'Crony Capitalism and Energy Policy' Lecture at the U. of Rochester

By Michael Rizzo -- April 11, 2012

[Editor note: This introduction was given on March 28 at the University of Rochester where Dr. Rizzo is assistant professor of economics. An increasing number of colleges and universities are becoming ‘freedom friendly,’ creating opportunities for free-market guest speakers such as Robert Bradley on energy.]

Welcome to Liberty Week at the University of Rochester hosted by the Alexander Hamilton Institute for the Study of Western Civilization. We want to again thank the College Democrats for co-sponsoring the opening event with Robert McNamara of the Institute for Justice. His sobering and inspiring presentation was on the fight to protect the right to freely choose to enter into occupations and consume from businesses of their choosing, to pursue their own destinies, in the face of overreaching by governments and interest groups.

Tonight, we focus on the forces operating the other side of this coin – the businesses and governments who cozy up in bed to benefit themselves at the expense of all Americans. We are pleased  to have Robert L. Bradley Jr., founder and CEO of the Institute for Energy Research to talk to us about how this process works, with a particular focus on how this operates in the energy sector.

We’d like to thank the College Republicans for co-sponsoring our event this evening.

Institute for Energy Research

Rob Bradley joins us from the Houston office of the Institute for Energy Research. IER is a scholarly non-profit that studies the economics and politics of energy markets from Houston and its main office in Washington, D.C.

The scholars (profiles here) who write/research for IER are accomplished and prolific economists, lawyers, mathematicians and policy experts from a wide variety of backgrounds, including Mary Hutzler a former head of the U.S. Energy Information Agency; Andrew Morriss, a lawyer and economist who has written widely on Common Law and the Environment, Green Jobs programs, and the history of property rights; and Robert Murphy– financial consultant and one of the leading purveyors of basic economic knowledge in America today. The full-time staff of the Institute has extensive experience in a variety of positions on Capitol Hill.

Check out IER’s website, where you will find neat short summaries of almost all possible forms of energy supply and see infographics and links to the work from their scholars.

For example, you’ll learn such facts as:

• 1.4 billion people in the world do not have access to electricity;
• The Central Arctic Caribou Herd habitat includes the Prudhoe Bay oilfields. This herd’s numbers have increased from 5,000 in 1977, when oil production began, to 31,000 in 2002 to approximately 67,000 in 2009 based on the Alaska Fish and Game’s most recent census.
• In 2003, Central Arctic Caribou Herd’s population of 31,000 was highest population level ever recorded and the population has more than doubled since then.
• The Outer Continental Shelf owned by the American taxpayers is approximately 1.7 billion acres in area, or over 70% the size of the entire land mass of the USA

The organization itself has studied and shown how markets, property rights and the rule of law have combined to deliver energy today that has contributed dramatically to our standards of living and improving environment.

Like the Institute for Justice, the Institute for Energy Research casts a realistic eye toward interventions in markets in the name of market failure: appreciating the public choice insight that bureaucrats and politicians each also subject to the pull and push of incentives and that interventions themselves are subject to the forces that cause markets to work less well than advertised.

IER does not suggest that government have no role in an economy: rather their work focuses on the idea that government policies be in accordance with the rule of law: that they are predictable, simple and do not favor any particular group/technology/standard. This is the only way to be fair, and to spur entrepreneurial dynamics to improve the well-being of all of us in America.

Good Energy vs. Crony Capitalists

While Dr. Bradley is going to be talking to us about how political capitalism can easily morph into causes that are antithetical to the general interest – and the ugly battle between capitalISTS and capitalISM, I wanted to offer up a quick word on the message that gets lost amidst the rhetoric of the cronies and broadly in the discussion of energy policy for the 21^st century.

And that is simply that energy is good. It is good in a physical sense – the motive force that keeps us alive. It is good in an economic sense – that the relationship between accessing energy and human flourishing is strongly positive. And I will go so far as to say that it is good in a very moral sense – that it frees humanity from its primitive shackles, enables us to spend more time with one another, and to peacefully engage with one another rather than battling with one another, and is what makes it possible for us to dream of a better future, an adventurous future, a more abundant future.

But that is not the real message we are getting from many fronts today. The reason to have clean, renewable, abundant energy is not, as many would like to believe, to save the planet.

Heresy!

The reason to have clean, renewable, abundant energy is to get really, really, really, really inexpensive energy.

In my view it is totally astounding that this is not the focus of the “energy problem.” Instead, every environmental and energy concern is being used to put the brakes on global commerce.

I used to not believe this myself.

Just think hard about all of the rising opposition to the new clean energy sources that are coming on line. People are going nuts against hydro-fracked natural gas despite the fact that it can replace “dirty” coal and is necessary as a power source to go along with wind technology (and its incredible abundance). People are aghast that wind turbines kill animals, make noise, spoil views. Even though nuclear could power over 40% of our economy in a virtually emissionless manner (building and maintaining the plant would produce some, disposal is an issue of course, but a small one) people are opposed to that. Clean coal is condemned because evil coal companies would benefit from that being cost effective technology. Now opposition is arising to solar panels in the desert because of the water requirements for cleaning and the endangerment of habitat of protected species.

In some sense, we should all want a “Manhattan Project” for new energy development – just without the government picking winners along the way. And the reason is that despite being less than 5% of our GDP, energy is incredibly vital. Pause for a minute to reflect on what would be possible if energy were so abundant that you could consider it “free?” People would be able to live comfortably on virtually any corner of the globe. Inexpensive energy would have us able to create huge amounts of new useful land. If energy were abundant, the costs of desalinating water would fall considerably (they are already remarkably low) — meaning that deserts and other places without access to clean water could soon be home to people and farms.

If energy were inexpensive, we would, ironically, have the energy to access new energy. For example, the core of the Earth is a monstrously vast source of heat. Our challenge in getting it is technological and energy based. Finally, inexpensive energy would virtually put an end to any concerns anyone would rightly have over resources. The oceans themselves are a vast store of natural resources, and if energy costs were low enough, a plethora of goodies would be mined from the sea.

Even though I have supported (at times) the idea of a carbon tax, it is only with the intent of affecting the relative price of carbon. The point of a carbon tax is NOT to make energy as a broad class of goods to be more expensive. Having energy become more expensive would spell an enormous amount of suffering and misery for many hundreds of millions of people. The point of a carbon tax today, is, perhaps, to get us to a point where non-carbon intensive energy is even cheaper, so that the carbon tax need not be binding in the future.

Is this what folks have in mind when they salivate over making gasoline $10 per gallon? The reason, I repeat, for $10 gas is to spur innovation so that whatever new fuel we use to move our cars around ends up being the equivalent of $1.00 gas or $0.50 gas or even $0.10 gas. Now, that would be incredible and a reason to celebrate. Of course, I see no reason why we need to have $10 gas to actually get that innovation, maybe we need the opposite!

Thinking Back: Gesner and Rockefeller

Abraham Gesner’s New York Kerosene company began to make kerosene in 1856 for the purposes of illumination. When it brought that product to market, it did not advertise itself as, “having the potential to save the whales,” though indeed that was its effect.

When it did the research on this fuel, it was not the result of the diktat of some all-knowing energy czar in Albany or Washington, DC, despite the fact that the prices of whale oil for illumination had been increasing at “alarming” rates for some time. What is most remarkable is the way that Gesner advertised his wonder product. He ran pieces demonstrating that his kerosene was one-seventh the price of sperm whale oil. Indeed it was.

And for all the pomp and circumstance surrounding the new green energy economy, we never hear a single peep about radical changes like this. Stop and think for a minute – how would your life change if the cost of using energy fell by a factor of seven! For example, in the winter our home energy bill runs about $300 per month, and something like $150 the rest of the year.

For argument’s sake, call it $250 per month. So we spend $3,000 per year on electricity and gas for our home. And we probably spend about $4,000 per year to fuel up our two cars. And this is leaving out the embedded cost of energy in many of the other things we consume. We spend at least $7,000 each year on energy and related costs – well over 10% of our disposable income. What would a decrease in prices by a factor of 7 mean to us?

Well, it would mean that instead of spending $7,000 per year on energy, we’d only have to spend $1,000 per year. We’d have $6,000 per year, every year, of extra income that we did not have before. That gets one of our kids through the school that we have chosen for them. We sure as heck know what we would do if we had $6,000 of extra income, and it would be great … if only … if only.

Cost Cutting: More, Please

Reflect for a moment on the way that “cost-cutters” are treated in today’s world. It’s 100% contempt 100% of the time. Walmart is the king of recognizing efficiencies in its supply chain and it is the symbol of everything that is wrong with the world. Forget for the time being that its existence reduces the cost of goods by something on the order of $2,000 per year each year for the poorest families in America.

Or think of how we caricature Henry Ford’s ruthless cost saving or Andrew Carnegie’s miserly cost consciousness (did’t he famously sweep up iron and steel filings off the factory floor each day and put them back into his production process?) or consider that Rockefeller and his evil oil company figured out that there are over 200 products that can be generated from a barrel of oil. 200! And all of that came about because each and every one of these “evil” people cared very much about lowering costs.

What the modern energy and environmental movement desperately needs is “Windmart.” We need a renewable energy madman, whose sole goal is to deliver us energy for 10 times lower the cost as we are currently getting it today. We need a madman who refuses to see a single cent of effort or materials wasted in an effort to deliver the next form of energy to us. But we aren’t likely to see this guy anytime soon.

Gone Galt?

Why? Perhaps it’s because he’s got a life support/safety net in the form of loan guarantees, bailouts, grants, feed-in tariffs, usage mandates and more, he doesn’t have the fire of innovation beneath him.

Perhaps he’s ‘Gone Galt’. Why? Because the ruthless cost-cutter is seen as the devil, as everything that is wrong with our semi-capitalist world and few people recognize that the switch to Wind power or flower power or whatever power is coming next just ain’t gonna happen by diktat – it’s gonna happen when we get a breakthrough so incredible that it blows the cost doors off of our current options.

We should be ashamed. We really should be. We are fed a constant drone of platitudes about shared sacrifice and about how we simply cannot continue living like we are today without wrecking the planet. We are fed time and time again the sorry and tired idea that we need to spend more for energy and less for everything else.

That’s the new American way. We’ve devolved from a world of Horatio Alger-like ambition to Chicago Cubs fan’s losing resignation. If I were the “mouthpiece” of the new Energy and Environmental movement, I would be spending all of my time ginning up excitement at the prospect of energy that is a factor-of-seven cheaper than what we use today. That makes all of us richer, particularly the poor. That makes all of our environments cleaner, particularly the poor and particularly in developing parts of the world.

Is it easy? No. Am I predicting that it will happen? Of course not. But no one in the past was able to predict energy transitions and few could have imagined that energy technologies would become so inexpensive as to utterly change the world in ways we could never envision.

Entrepreneurship: Real vs. Political

Cheap and safe electric power was a game changer over using charcoal, coal and wood. I sure hope that someone like Sam Walton is lurking in the green energy sector obsessing about ways to make those turbines last a little bit longer, use a little less material, and so on. You know, the American way. Conservation driven by prudence and sensibility. Entrepreneurship driven in an environment of secure property and respect for success.

The political capitalists have promised time and again that they would do it, perhaps leveraging/bootlegging the (Baptist) rhetoric and sentiment of those who portend a bleak energy future. Most famously, perhaps, was Enron’s incredible announcement back in 1994 that it could deliver solar power for 5.5 cents per kilowatt hour, which would make it as cheap as the cheapest conventional power sources today.

Needless to say, Enron never got the facility in Nevada off the ground. Despite that, the tax credits, cash grants and loan guarantees continue unabated, and 20 years later we seem to be shocked that

• Solyndra ran through a half-billion faster than a Facebook discussion devolves
• BP exits the solar industry entirely even after promoting its “Beyond Petroleum” image
• Germany, perhaps the world’s largest supporter of solar with $130 billion in subsidies over a decade (amounting to spending $1,000 per ton of CO2 reduced) retrenches as their investments have not replaced traditional power plants
• We stand aghast as solar prices are anywhere from double to quadruple prices from standard sources.

And this is why tonight’s topic is so very important. The forces that Dr. Bradley will be examining tonight threaten the bright future that all of us imagined when we were little, and for which sometime between the age of 12 and 20 had sucked out of us.

Our Speaker

Rob Bradley has led a distinguished career including a long stint at Enron where he worked as a speechwriter for Ken Lay. The third book in his Trilogy on Political Capitalism will focus on the tragedy that was Enron’s fraudulent activities and fraudulent commitment to “Green” Energy. He’s written many other books, including two of my favorites, Energy: The Master Resource and Julian Simon and the Triumph of Energy Sustainability.

I’ll have Rob tell you more about himself in the Q&A period and in the time after the talk. He’s held a variety of academic and public policy positions and he blogs regularly at MasterResource. And like our previous speakers has dedicated to living his professional life toward making the world a better place, and doing it with class and in a principled and consistent way, even when there could have been easier and more remunerative things to do.

Remembering Two Giants

Before turning it over to Rob, I’d point out that he wrote his PhD dissertation under the supervision of “Mr. Libertarian” (as he was known in his era) Murray Rothbard.

In this vein, I’d be remiss if I did not remind the audience that F. A. Hayek, who in many ways is the reason we are here tonight, died 20 years ago this week. And among the most germane insights he had to the relevance of tonight’s talk comes from the epilogue to his classic, The Constitution of Liberty.

In his discussion of “Why I Am Not a Conservative,” Hayek says:

 

[Classical liberalism] has never been a backward-looking doctrine. There has never been a time when liberal ideals were fully realized and when liberalism did not look forward to further improvement of institutions. Liberalism is not averse to evolution and change; and where spontaneous change has been smothered by government control, it wants a great deal of change of policy. So far as much of current governmental action is concerned, there is in the present world very little reason for the liberal to wish to preserve things as they are.

Thanks for your patience, and enjoy the talk and discussion.