May 21, 2001
Don't Blame the Free Market for Energy Shortages
Political pressure is mounting in Washington as gas prices rise and the California electricity shortage worsens. The national media and politicians from both parties have irresponsibly characterized the situation as an energy "crisis,"thereby generating public support for further unconstitutional and unwise federal intervention in energy markets. Washington appears to have accepted full responsibility for the California problem; hence the one-sided debate centers around a supposed need for a national energy policy. The obvious implication is that the federal government must play nanny to California or any other state which finds itself facing shortages caused by its own bad policies. Never mind that California caused its own problems by restricting supply and freezing energy prices while the population skyrocketed. The real danger is that the federal government may repeat California's mistakes on a national level, subjecting the rest of the nation to similar shortages. The true crisis facing us is not a physical shortage of energy, but rather the looming threat that socialist economic planning will replace market mechanisms and cause unnecessary shortages.
The worst idea coming out of Washington (with support even from some supposedly free market politicians) is that the federal government should impose price controls on energy companies that sell to California. The politically favored term is "price caps," which sounds less authoritarian. The premise is that greedy energy companies charge California too much, so the federal government should set "reasonable" limits on wholesale prices. The accusation of price gouging is never questioned: no one considers the costs involved in producing excess capacity to sell to California. Why should electric companies sell their power at below-market rates? Is it their responsibility to correct the mistakes of California politicians? Why do we presume the federal government has any authority or credibility to determine prices and profits?
The answer is obvious to anyone with even the slightest knowledge of basic economics: price controls always cause shortages. When government sets a price too low, supply drops. The simplicity of this is apparent to anyone who examines a supply and demand chart, and history consistently proves the folly of centralized government price planning. Producers of energy (or any other good) make less when they are forced to sell at below-market prices. This is exactly what happened in California. Expect energy companies simply to stop selling to California if new federal price controls are imposed. It's discouraging that basic economic fallacies are still used to justify terribly harmful government practices.
By contrast, the market price mechanism works to insure that everyone has electricity. In a free market, increased demand naturally causes prices to rise. Two things then happen: people conserve, and supply increases. If California had not chosen to regulate the energy market, new plants would have been built to meet the needs of the growing population. Californians still would have seen price increases, but they would have had a strong economic incentive to conserve energy. Over time, new energy providers seeking to profit from the demand and price increases would have gradually increased supply and driven prices down. Instead, California capped prices and restricted supply. This summer's blackouts will be the direct result of this exceedingly misguided policy.
Free markets work. Government, not markets or deregulation, causes the economic woes we face today. Free markets insure that supply and demand are evenly matched, preventing shortages. Contrary to the claims of environmentalists, free markets always promote conservation by increasing the price of precious resources as they become scarcer. Advocates of socialist central planning in Washington may claim to have the solutions to energy shortages, but in truth market forces cannot be ignored any more than the laws of physics. Americans who want to continue to enjoy uninterrupted energy supplies should oppose any federal regulation of energy markets.