Heated Debates Over Energy IssuesPublished: May 23, 2001 in Knowledge@Wharton
Little doubt exists among the knowledgeable on all sides of the issue that an energy-supply crisis looms in the United States that needs to be addressed. But there is clearly vehement disagreement on whether the latest proposals by the Bush Administration are economically, environmentally and politically sound steps to solve the problem in the long term.
"The plan that is being trotted out is multi-faceted, but the key thing is that it is market-supply-oriented," says Hendrik Bessembinder, professor of finance at Emory University’s Goizueta Business School. "It is important that demand come into play, too."
In general, the report from the President’s National Energy Policy Development Group issued on May 17 calls for more power-generating plants, more drilling for oil and natural gas even in federally-owned and environmentally-sensitive land, fewer regulations for exploration and refining fuels and a longer-term look at developing alternative power sources, though primarily directed at nuclear energy.
The Development Group’s report had little to say about conservation or decreasing demand for energy, what to do if and when fossil fuels run low or how to foster the search for those alternative energy sources like wind, solar and hydroelectric power. This disturbs environmentalists and doesn’t exactly please economists, say experts at Emory and the Wharton School.
"What I do think is that this energy plan favors certain business interests over others," says Julie Mayfield, director of the Turner Environmental Law Clinic at Emory. "Bush is not just pro-business; he is pro-some businesses. What I mean by that is there are alternative sources of power - fuel cells, wind power, solar power – that at this point are relatively inexpensive and environmentally friendly. "But he is not interested in developing these industries because it would come at the expense of the businesses that he is closest to - the oil and fossil fuel businesses," she says.
"What is troubling is how incredibly short-sighted that is in terms of long-term sustainable energy sources and the environment," says Mayfield. "Bush wants to open up national forests and national parks and national monuments to drilling, but to think that the survival of this country depends on the natural gas or oil that is on that small amount of property is ridiculous. Further, once you go into these areas, they are gone. You don’t get the Arctic National Wildlife Refuge back once you go there."
Bessembinder agrees, but he couches his argument more in economic terms. "There are certainly long-run effects on the economy here," he says. "The economy can’t continue to grow without a healthy energy supply. It is safe to say that we need in the long run to have additional sources of energy supply to maintain economic growth." Bessembinder believes that new energy policy or not, the markets will decide when and whether these new energy sources will be tapped.
"We are likely to continue relying on fossil fuels because they are cheaper now," he notes. "As they become scarce, alternative energy sources will make more and more sense. The problem, given current technology, is that it is difficult to have alternative energy sources in most areas competing because they are not yet cost-effective."
That the Bush Administration report doesn’t do enough to encourage new technologies may be a mistake. Those technologies, Bessembinder says, may be the key to that healthy energy supply and, thus, the long-term economic growth of the country and the world. "That’s a wild card here," he says. "If we had a sudden technology shift, some new and inexpensive way to unlock these alternative energy sources, one that would lower prices for everyone, then the energy policy would change without any pronouncements like this."
While Emory economics professor Paul H. Rubin likes the new Bush Administration proposals, he is worried about the roadblocks the administration’s opponents may put up. "I’m all for environmentally friendly policies," he says. "But nuclear energy may be the most environmentally friendly source of energy we have. It is essentially non-polluting. You have to make safety provisions for waste, but there are no effects on the air, water and greenhouse problems. The opposition to it seems to be more emotional than rational, but it is real. You don’t want the costs of power to be greater than the benefits, but we could certainly be producing more than we are now and benefit all in the economy."
Witold Henisz, a professor at the Wharton School of the University of Pennsylvania who studies utility regulation and investment, says that the new Bush proposals seem more politically and not economically driven. "There was plenty of supply already being built, especially in California. In two or three years, there will be quite enough there," says Henisz. "But the prices were spiking so high in California, there seemed to be a need to do something political.
"The problem is that if it gets politicized and people get riled against the policies, then maybe some of these plants will be put on hold or companies will declare bankruptcy. Then it will be a real economic problem," he says. "So I don’t think this will be seen as a credible solution in the short term. And if it does get politicized, then it may confound some of the long-term market solutions already in place."
Ironically, both environmentalists and economists see the Bush Administration, which has supported market-based solutions to problems such as this, as going against its natural ideals to the detriment of the long-term.
"Economists always say, ‘Show me a shortage and I will show you a price control’," says Bessembinder. "As consumers we all want lower prices. As an economist, I can see that if there is a supply shortage, there will be either brownouts or higher prices. Then there will be more supply brought on line. It’s that simple.
"But it is true that electricity cannot be stockpiled like shoes or cars or some other staple," he says. "There are physical limits on the ability to generate and transmit electricity. There really is a need for a way to make the grid better, and that would be a good economic focus."
Mayfield points out that market forces have helped energy efficiency in recent years. "Ford and GM have been battling to see which is the greenest car company," she says. "These companies and others, some even in the oil business who have been improving fuels before they are required to, have been picking up on this sentiment in the country and making money doing it. Bush is going in the opposite direction.
"There is no reason you couldn’t focus on conservation while at the same time trying to figure out how to make more energy," she adds. "We are seeing it in water. Georgia is in the fourth year of a drought, and we are constantly reminded about ways to save water. This should be a part of the economics of energy, too."
In the end, though, more long-term thought and negotiation with all constituencies will be the key to economic and social benefit in energy policy, notes Bessembinder. "There are questions here about fundamental social values and no one person can dictate what high priorities have to be followed," he says. "If we don’t find additional sources of energy, it will impact economic growth. But we might decide that is worthwhile because we protect wildlife refuges and other things. So short of that technological breakthrough, the country’s energy policy in the foreseeable future will be a matter of balancing these competing interests."