The Utopian Dream of Energy Subsidies

In a recent PolicyMic article, I explained how higher gasoline prices affect our decisions, which may include whether to go to our favorite pub, take a summer vacation, or where to take our significant other out on a date.

To stabilize energy prices, federal subsidies (i.e. corn ethanol) have been considered the answer to our energy needs. The latest report by the U.S. Energy Information Administration confirms the government’s belief that energy subsidies are a solution, as these subsidies have doubled over the last decade to $16.6 billion in 2007. Will this policy work, or is this just a utopian dream that may create even more problems?

While one may consider oil to be a waning energy source and believe that it should not be a part of an efficient energy sector in the future, this view is far-fetched and underestimates the amount of demand for oil products across the country. Compared to the energy-specific products from oil, no other energy source can provide these products more efficiently. Additionally, the infrastructure across the country will have to change dramatically before a reliable alternative is readily available. Hence, expansion of oil and gasoline production must be a part of the solution to stabilizing energy prices.

Although subsidizing various energy sources may help to keep many inefficient energy sources profitable for firms to produce and artificially hold down prices paid by consumers, President Obama has also considered “green energy” to be a path of job growth in the future, as $40 billion of the 2009 Recovery Act was allocated to energy related innovations.    

A recent debate between two PolicyMic writers pointed out several costs and benefits of subsidies. Before this debate should be discussed, we should consider why the federal government should be involved in the energy sector. One argument is due to market failure.

A Cato Institute article counters this reasoning for government involvement explaining: “But even if there were market failures, that would be only a necessary condition for intervention, not a sufficient condition. One must further demonstrate that the government is actually capable of remedying market failures and that intervention would produce more benefits than costs.” 

Another reason for government intervention is the fact that the U.S. imports 51 percent of petroleum products from other countries, such as Canada (23.3 percent), Venezuela (10.7 percent), Saudi Arabia (10.4 percent), and Mexico (9.2 percent) (data in parentheses are percentages of all imported petroleum products). Therefore, there is a utopian view that subsidizing renewable sources of energy will reduce our dependence on foreign sources of oil without increasing oil production domestically.

Each president since Nixon has chosen rhetoric on reducing our dependence on foreign sources of oil over results. President Obama recently outlined an energy plan that continues the failed subsidy plans of the past. Although he did refer to diversifying our basket of energy sources, which would be a step in the right direction, there continues to be too much focus on green energy sources.

We must demand that our leaders stop making the same mistakes of the past over and over again and expect a different result, which is one definition of insanity. These mistakes include putting all of our eggs in one basket. Having a diversified portfolio of energy sources would lead to a more stable and efficient energy sector. For example, as oil prices rise we could use another energy source, and as this other energy source price rises, we could go back to oil. Substitutes would allow us to have more opportunities for competition between various energy sources.

Subsidies are not free and they tend to distort markets. Specifically, the funds for subsidies must come from somewhere, and it is from you, the taxpayer. Green energy, however defined, advocates typically dislike that oil companies are subsidized, but like it when green energy sources are. This is hypocritical and allows politicians to pick winners and losers, defeating the purpose of a market.

I propose that all subsidies should stop! Congress should reform the tax code to provide more efficient allocations of resources throughout the energy sector. A great start appears to be brewing in the House by Congressman Ryan’s Path to Prosperity.

The more we subsidize energy sources, the less chance we will have to achieve energy independence and find the next revolutionary innovation. As Austrian Economist Ludwig Von Mises once said, "Markets work best, why mess with anything else!" While higher energy prices may cause us to have problems paying our bills and change our consumption patterns, the utopian dream of subsidizing energy sources to stabilize these prices is making the situation worse.

Photo Credit: Wikimedia Commons

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Vance Ginn

Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin, Texas. He can be reached at vginn@texaspolicy.com. Vance has been a PolicyMic contributor since 2011 and has university teaching and public policy experience. Fun fact: Vance is a drummer and once played in a top-rated rock band in Houston, TX.

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