Energy mythology

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Just in time for Independence Day, the Senate passed the “Clean Energy Act of 2007,” promising to increase American “energy independence and security,” “protect” consumers from price-gouging and clean up the environment. The bill does none of these things.

Energy security is a favorite theme of politicians, who “point with concern” to steadily increasing oil and transportation-fuel imports. This sounds scary until you realize more than a third of oil imports comes from Canada and Mexico, two of our most reliable trading partners.

Moreover, trade in energy brings Americans cheaper energy, and that helps make American exports of goods and services more competitive globally. Thus, increasing energy prices through the simplistic protectionism of the Senate bill will both hurt American consumers through higher prices and make our exports less competitive, threatening American jobs.

Political talk about “energy security” is Washington code for consumers paying higher prices for more expensive domestically produced fuels. Why have politicians turned against consumers? Because they hope producers of the more expensive fuels will open their wallets to support the politicians” next campaign. That brings us to one of the biggest consumer ripoffs in the Senate bill: the renewable fuels mandates.

The Senate bill doubles the current mandate for 7.5 billion gallons of ethanol in 2012 to 15 billion gallons, and requires 3 billion gallons of “advanced biofuels,” such as cellulosic ethanol, must be available by 2016. The last time Congress tried to dictate technological progress, it created the “synfuels” boondoggle that cost taxpayers billions without delivering the promised technology. This time the politicians have chosen ethanol, a choice just possibly influenced by corn-producing Iowa”s first-in-the-nation presidential caucuses next year.

Ethanol is a dubious pick for three reasons.

(1) Ethanol may not even add much net energy, because it takes so much energy to grow, harvest, transport, and process the corn. Cornell scientist David Pimentel has calculated the net energy from plant-based ethanol and concluded there is “no energy benefit to using plant biomass for liquid fuel.”

(2) Producing enough ethanol to replace a significant portion of gasoline would also require a massive expansion of corn and other crop production, causing environmental problems and driving up food prices around the world. Existing ethanol programs have doubled corn prices, making everything from pork in America to tortillas in Mexico more expensive.

(3) We lack the pipelines, gas station tanks, and other infrastructure to deliver ethanol to consumers. Building these would divert billions from making our existing energy infrastructure more secure and reliable.

As the Gulf Coast refinery shutdowns after Hurricanes Rita and Katrina showed, U.S. energy infrastructure is vulnerable to natural disasters and accidents, fires and terrorists. Plus, gaps in the domestic pipeline networks for refined products leave many areas vulnerable to local refinery closures and reduce competition among energy suppliers. Addressing those problems would add more to our energy security than pie-in-the-sky ethanol plans.

Finally, with its “price gouging” provisions, the Senate bill includes some of the worst pricing legislation since the 1970s” disastrous energy price-and-allocation controls. As anyone who experienced the gas lines and shortages of those days knows, letting politicians meddle with prices is a recipe for disaster.

No one likes high gas prices, but they are needed when shortages cause prices to go up, so consumers conserve and entrepreneurs find ways to increase supply. When people can”t use prices and markets, they use something else to decide who gets gasoline instead: valuable time. Wasting time and fuel in queues is an unintended consequence of political interference in markets, a good reason to make sure this provision does not become law.

There is a way to improve energy security: unleash entrepreneurs. Refiners have been solving America”s energy problems since the start of the 20th century. When the U.S. faced a major gasoline shortage in 1910, entrepreneurs revolutionized refining technology and doubled gasoline yields. For the last 30 years, they”ve been boosting output from refineries, making it possible for our total capacity to rise even as older, less efficient refineries were closed.

In short, American refiners have regularly increased the quantity and quality of gasoline from each barrel of crude, and done it without Congress” advice.

If we want to increase our energy security, we”ll stop changing the rules every time a politician needs an issue for his next campaign ad. Refineries, pipelines, and oil fields are all multibillion-dollar investments that take years to earn a return. The constant shifting of government rules undermines the certainty investors need before making such a large-scale capital commitment.

If we want to make America more secure, decrease gasoline prices, have cleaner fuels, and increase the reliability of supplies, we need to get the government out of the way of the entrepreneurs who can deliver those things.

Andrew Morriss is H. Ross & Helen Workman Professor of Law, professor of business administration and professor at the Institute of Government and Public Affairs of the University of Illinois, Urbana Champaign, and a senior fellow at the Institute for Energy Research in Houston, Texas. You can read his latest article on gasoline pricing at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=989827.

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