“Energy Choices and Market Decision Making”: A 30-year Retrospective

By Robert Bradley Jr. -- October 31, 2023

In October 1993, I published a pamphlet in Studies in Market-Based Energy Policy (#3) with the above title. On its thirtieth anniversary, I excerpt its major parts. So how does it read today–and compare to other writings of its time that were critical of fossil fuels? I report: you decide.

“From today’s [1993] vantage point, the energy-policy lesson has been half-learned. It is widely known that major command-and-control regulations do not work. The lessons of the 1970s energy crises have not been forgotten, and another energy crisis cannot be expected without price and allocations regulations.”

Executive Summary (pp. 1–2)

This primer on energy choices and market decision making has direct implications for energy policy. If voluntary choices in a free-market setting result in efficient outcomes, many current energy policies based on taxation, subsidies, and regulation can be critically questioned. Such a re-examination is undertaken in this booklet….

Thorough-going free-market reliance remains a viable and unappreciated policy package for the U.S. energy market. The lessons of history strongly support relying on market processes and minimizing government intervention. While none of the present government energy policies or programs–even the frontal assault on domestic oil drilling–will produce another “energy crisis,” they do uniformly restrict supply and thus raise prices for consumers and/or require taxpayer funding. As part of a broad-based economic recovery and deficit-reduction program, a laissez-faire energy policy of deregulation, privatization, tax reduction and repeal, and de-subsidization should be seriously considered.

The Lessons of History (pp. 3–4)

Eight major conclusions can be gleaned from the long and storied U.S. energy experience:

1. The free market has reliably served U.S. energy consumers since inception. Energy choices based on market prices and profit-and-loss entrepreneurship have resulted in improved product quality, increasing supply, and falling prices for over a century. Central-planning episodes during World War I, World War II, and the 1970s energy crisis have proven the opposite point: government energy management distorts the market’s inherent order and creates supply and price problems.
2. From the beginning, crude oil has been more competitive than its synthetic counterpart, coal oil; manufactured gas (coal gas) was eclipsed with the availability of natural gas. Private and government attempts to make synthetic fuels economic have failed.
3. The conventional fuels (oil, gas, and coal) are characteristically and typically in “oversupply.” Transient fossil-fuel shortages were directly related to government regulation rather than market realities.
4. Consumers and the general economy have benefited from “the process of creative destruction” as new energies displaced existing ones. Coal displaced fuel wood as the dominant energy source in the 1750–1800 period. Coal oil and whale oil were replaced by crude oil; manufactured gas was displaced by natural gas. Electricity displaced kerosene illumination, while the later development of the internal combustion engine redirected petroleum to a more urgent use. Change also affected regions. At the turn of the century, the Appalachian area (Pennsylvania, Ohio, New York, West Virginia, and Kentucky) was the center of the U.S. petroleum industry; two decades later the Southwest–Texas and Oklahoma, in particular–claimed this title. Changing technology–often unforeseen–will change energy fortunes in the future as it has in the past. The process of creative destruction continues to run its course.
5. Nonrenewable energies, such as oil and gas, have remained more competitive than politically favored renewable energies, such as solar and wind in electrical generation. While the cost differential has narrowed, it is still significant. The development of wind and solar has been largely the result of government and ratepayer subsidies.
6. Alternative motor fuels to gasoline and diesel are economic only in limited applications and with government favor. The natural gas-vehicle market benefits from a motor-fuel tax exemption and conversion and infrastructure subsidies from utility ratepayers.
7. Mandatory conservation is unwarranted and inefficient compared to market-oriented conservation because of the innate abundance of energy and the technological ability to control emissions from traditionally polluting sources.
8. The cleanest of the fossil fuels, natural gas, has been the most disadvantaged by regulation in decades past, while less environmentally preferred fuels–petroleum, coal, and nuclear energy–have been relatively advantaged. This irony illustrates a major theme of political economy: the unintended effects of government intervention. The Clean Air Act of 1990 and the Energy Policy Act of 1992, however, position natural gas as the politically favored fuel of the 1990s and beyond.

These lessons point toward a more fundamental one: the reliability of decentralized market prices and the dangers of centralized energy management through government agencies and edicts.

Conclusion (pp. 36–37)

From today’s [1993] vantage point, the energy-policy lesson has been half-learned. It is widely known that major command-and-control regulations do not work. The lessons of the 1970s energy crises have not been forgotten, and another energy crisis cannot be expected without price and allocations regulations. But with a multitude of smaller regulations, subsidies, and taxes, the sovereignty of the energy consumer has not been respected.

Imagined market failures have given rise to government micromanagement of the energy choices of individuals. If energy consumers can be recognized as forward-looking and intelligent, activist policies can be rescinded and the supply of energies can rise and its prices fall.

In such a world, there would be no place for a Department of Energy or its state corollaries such as the California Energy Commission….