It seems like we haven’t learned much of anything as we continue to interfere in various energy markets. This results in inefficiencies and unintended consequences.
The most recent example of this is President Obama’s misguided proposal for a $10.25 per barrel tax on oil. Aside from probably raising the price of gasoline and all goods that require oil in their production, what will this accomplish? Even though the proposal exempts oil exported from the U.S., the tax will harm U.S. producers and our allies who will receive less U.S. oil and will be forced to rely more on Russia and the Middle East.
Oil prices are set in the international marketplace. If the U.S. imposes a $10.25 per barrel tax on oil, U.S. producers will not be able to raise their price to recover the tax. If oil currently sells for $30 per barrel, then U.S. producers will simply receive $20 per barrel because of the tax. This will reduce oil production, perhaps raising the world price of oil a bit, but because U.S. production declines, we will be importing more oil from the Middle East and Venezuela, as will our allies. The only beneficiaries of this policy will be non-U.S. oil producers, certainly not the American public.
This is not the first time interventions in energy markets have had unintended consequences. For example, there are the various clean energy programs, some of which are actually increasing greenhouse gases. Two examples that make this clear.
First, solar and wind power benefit from a production tax credit, which is simply a subsidy based on the amount of electricity produced. Coupled with various state laws that effectively force grid operators to purchase electricity from solar and wind generation whether or not it is needed, greenhouse gases may actually increase. This is because solar and wind power is not always available, but the regulations are forcing always-on, emission-free nuclear power plants to close prematurely, even though they are still capable of generating electricity. As nuclear power is replaced by a mixture of solar and wind power, along with coal, gas, or oil back-up power for when solar and wind power is not available, emissions actually increase rather than decrease due to the “clean energy.”
Second, the push for all-electric vehicles, often backed up with subsidies for their purchase, may actually increase emissions and greenhouse gases. This is because no attention is paid to the source of the electricity used to charge the vehicles. Electric cars would be cleaner than gasoline cars only if all of the electricity they use were generated from clean sources. But this is not the case. If, as an example, the electricity were generated from the average mix of fuel used to generate electricity in the U.S., the electric vehicles are about twice as dirty as gasoline-powered cars, considering both the production of the vehicles and their use.
Market intervention doesn’t stop here, however. The administration wants to suspend coal leasing on public lands, and Hillary Clinton says that, if elected, she will stop all fossil fuel production on public lands. The administration is also considering suspending oil drilling off the Atlantic coast. All of this interference will harm Americans and our allies and may not help the environment.
Of course, we certainly have greenhouse gas and other emissions problems. But we have good examples with air and water environmental regulations that can work through markets to accomplish the desired clean-up at the lowest possible cost. We do not need heavy-handed intervention in the markets.
If we just let energy markets work, we could achieve our emissions targets at less cost, and we could avoid these unintended consequences that ultimately hurt consumers and taxpayers.
Stanford L. Levin is Emeritus Professor of Economics at Southern Illinois University Edwardsville.