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Energetic America

The energy policy the U.S. needs.

Sep 29, 2003, Vol. 9, No. 03 • By LEWIS E. LEHRMAN
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IF THE TWIN SCOURGES of mankind are sin and ignorance, America's energy problems, according to the political and environmental left, are caused by our sins against nature. In this view, the problem goes all the way up to the Oval Office, which is supposed to be living in sin with the energy industry. If the left is correct, America's energy situation must be hopeless. Federal policy, no matter what it is, cannot be counted on to transform fallen human nature.

On the other hand, there are grounds for hope if one believes that the biggest obstacle to sensible energy policy is not sin but ignorance. Missing from the media energy debate are plain answers to the basic questions: How much energy do Americans use? What kind is it, and what does it cost? Where does it come from? When we know the answers to these questions, we can frame a sensible energy policy--which basically amounts to answering the same questions, but replacing is and does with should. Then it becomes clear that the most basic issue is not a technical one. Rather, the American people face fundamental choices about energy, on the supply side and the demand side, which will decide the way they will live their daily lives for generations to come. Such questions should not be decided by energy technicians.

1. How much energy do we use? We can get an idea of how much energy we use, and why, by comparing the total energy used by the United States since 1950 (detailed statistics start in 1949) with other related economic variables: particularly the total size of the economy, the number of workers, and the average cost of fuel in "real" or inflation-adjusted terms (see chart).

The comparison is revealing in a number of ways. First, the sustained economic growth in the 1950s and 1960s was accompanied by stable or declining prices for energy. This period of large American families and generally one household breadwinner was still an era of rising prosperity. It is my argument that these facts, among others, covering a time when the United States was the world's leading oil-producing country, were, to an important extent, the result of careful and responsible design by policymakers--and that cheap energy should once again be a key goal of economic policy. Along with proper tax, budget, regulatory, and monetary policy, a cheap energy policy will lead to sustained, rapid, long-term economic and employment growth.

The same comparison of energy use and other key economic factors shows that after 1970--when OPEC seized and held oil market power--four recessions were triggered by a sharp rise in energy prices. OPEC had temporarily succeeded in colluding to restrict the oil supply. Such collusion would be illegal in any U.S. industry. Thus, if we desire rapid growth and full employment, our policy goal, unlike OPEC's, must be low, steady real prices of energy.

Second, the comparison also reveals an interesting but overlooked fact about Americans' use of energy: For the last 20 years, total U.S. energy use has paralleled the growth of U.S. employment. This contradicts conventional wisdom in two ways. On the one hand, it is conventional to speak in terms of energy use per capita, meaning averaged over the whole population. And of course over the very long run, energy use and population should broadly move together. But over shorter periods, especially when the age structure of the population is changing, energy use clearly tracks growth in employment much more closely than population. Workers need to commute to work, for example, but many outside the labor force, like children and retirees, don't. Thus, growing the supply of energy slightly in excess of demand contributes to full employment policies.

On the other hand, most economists, including many in the Department of Energy, still extrapolate heavily from the experience before 1980, assuming that the demand for energy automatically increases with real GDP. They look at it this way: Over the whole period from 1950 to 2002, real GDP multiplied by a factor of 5.6, while total energy use multiplied by 2.8. So the economy's energy efficiency roughly doubled in the last half-century. Extrapolating from this, they also expect energy use to grow about half as fast as real GDP in the future.