Markets, not government, must set energy prices

It is fashionable these days for policymakers, particularly those running for office, to somberly suggest that America needs an energy policy—thus implying that America has no energy policy.

As one of the prime architects of an energy policy that has served America well, I could not disagree more. The fact that our collective memory seems on the verge of lapse suggests that we may be about to relearn the painful lessons of the past.

Controls created chaos

Thirty years ago this winter, an antiquated system of price controls on natural gas combined with an extended period of cold weather to prompt the first and only widespread curtailments of natural gas in our history. We watched in disbelief as factories and schools were forced to close because we had no ability to keep them warm.

These price controls, which had no basis in statutory law, but rather had been devised and extended by federal regulators, artificially restricted the price of natural gas in certain markets. Not surprisingly, natural gas found its way to markets where its price was not restricted. Not until Congress intervened and removed the artificial constraints were we able to restore heat to much of America’s heartland.

The following year the Islamic Republic of Iran imposed an oil embargo, and the mightiest nation on earth saw its citizens waiting in long lines for gasoline. The shortfalls from the embargo were exacerbated by a federally imposed regime of price and allocation controls. Those controls, which actually dictated the amount of oil and gasoline available to various regions of the country, created absurd situations. For example, drilling rigs in my home state of Louisiana were unable to continue operations because they lacked a federal allocation of diesel fuel.

Resist temptation to control

In the generation since those dark days, we have had a sound, well-defined energy policy—one that has largely removed the federal government from the business of regulating the price, the transportation, or the allocation of our various energy commodities. We have allowed markets to operate, made those markets transparent, and allowed price signals to flourish. The new assumption has been that the various participants in those markets can better allocate capital, better assess and manage risk, and better supply the energy we need if government gets out of the way. For nearly 30 years, consumers have enjoyed a period of relatively cheap, relatively abundant energy.

But as the words and deeds of so many would indicate, memories are short. Recent events suggest that we may have overlearned the lessons of Enron and may be overreacting to perfectly rational price increases associated with a tightening global market for energy.

Two situations suggest that history’s lessons may be fading. One is Congress’s attempt to criminalize the charging of “unconscionably excessive” prices for gasoline. Another is the Federal Energy Regulatory Commission’s complicated effort to punish the failure to charge a properly “implied price” for natural gas based on a reference to derivatives markets. The first scenario is an ambitious attorney general’s dream; the second is an energy trader’s nightmare. Both introduce new elements of post-facto regulatory risk to markets and can only inhibit the efficient function of markets and efforts to mitigate risk.

More fundamentally, these actions reflect a growing attitude that a fair and workable energy policy can only derive from the active involvement of government—a government that presumably knows better than the market and its sophisticated participants what prices “should” be. With all due respect, I would suggest that such notions are naive and destructive.

The record is replete with well-intended governmental efforts to control the prices paid for energy. The most common thread in these efforts is the degree to which they have distorted markets, created artificial dislocations, and ultimately failed to achieve their goal. If we have learned anything in the past 30 years, it is that regardless of government regulation, energy resources will ultimately find their way to markets where their true value is reflected and rewarded. In a global economy, those markets could well be in other countries.

We stand at the forefront of two of the most daunting issues we have faced as a nation: how to ensure our long-term energy security while rationally addressing the causes and effects of climate change. If we are to confront those issues in a meaningful fashion, I suggest that more than our technology must change; our attitudes must change as well.

Meeting these challenges will require fundamental changes in human behavior. The notion of changing behavior while simultaneously insulating consumers from the economic consequences of their actions is, at best, dubious. The idea that we can attract hundreds of billions of dollars in capital investment for much-needed energy and environmental infrastructure while threatening the private sector’s ability to recover those funds or manage the risks associated with their investment defies reality.

We cannot hope to meet our future energy and environmental needs without harnessing the power of markets. We cannot hope to harness that power if we forget the lessons of the past.

—J. Bennett Johnston is the principal and founder of Johnston & Associates and former chairman of the Senate Energy and Natural Resources Committee.