In a recent speech at the Brookings Institution, Senator Richard Lugar (R-IN) bashed what he called “a laissez-faire energy policy that relies on market evolution.” Under such a policy, he says, “life in America is going to be much more difficult in the coming decades.” He insists that “[w]hat is needed is an urgent national campaign led by a succession of presidents and Congresses who will ensure that American ingenuity and resources are fully committed to this problem.” Government action to spur development of alternative technologies is essential, he contends, because
by the time a sustained energy crisis fully motivates the market, we are likely to be well past the point where we can save ourselves. Our motivation will come too late, and the resulting investment will come too slowly, to prevent the severe economic and security consequences of our oil dependence. This is the very essence of a problem requiring government action.
NYT columnist Thomas Friedman concurs, praising Sen. Lugar’s “new grip on reality.” I dissent.
The profit motive is an amazing thing. It drives innovators to develop marvelous new technologies. And, because the early bird catches the worm, entrepreneurs are constantly on the lookout for opportunities to market those technologies. Lazy business people who don’t plan ahead–who fail to have new technologies ready when they can be profitably marketed–don’t succeed. Diligent entrepreneurs make gazillions. If Sen. Lugar really believes that market actors will sit on their hands and fail to pursue innovation until a full-on energy crisis develops, he’s losing it. If he thinks the government will outperform private actors at selecting appropriate alternative technologies, he’s on glue.
Somewhat ironically, while Thomas Friedman was praising Sen. Lugar in the Times, the W$J was reporting on Shell’s $400M purchase of extraction rights in Canada’s oil sand fields. Oil sands contain substantial quantities of oil that is significantly more difficult to extract than the oil in conventional reserves. Oil companies have known about Canada’s vast oil sand reserves for quite some time, but they’ve not bothered to develop the reserves because it hasn’t been profitable to do so. Well guess what — market forces are changing that. As the Journal reports, “amid today’s superhigh oil prices and fewer prospects elsewhere for big oil companies, Canada’s oil sands have attracted significant new investments.” So have non-petroleum sources of energy. (See “Alternative Fuels Attracting Venture Capital.”)
I seriously doubt that Sen. Lugar genuinely believes that the market won’t be motivated to produce alternative sources of energy until we are “well past the point where we can save ourselves.” More likely, he’s disparaging the market because he represents a corn-producing state that stands to benefit substantially from his (and Illinois Senator Obama’s) plan to “replace hydrocarbons with carbohydrates.” It’s disheartening to see a respected Republican senator bash markets for political gain.
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I agree with you that this is how things should work, and probably how they do work. The only argument I can see for Lugar is the spectre of pharmaceutical regulation. If private sector R&D in big pharma is effectively destroyed by sufficiently broad compulsory licencing regimes and such, R&D for all public “necessities” is threatened. Were I in Shell’s shoes, the potential that my the law in 20 years time might wipe out any profits from any 20 year & $5 billion project might be a significant disincentive to start spending.
To Lugar’s credit, he seems to be against compulsory licencing. I’m tempted to try to find a better justification for his words, since he’s pretty sound on trade. He’s introduced bills to make it tougher to engage in trade wars. Cato’s “rating the 108th congress” reckons that he’s even great on subsidies, despite coming from an agricultural state. I really don’t see him as a populist in these matters, so it all seems a little odd.
Perhaps the answer is that he believes that the government, combined with the private sector, can produce great stuff. If the government incentivises research into an Iowa Corn based future, perhaps that will be the research that is done and the future will be a pleasant yellowy-brown. I still wouldn’t be a fan of the policy, but it seems to me like a subsidy for R&D might not be as horrible a thing as the post makes it sound. There’s worse pork out there.
As part of the state agency that regulates Missouri utilities, I must wholeheartedly agree with your analysis (surprise). Market solutions will drive change much more quickly than government intervention. The drive to make a return on your investors money cannot be discounted so quickly by politicians and governments. This is true in the energy markets, but it is even more true in the telecommunications markets. With innovative wireless phones, and IP VoIP)and digital telephony providing more and more competition, wireline companies are being forced to reinvent themselves. It would be nice if the FCC and the 96 Telco Act would get out of the way and let the competition flourish.