A Free Market for Energy

While reading [http://www.house.gov/paul/congrec/congrec2006/cr040506.htm]this essay on Iran[/link] by Republican Congressman Ron Paul of Texas, I was struck by his mention of “those who don’t understand how a free market can develop substitutes to replace diminishing resources.”

Thinking over what he might have meant by that phrase, it occurred to me that in fact we do not have a true free market with regard to energy. It might be argued that we have a relatively free oil market. I’m sure there are many that might argue otherwise, but for the sake of this post let’s assume that oil is a commodity that is traded freely and openly on the market and free market forces are allowed to operate directly on this trade.

But if you look at energy as a whole — all sources of energy, including oil, nuclear fission, coal, wind, solar, tidal, and any other alternative energy source you can dream up — it’s clear that these do not exist in a free market. There are certain energy sources which are heavily entrenched and which receive favorable treatment by government regulators and legislators. In particular, I’m thinking of oil.

Oil companies receive all kinds of incentives for oil exploration and oil research. I don’t have numbers, but I feel certain that in dollars these incentives are orders of magnitude larger than the incentives for other forms of energy. Granted, oil is fundamental to the workings of today’s society, but I have to wonder, if these incentives were removed and the true cost of drilling for and refining oil was realized, would the market shift in some dramatic way? Would the free market lead us away from oil as it grows more and more expensive and lead us toward alternatives that are more economically-viable for the long term?

Regardless, these incentives — and the oil itself — can’t last forever, and so some form of market correction will undoubtedly take place at some point in the future, and perhaps not too distant in the future, if the peak oilers are to be believed. But again, I wonder if these artificial buoys are setting us up for a more dramatic and harmful market correction, when possibly the correction could have been less dramatic and gradual — and less painful — if unmitigated free market forces were allowed to play their rightful role.