Markets Work!

Posted: May 24, 2001 12:00 AM
In his recently released energy plan, George W. Bush put most of the emphasis on increasing energy supplies -- increased oil and gas drilling, new refineries, and more power plants, including nuclear. This has brought forth a predictable response from Democrats that none of this is necessary. Conservation, they say, can reduce energy consumption sufficiently to make current energy supplies adequate for national needs. In effect, Democrats are saying there is a free lunch. They imply that conservation is essentially costless and that it can bridge the gap between current supply and demand without sacrifice. Says economist Brian Nottage of, "Critics of Bush claim not only can we solve the energy problem by focusing on reducing demand more than increasing supply, but the reductions in demand are relatively painless changes that will do little to affect our lifestyles and without having to endure higher consumer energy prices." Hearing the Democrats, one would think that there hasn't been any conservation at all up until now. But in fact, there has been a vast increase in energy efficiency. In 1973, it took 18, 380 BTUs of energy to produce $1 of real gross domestic product in the United States. Last year, it only took 10,570 BTUs to produce $1 of GDP. Looking only at oil and natural gas, the improvement is even greater. Between 1973 and 2000, consumption of these fuels fell from 13,910 BTUs to just 6,580 BTUs per $1 of GDP -- better than a 50 percent increase in energy efficiency over this period. To put it another way, since 1973 real GDP -- the total output of goods and services in our economy, adjusted for inflation -- has risen by 125 percent. Total energy use, however, has only risen by 30 percent, from 75.8 quadrillion BTUs to 98.5 quadrillion BTUs. The increase in consumption of oil and natural gas has been even more modest, with a total increase of just 7 percent in 27 years. This is remarkable given the huge increase in population, housing, autos, industry and all of the other things that cause energy use to rise. What has happened, of course, is conservation. We are using less energy to do the same things we did in the past. Autos today average 21.4 miles per gallon of gasoline, up from 13.4 mpg in 1973. And despite their bad press, sport-utility vehicles have also seen a sharp increase in fuel economy, rising from 10.5 mpg in 1973 to 17.1 mpg in 1999. As a consequence, the United States is by far the most energy efficient major country on earth. According to the Paris-based Organization for Economic Cooperation and Development, Americans used the equivalent energy of 1.4 billion tons of oil in 1998. This was about 40 percent of total OECD energy use. But the United States did far more with that energy and got more value out of it than any other country. For every $1 million of GDP produced here, just 76 tons of oil-equivalent were needed. For the OECD as a whole, the average was 151 tons. The next most energy efficient nation was Switzerland (80 tons), followed by Japan (89 tons), Denmark (90 tons) and Italy (110 tons). Thus we see that the fifth most energy efficient nation used almost 50 percent more energy to produce $1 of GDP than the United States did. At the opposite end of the spectrum, the least energy efficient nation, the Czech Republic, consumed an astonishing 453 tons of oil-equivalent for every $1 million of GDP it produced. In other words, the Czechs needed six times as much energy to produce the same amount of goods and services as Americans do. The Czech Republic was followed by Poland (422 tons), South Korea (371 tons), Hungary (363 tons) and Canada (312 tons). One of the things suggested by these data is that those countries with the highest productivity levels are also the most energy efficient. Countries such as the United States, Switzerland and Denmark are among those with the highest levels of GDP per capita and are also at the top in energy efficiency. By contrast, those with low output per person are also at the bottom in terms of energy efficiency. These include Turkey, Poland, Mexico, Hungary and the Czech Republic. This stands to reason. High productivity means that more is produced with less -- less labor, less natural resources and less energy. And increased productivity results principally from greater capital investment. New plants and equipment, therefore, is key not only to raising output per worker, but raising such output with less energy and other inputs. The reason why countries with low productivity also have low energy efficiency is because they have less capital per worker, and much of the capital they have is old and out of date. Visit a factory in Poland or Hungary, and you will likely see 1950s technology at work. Indeed, not just 1950s technology -- but the actual equipment from that time and earlier, painstakingly repaired, but never replaced or updated. Another thing that comes through from the data is how many of the countries at the bottom of the productivity and energy efficiency lists were formerly communist. Because the market did not guide investment or production decisions there, because prices did not reflect true supply and demand, because central planners favored heavy industry over high-tech, it was almost inevitable that this would be the case. Yet, ironically, many Democrats implicitly favor central planning as the solution to our energy woes. They want the federal government to mandate energy efficiency through increased taxes and regulation. But at the same time, they want price caps to protect people from higher energy costs. Below-market prices will, of course, encourage excessive energy use and discourage conservation. If conservation is really what we want, higher energy prices will bring it about faster than anything else. Incentives for capital investment will also help, because less energy-efficient plants and equipment automatically will be replaced with that which is more efficient, simply because it is newer. And let us not forget free trade, which will encourage capital to flow to places like Poland and Hungary, where labor costs are low and so is energy efficiency. In short, let markets work, and don't repeat the errors of central planning in the energy sector. *** Chart data: Tons of Oil-Equivalent Consumed Per $1 Million of GDP, 1998