Friday, June 20, 2008

The Democrats’ quandary: free markets reducing energy consumption

The price of gasoline in the U.S. is now $4.06. That means for the driver of a 16-gallon tank sedan, it now costs $17 more to fill up since last year. The added cost of gas has forced consumers to buy fewer of the goods that they want in order to buy goods that they need, like gas. That means fewer movies seen, fewer clothes bought, fewer nights out, but the same (or less) amount of gas purchased. This has consumers feeling squeezed and policy makers in D.C. on a rampage.

The Democrats, in their quest to help middle-class America, have taken this energy crisis as an opportunity to push agenda. First, and foremost, they want to reduce gas prices for American drivers since $4/gallon gas is simply too much. But at the same time, they are driving climate change, windfall profits taxes, conservation plans, and energy bills. The problem is: market forces are already at work, and no new bills are needed to enforce the outcomes that the Democrats desire.

The quandary for the democrats: market forces are working, and energy consumption is falling.

Consumers are using less gas. Going forward, as gas consumption falls, demand falls, and the price will eventually fall. Even with oil prices above $130/barrel, reduced demand will cause the price of oil-related energy products (heat, gas) to fall…or at least not rise anymore. So, stick around for a while because gas prices are not going to rise too much above the level that they are now. Economies other than the U.S. are also reducing gas usage, or soon will in the future. China just announced that it will raise the price of gas 15%-20% (gas prices are set by the government in China). Globally, countries are reducing energy usage, which eventually will put downward pressure on the price of gas all on its own – without the help of the Democrat agendas.

So what are the Democrats to do? Windfall profits taxes and the tradeable permit program (to reduce emissions), and other agendas that target emissions, are unnecessary when market forces are reducing energy consumption. This must have Nancy Pelosi in a fit because government intervention is now unnecessary. In a world of freely floating energy prices, consumers and firms are forced to find more energy-efficient products and production methods (cars, appliances, computers, etc). That means that on its own, and without the help of the Democrats in Congress, the U.S.A. will be a greener nation. If climate change is a serious agenda for the Democrats, then the substitution away from buying and producing products that use a lot of energy is a good thing.

It is perplexing why Democrats continue to push government intervention in the energy markets in order to drive climate change and emission reduction. The simple fact is that market forces are doing all the necessary work. The Democrats would likely make a mess of what is a completely natural process: high oil prices → high energy prices → reduced energy consumption → greener America.

I am happy to receive any comments. Best, Nontruths

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