions abroad. If the domestic price of fuel is kept artificially low, less will be available on the domestic market. Both foreign and domestic producers will look elsewhere for markets where they can sell at higher prices. If the domestic price of fuel is kept artificially high, imports will rise if not prohibited. Yet, such increased international division of labor and trade, though beneficial to consum ers, is now considered contrary to the government's professed goal of energy ((independence." Every government intervention is bound to have some unexpected and unwanted effects. To cope with each problem in turn, one government intervention after another is pro posed. One government agency is erected on top of others. Yet the goal the legislators are pursuing continually eludes them. They find it im possible to manipulate prices and production so as to keep the prices consumers pay down, while at the same time keeping the prices pro ducers receive up enough to cover their costs and induce them to stay in business.

Ideas + Savings = Production Not many centuries ago men had little energy available except what they produced from their own labor, that of a few animals, running water and the wind when it blew. And effective use of these energy sources was thwarted by primitive technol ogy and lack of capital. Only about a thousand years ago did people find a way to harness horses so they would not be choked when pulling heavy loads and a means to protect the hooves of horses and oxen on rocky ground. Large windmills or water wheels were not developed until 400 to 500 years ago because there was no call for them; the poor state of the roads limited both the quantities of raw materials a mill could obtain 1978 ENERGY IN A CHANGING WORLD 535 and the distances the finished goods could be shipped. UntH fairly recently men pushed, pulled and pounded as best they could with their own muscles and elbow grease. They dug and scratched the earth using simple tools that soon dulled. At times, they had help from beasts of burden. But gradually men with ideas and vision made changes. They found ways to fashion more and better tools. They saved, accumulated capital gradu ally, until they could take time to build more elaborate tools and en gines that produced more power.

They found better ways to use old fuels and they discovered new sources of energy. In this way, inno vations, often very simple ones, en abled men step by step to improve their tools and use· of natural re sources and increase their produc tion of consumable goods. All the things we have today are products of ideas and vision plus savings. As the firewood of England was approaching exhaustion, men with ideas and vision turned to coal. As transportation by land and water improved production and savings increased, they devised larger waterwheels to run their mills. When entrepreneurs were looking for ways to increase the output of their small factories, several inven tors came up with designs for en gines that could convert coal to steam power. Even as economist Jevons was warning in the 1860s that the increasing inaccessibility of coal would force British producers and consumers to cut back, huge supplies of petroleum were being found in the United States. Neces sity, as the proverb says, is the ((mother of invention" -if, and only if, men with ideas and vision are free to follow through.

Energy Developments Since World War II Few people can conceive of the ingenuity producers will show-if free to try and to profit-when chal lenged by a scarcity of raw materials and a rising demand from consum ers. Millions of natives had roamed the Middle East without realizing the potential wealth in oil that lay underfoot. Large scale production of oil in that part of the world has been primarily a post World War II de velopment. Companies, employing men with ideas and vision, foresaw a rising demand throughout the world for products that require the consumption of energy. With the aid of savings and large accumulations of capital, they explored and de veloped the oil fields of the Middle East. They often constructed com plete cities to house and supply their workers in that harsh, desert cli mate. At first local officials were fairly cooperative. Production boomed. However, the spirit of nationalism 536 THE FREEMAN September was on the rise. The Arab nations soon began to impose higher and higher taxes and to threaten confis cation or nationalization. Oil com panies also became alarmed at the threat of serious conflict between Israel and the Arab nations which could disrupt shipments of oil from there to the United States. Yet, they anticipated that the energy de mands of consumers throughout the world would continue to rise. So they sent geologists to other parts of the world.

The Alaska Pipeline In 1968, representatives of the At lantic Richfield Company found oil on the northern slope of Alaska, near Prudhoe Bay. Before long it appeared that this was an extremely rich source of oil. In 1969, several U.S. firms bid more than $900 mil lion for drilling rights. Their next concern was how to transport oil from the northern slope of Alaska to consumers in the lower 48 states. By land or by sea? In 1969, Humble Oil Company, with Atlantic Richfield and BP Oil Corporation participating, dis patched the S. S. Manhattan, a thousand-foot oil tanker, to search for a northwest passage connecting the Atlantic and Pacific oceans. This tanker pounded through the ice and finally succeeded where explorer Henry Hudson had failed, reaching the oil fields of Prudhoe Bay. Thus, men with ideas and vision demon strated that oil could be transported to the rest of the world by oceango ing tankers-if the cost were not prohibitive. At the same time, the oil companies were investigating the construction of a pipeline run ning southward from Prudhoe Bay to Valdez on Alaska's southern shore. This pipeline route soon ap peared the more feasible and economic way to ship the Alaskan oil. As arrangements to extract the oil proceeded, so did plans to con struct the pipeline. But work on the pipeline was soon halted.

For 10 or 15 years, conser vationists had been pointing out that energy-using producers and consumers are continually polluting the environment. In 1969, at their urging, Congress had enacted the National Environmental Policy Act, effective January 1, 1970. The Council of Environmental Quality and the Environmental Protection Agency were set up, with certain powers to compel business firms to clean up waste products and refrain from polluting the waterways and the atmosphere. Conservationists also persuaded Congress to pass a law to protect plants and animals that might be threatened with ex tinction because of industrial de velopment. In 1970, three environmental groups-the Wilderness Society, the Environmental Defense Fund and 1978 ENERGY IN A CHANGING WORLD 537 Friends of the Earth--claimed that the National Environmental De velopment Policy Act required the U.S. Department of Interior to file an ttenvironmental impact state m.ent" before granting a permit for the construction of the oil pipeline in Alaska. The warnings of environ mentalists were strengthened by several well-publicized oil spills notably that from the tanker Torrey Canyon off England in March 1967 and the January 1969 leakage offshore near Santa Barbara, California. Thus, the permit for con struction of the Alaskan pipeline was withheld for several crucial and costly years-out of concern for the environment, the permafrost and the wildlife. Also delayed as a result was the delivery of oil from the new fields to consumers in the lower 48 states. Not until Congress passed a special enabling act, signed by Pres ident Nixon on November 16, 1973, could the pipeline construction be resumed.

During these years, 1970-1974, many problems materialized which the oil firms had anticipated and for which their employees with ideas and vision had tried to prepare by expansion, research, exploration and development. The energy de mands of consumers rose. Conflicts continued in the Middle East. Oil shipments from there became ever more uncertain. The Arab nations, with other oil producing countries, set up the Organization of Petro leum Exporting Countries (OPEC), a cartel to enhance their bargaining position and raise the selling price of their oil. Confiscation The oil companies' fear of confis cation or nationalization was borne out. In 1973, Libya took over the properties of several foreign oil companies. Rather than nationalize directly, some OPEC nations levied confiscatory taxes and fees on firms with facilities within their ter ritories. Then in October 1973, the OPEC nations imposed an outright embargo on oil shipments. Through out the world, wherever oil prices were flexible, they rose sharply.

Wherever oil prices were regulated by governments, serious shortages and dislocations developed, with many cold homes, plant closings and long waiting lines at gas pumps. The lifting of the OPEC embargo in March 1974 alleviated the im mediate crisis, but the wide-ranging effects of countless energy-related government regulations and con trols persisted. To further compli cate the international oil situation, the facilities of foreign oil companies in Venezuela were nationalized as of January 1, 1976. During the years when the Alaska pipeline was delayed, most govern ments throughout the world were inflating their currencies, i.e., in538 THE FREEMAN September creasing the quantity of their money in circulation. This led inevitably to higher prices for almost everything needed to construct the pipeline and seriously complicated the necessary economic calculations. When gov ernments are inflating, it is espe cially difficult for any business firm engaged in a long-range, time consuming, large-scale project, re quiring huge accumulations of capi tal, to calculate potential costs and selling prices. Projects such as the development of oil fields, the con struction of a gigantic pipeline of sophisticated technology and the coordination of all these activities with those of oil shippers, warehousers and retailers through out the world, call for huge savings and very complex economic calcula tions that are difficult or impossible in a world of volatile prices.

In addition to the uncertainties created by the delay, the Alaskan pipeline's cost rose substantially be cause of inflation. Its final cost was about $7.7 billion. Interest alone on the construction loans has been es timated at $1.1 billion. Also, if work had been permitted to continue as scheduled, the pipeline might well have been in operation before the 1973-1974 OPEC oil embargo. How ever, it was the summer of 1977 before the Alaskan oil began flow ing. The development of nuclear energy was actively encouraged and subsidized by government in the early years following World War II. Yet in the 1960s nuclear power plants became a special target of environmentalists. Legislation permitted them to adopt various de laying tactics. Often disregarding the property rights of others, they picketed, petitioned for delays and instituted suits. They widely exag gerated the environmental impact and potential risk of explosion of nuclear facilities.

Environmentalists succeeded in postponing for more than ten years FPC approval of Con Edison's nuclear-powered Storm King Project on the Hudson River. Approval was finally granted March 14, 1973-too late to be in operation when the OPEC embargo was imposed. Then actual construction was halted four months after it began-by court in junction still in effect as of this writ ing, pending study of the Project's effect on fish in the Hudson River. During these years of delay, brown outs and blackouts have been fairly frequent in the New York area. The most notable occurred November 9, 1965, when just at the evening rush hour the entire northeastern part of the country was blacked out for twelve or more hours. This is one instance when persons of vision and foresight, attempting to meet an an ticipated rise in demand, have been frustrated by government interfer ence and delays.

1978 ENERGY IN A CHANGING WORLD 539 Interventions Have Unwanted Effects As pointed out, we must re member that no action has just a single consequence. This lesson is amply illustrated by our experience with recent government energy pro grams. Even the best intentioned legislation, whether designed as a piecemeal measure to cope with a special contingency or as a com prehensive program to encompass and coordinate all related activities, is bound to have unwanted results its advocates failed to foresee. For instance, laws to safeguard the environment have required costly anti-pollution devices scrubbers on power plants and catalytic converters on cars-which consume still more fuel, in violation of the goal of energy conservation. Subsidies to encourage consump tion or to support oil prices on the U.S. market tend to attract addi tional imports, in violation of another professed goal, energy inde pendence. If imports are then legally restricted, the consumption of domestically produced oil may rise, hastening the depletion of existing domestic oil fields.

Dismemberment of the big oil firms, as some persons have sug gested, would inevitably increase oil prices to consumers. Smaller firms could not take advantage of the same mass production methods or maintain facilities in other lands where resources may be more read ily accessible, easier to extract and so available to consumers at lower prices. Advocates of this proposal apparently do not realize that busi ness can become big and earn profits in a free market economy only by developing economies of scale and serving many customers better and cheaper than do their competitors. Government officials are ill equipped to plan the development and distribution of any good or ser vice. They cannot be specialists in every field. In proposing to regulate and control the development and distribution of any good or service they are short-sighted. Their vision of the economy is limited by mental blinders. They may recognize that adding a new tax or tariff to the market price of a good or service will prevent consumers from buying as much as before. They may realize that an offer of subsidies to produc ers, or consumers, will spur them to increase production, or consump tion, of the good or service con cerned. But they cannot see the other consequences of such legisla tion, because they cannot know what people will think or do.

They cannot know how producers and consumers will try to adjust to avoid unwanted side effects of the laws. They cannot know j~st how producers and consumers will re spond to higher, or lower, prices. They do not know what is going on 540 THE FREEMAN Septembf}': in the-minds of individuals inventors, entrepreneurs and consumers-who are always looking for ways to do things more easily, cheaply or better. They can never know what innovations may be de veloped that will prove to be the wave of the future. With respect to energy, government legislators and administrators cannot know what new production techniques, new ways to use old fuels, or sources of new fuels will be developed. Energy Production in the Future The provision of energy in the future will depend on the ideas, ac tions and savings of countless indi viduals. Just who will make impor tant contributions no one can know in advance. Therefore, government should refrain from imposing re strictions that might hamper incen tive. Individuals like those who con ceived of the wheel, the harness and the steam engine, should be free to pursue their ideas, use their prop erty as they wish, to save and invest and to try to improve present energy techniques.

Today's methods of energy pro duction were developed by countless men of ideas and vision, each famil iar with some particular aspect. Countless such individuals helped to develop oil in Texas, offshore Louisiana and California, Alaska, the Middle East, the North Sea and elsewhere, as well as to discover the as yet unproven fields in Mexico and off the United States eastern sea board. The ideas, vision and savings of countless persons have made it economic to extract oil from far be neath the seas and coal from depths economist Jevons never dreamed of. Elaborate designs for the de velopment and distribution of energy have been devised. These ideas plus huge accumulations of capital have made· possible the con struction of extremely productive tools and equipment-propellers, furnaces, motors, turbines, batteries transformers, computers, oil drill ing rigs, refineries, long distance pipelines, deepwater platforms, supertankers, offshore oil terminals with buoy moorings and pipelines direct to storage tanks on shore, gigantic power plants, high power transmission lines, and the like.

Now on the drawing boards are po tential schemes for deriving energy from waste, hydrogen, sea water, geothermal plants, satellite solar power stations, and so on. We cannot know just how energy will be de veloped and distributed in the years to come. But we can know that energy production in the future will depend on cooperation between sav ers and men of ideas and vision. Whether the energy of future gen erations comes from the atom, the wind, the sun, the seas, the rivers, the earth, plants or some other still unrecognized resource must be left 1978 ENERGY IN A CHANGING WORLD 541 to those whose ideas and actions pave the way. We cannot expect any one in a legislative assembly and government office to plan success fully for the development of new energy sources or for adapting tools and machines to new fuels. No gov ernment program can provide for the satisfaction of future energy needs as well as individuals will if left to their own devices. If individ uals are free to pursue their own ideas and vision, the energy demands of the future will be taken care of from day to day. Each inventor, saver, investor and entrepreneur will adapt and adjust to changing conditions in the course of daily liv ing and working in the field of his special interests. And if the consum ers of the future are also free to choose, each will decide how much energy to consume, and for what, on the basis of market prices prevailing then and the urgency of his various wants and goals. i -BIBLIOGRAPHYBeckmann, Petr, The Health Hazards of NOT Going Nuclear (Boulder, Colorado: The Golem Press, Box 1342, 1976).

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