The Natural Gas Crisis and the "Free Market"

In 1997, the CATO Institute published a 76 page study attacking government subsidies for renewable energy. The report’s author, Robert L. Bradley, singled out wind power for particularly harsh treatment: not only is it uneconomical, he said, but it kills birds. (The report returns repeatedly to the “avian mortality” problem but never mentions the greenhouse gasses produced by fossil fuels).

What was Bradley’s answer to our ever-increasing energy needs? Natural gas.

“Continual reserve replacement and falling gas prices from the wellhead to the burner tip suggest that natural gas is not a nonrenewable resource in a policy-operative sense . . . In addition to the abundant resource base, there is the question of whether at least some methane [natural gas] deposits are classically depletable. . .This view, however, is secondary to the more important one: improving technology literally creates commercial supply where there was none before, and this process is open-ended.”

Seven years later, natural gas wellhead prices are four to five times what they were in 1997, even as domestic production remains flat, despite the fact that we drilled twice as many wells in 2005 as we did in the mid-90s. Imports from Canada make up most of the difference, even though Canada’s gas supply is now declining. A small amount (2–3%) of gas is liquefied and transported overseas, but unloading it requires specialized ports, of which there are only a few. Experts are now warning that we may have shortages or rolling blackouts in the Northeast this winter if the weather is colder than normal.

So have Bradley and others who shared his views (Daniel Yergin, Michael Lynch, etc.) revised their positions? No. In fact they are making the same arguments now, vis-à-vis oil—namely that the combination of ever-improving technology and market incentives will always trump geology, and that those who argue that peak oil is imminent are naïve doomsayers.

Superficially, the argument that higher prices make the recovery of more oil and gas economically feasible seems to make sense, to a point. But the way that some free marketers talk about supply and demand, one gets the feeling that the discussion has slipped the bounds of economics and moved into the realm of theology. “In 1992 the CEC held a policy debate about fuel diversity,” Bradley writes,

“Supporters of renewable energy lobbied for a fuel diversity penalty on natural gas in the integrated resource planning process to make planned gas-fired capacity additions more expensive relative to renewables. Their rationale was that natural gas had a price risk that renewables, without an energy input cost, did not. In response, the American Gas Association argued that ‘[energy] cost is only one form of risk . . .’ Enron Corp. testified that available long-term, fixed-priced gas contracts, futures hedging, and storage could mitigate or entirely remove price risk.”

If I understand this passage correctly, Bradley (and Enron) are arguing that through complicated financial devices we can transcend the physical world. A person with a more conventional understanding of reality might argue that if production of a resource declines, then someone, somewhere, will have to use less of it. If long-term contracts protect the price of one consumer, then someone else will be hit doubly hard, or there will be shortages. (The irony of quoting Enron in this case will not be lost on anyone).

But while the question of natural gas supply is of paramount importance (especially this winter), even more significant is the unshakable grip of the “free markets” ideology which has helped to create the crisis. That this ideology is based on a fundamentally flawed premise is lost on almost everyone. Both the left and the right generally accept the view that that our society is one in which businesses are primarily successful in spite of, and not because of government. Conservatives argue that there should be less government regulation and subsidy, while liberals say that the “free market” is imperfect, and that the government must intervene from time to time to protect other interests.

But even a cursory glance at the recent history of information technology, media, medicine, energy production, agriculture, land use or urban planning illustrates how deeply embedded and intertwined business and government have been (and continue to be) in shaping our society. There would never have been three television networks had the government not essentially given them the right to use public airways for free; countless drugs would not be available had the NIH not done the basic research to make them possible; the Internet boom would never would have happened without the government inventing the Internet; suburban sprawl as we know it would be impossible without the federally funded and maintained interstate highway system; American food would not be cheaper to buy than it is to produce if it weren’t for massive government subsides. The entire structure of our lives, from where we live, to where we drive (and the fact that we drive), to the nature of our media culture, to what we eat, has been shaped by decisions made by giant corporations in cooperation with local, state and federal governments. In the strictest sense, there is no such thing as a free market—only competing interests and priorities. Until we understand this reality, we will never be able to make the collective choices necessary to secure the future.

When John F. Kennedy announced a plan to put a man on the moon, no one argued that it would be more cost effective for a private company to do it; the space program is seen as beneficial for reasons beyond simplistic calculations of return on investment. Why, then does the question of how to produce energy—surely as important as national missile defense or the space shuttle—deserve no better than to be shunted off into a phoney debate about “market based solutions”?

Comments

[scruss]

Bradley's an advocate of Erich Zimmermann's "Functional Theory of Resources", which seems to state that resources appear if you look for them. History does not record if the young Prof Z. ever looked for fairies at the bottom of his garden.

The Bradley paper seems to selectively quote Paul Gipe. Paul's a good friend of mine, and what he really meant to say is on his website -- http://www.wind-works.org/articles/cm_birdcuisinarts.html

[Lakis]

Thanks for the link to Paul Gipe’s website. I’m very interested in finding out more about wind power. It was, of course, very insidious the way that Bradley quoted him, but then, the whole piece read like a willful distortion of reality to me.

I didn’t realize that Zimmerman was the source of the ever-present ideology of “unlimited finite resources”. When pressed, I’m sure most of his adherents would admit that there is a such thing as a finite resource, but sometimes their language sounds as if they believe that the market literally has supernatural powers. If this is the best argument that peak energy skeptics can give us, then I’m not comforted.