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Jewish World Review June 12, 2001 / 22 Sivan, 5761

Jeff Jacoby

Jeff Jacoby
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Consumer Reports

What energy crisis? -- I HAD this column all figured out.

"Good news," I was going to begin. "Gasoline prices are up. And why is that good news? Because it means more gasoline is on the way -- and more gas means cheaper gas."

I intended to explain that prices were high because supplies of fuel were tight. But those higher prices, I was going to predict, would spur energy companies to increase production, build up inventory, and resupply dealers as quickly as possible. And as increased supplies flowed into the market, prices would begin to fall. In truth this is nothing but the law of supply and demand, but I would have looked wonderfully prescient when pump prices started coming down after my column appeared.

Unfortunately for my chance to pose as a seer, the free market beat me to the punch.

"Gasoline prices took a blow, falling to a three-month low as supplies rose amid record production," The Wall Street Journal reported in its commodities column the other day. "Increasing supplies, combined with easing demand in the latest inventory reports, prompted heavy selling that sent prices down 2.5 cents ... Increases in gasoline supplies have thrown cold water on prices ... and retail prices are edging lower -- to a national average of $1.69 a gallon yesterday from $1.71 last week."

Reduced supply (or high demand) leads to high prices. High prices lead to increased supply. Increased supply leads to lower prices. This interplay of supply, demand, and price is as old as human commerce; even the Bible speaks of it. After the Arameans abandon their siege of Samaria, so much food floods into the city that "a measure of fine flour was sold for a shekel, and two measures of barley for a shekel." (See II Kings 7 for the details.)

When the price of gasoline -- or heating oil or natural gas or electricity -- goes up, it is not evidence of a "crisis" or proof that consumers are being "gouged" or a reason to schedule congressional hearings or to fret that we are "running out of" a natural resource. It is simply the market signaling producers that there is money to be made by boosting supply. Invariably, the supply gets boosted and prices retreat. So why must so many pundits and politicians act as if a run-up in price is the first bitter taste of some looming catastrophe?

"If we fail to act, this great country could face a darker future, a future that is, unfortunately, being previewed in rising prices at the gas pump and rolling blackouts in the great state of California," intoned President Bush in unveiling his "comprehensive," 100-part energy plan last month. "If we fail to act on this plan, energy prices will continue to rise.... If we fail to act, Americans will face more and more widespread blackouts. If we fail to act, our country will become more reliant on foreign crude oil, putting our national energy security into the hands of foreign nations.... America cannot allow that to be our future."

It is true that California is in the midst of an energy horror-show at the moment. (A horror-show, let us note, that was caused by (1) a hostile regulatory climate that for 10 years has blocked any new power plants from being built in the nation's most populous state and (2) a bizarre California law that allowed the government to impose retail price controls on electricity, forced companies to sell their power plants, and banned them from making long-term contracts to buy power.) But the rest of Bush's scare-talk is empty hyperbole.

"A darker future?" "Widespread blackouts?" In fact, the future's so bright, we'll have to wear shades. As Jerry Taylor, director of natural-resource studies at the Cato Institute, points out, Americans are "in the midst of a power plant construction boom, with some 90,000 megawatts of new electri[DI]city capacity scheduled to come on line by 2002 and a staggering 150,000-200,000 megawatts by 2004." We'll likely end up with an electricity glut -- which will lead to lower prices. Meanwhile, the price of natural gas is plummeting on the futures market, and gasoline, as The Wall Street Journal noted, is already getting cheaper.

And to think it's all happening without any government plan at all.

The United States does not need a massive federal strategy to guide and regulate its creation of energy. It doesn't need government subsidies for alternative fuels, it doesn't need price caps, it doesn't need new taxes on SUVs, it doesn't need mandatory conservation. All it needs is economic liberty. Entrepreneurs, self-interested consumers, and the free market will take care of the rest.

For as far back as modern record-keeping goes, the supply of energy has tended to climb and the cost of energy has tended to fall. For just as long, there have been warnings of coming scarcity. Between 1866 and 1975, 10 federal studies predicted impending shortages of oil. In 1971, the Club of Rome -- widely hailed at the time for its manifesto, "The Limits to Growth" -- insisted the price of oil would hit $100 a barrel. It stands today at about $27.

Relative to wages, coal, oil, and electricity cost a fraction of what they did in 1900. In real dollars, gasoline prices have been falling since the 1920s. We live in an age of cheap and plentiful energy, cheaper and more plentiful than our grandparents could have dreamed. It will be even more abundant and more affordable for our grandchildren -- if only we let the market do its job.

Jeff Jacoby is a Boston Globe columnist. Comment by clicking here.

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