Murray Weidenbaum
Murray Weidenbaum is the Mallinckrodt Distinguished University Professor of Economics at Washington University in St. Louis, where he also serves as honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.
The future of energy policy in the United States depends on a host of actions to be taken in the years ahead. All of these developments are difficult to forecast. The challenge facing any forecaster is that energy policy is a constantly changing amalgam of economic, political, environmental, military, and foreign policy concerns.
For starters, the underlying world energy situation is neither benign nor stable. A fundamental mismatch exists between the location of energy suppliers -- so much of our oil comes from the most unstable regions of the world -- and the location of major energy consumers. The overall outlook is truly dynamic so that it is necessary to frequently review the key assumptions that underlie current policy.
For example, a substantial rise in the cost of producing energy from conventional sources creates an opportunity to develop new energy sources. Such price increases also strengthen the desire to enhance the efficiency of existing production. Simultaneously, increases in energy prices make more attractive the use of less energy-intensive forms of production and consumption.
However, as we have recently experienced, at times the prevailing prices of energy decline abruptly. This change can pull the ground out from under the developers of new energy sources, which suddenly become uneconomical. Similarly, sharp changes in government environmental policies affect the mix of fuels used to produce energy. Thus, producers of coal continually reassess the likelihood that anti-coal talk will soon be converted to anti-coal action. Investors in coal companies learn about this problem the hard way.
In the short run, the unusual phenomenon of a worldwide recession has reduced the overall demand for energy. At least for a while, the global downturn has brought the price of oil down substantially. However, several conflicting forces are becoming more visible -- notably the continuing prospect that the United States will be importing a rising share of the energy that we consume domestically. Simultaneously, global warming concerns are reducing the long-term prospects for coal, oil, and natural gas as the nation's major energy sources. Nevertheless, the speed with which unconventional types of energy such as wind and solar become widespread is limited by their high cost structures and by a new array of environmental objections.
Thus, over the next decade, fossil fuels likely will continue to dominate the U.S. energy sector. Most of the cars on the road during this period will be gasoline-powered. Renewable energy -- hydroelectricity, wood, biofuels, wind, solar, geothermal, and so on -- now provides much less than one-tenth of the nation's energy. Even optimistic projections show that approximately nine-tenths of energy used in the United States will come from oil, natural gas, and coal over the coming ten years.
Meanwhile, an important long-term development may generate other adverse effects. A new set of "seven sisters" is dominating global energy markets. They are not the traditional American and European companies. ExxonMobil, Shell, and BP account for less than one-fourth of global oil production and barely one-tenth of worldwide oil reserves.
Seven government-owned enterprises are now the major oil suppliers, notably Saudi Aramco, Petro China, and several Russian instrumentalities. The global importance of these companies will be enhanced as reserves of Western oil companies are depleted or cannot be developed because of environmental constraints.
These new "seven sisters" provide their government owners with an opportunity to use energy market power to help achieve a variety of other governmental objectives, especially in foreign policy. However, their advantages may be offset by a variety of public policies unrelated to energy. A key example is the forced diversion of their revenues to other government purposes. Other problems faced by government-owned enterprises include the deferral of needed investment in more modern production facilities in favor of social programs. In addition, expensive government-imposed employment requirements may be imposed for reasons related more to income redistribution than economic efficiency and competitiveness.
Looking beyond the coming decade, the future of American energy companies will be more difficult and surely more challenging than today. Although the details are being debated in the halls of Congress, it is likely that government tax and regulatory policies will increasingly discourage the use of fossil fuels. However, because of the many difficulties involved in generating alternative energy supplies on a large scale and at competitive costs, government policies will continue to be inconsistent in their structure and uneven in their application. Pressures from interest groups will not lessen. In fact, with rising governmental intervention in the energy area, the incentive will rise for the various interest groups involved to increase their participation in public policy debates and decision-making.
New technological advances will be necessary to bring the costs of new energy sources down to a level that would make them economically feasible. However, public support in the abstract can quickly become opposition in specific cases. Consider the effort to harness the wind power of the Cape Cod area. Many of the residents, who otherwise boast of their environmental credentials, vehemently oppose this "unnatural blight" on the beauty of the region. In other areas, opposition to wind projects is based on concern over the birds that may be hit by the blades. In the case of solar power, and other new energy sources, the lack of a distribution network is a limiting factor where producers of energy are distant from major consumers.
How all this works out over the years ahead will depend on a host of decisions by government policymakers and private decision-makers. The outcome is, by its very nature, uncertain. However, managers of companies that produce and distribute energy will continually face the challenge of adjusting their plans and resources to unanticipated changes in markets and government policy.
On balance, the long-term price of energy consumed in the United States is likely to rise, although at a fluctuating rate. As a counterweight, the American economy will continue operating at a declining level of energy intensity, as it has since responding to the energy embargoes of the 1970s. Thus, forecasting future trends in energy will surely be a hazardous occupation, but not one covered by government safety regulations. *
"I want an American character, that the powers of Europe may be convinced we act for ourselves and not for others; this, in my judgment, is the only way to be respected abroad and happy at home." --George Washington
