On energy, markets working fast

As President Bush prepares to unveil his US energy policy, private industry is already pouring billions into developing new petrochemical and power-generation resources - government plan or no.

One big reason: Econ. 101. High prices, and the lure of fatter profits, are causing utilities and refiners to proceed with expansion plans that were put on hold during the cheaper-energy years of the go-go 1990s.

This doesn't mean that the Bush energy plan is necessarily trivial. The administration's effort could well launch the biggest debate in years on issues such as pipeline location and oil exploration in environmentally sensitive areas.

It does mean that, when it comes to easing the nation's current short-term energy crunch, capitalism will likely prove to be a more powerful force than Washington.

"If you look at each industry sector, you see that high prices are doing what they are supposed to do," says Jerry Taylor, director of natural-resource studies at the free-market-oriented Cato Institute here.

Mr. Bush was set to finally announce details of the energy plan today. In recent weeks, administration officials have telegraphed its broad outline, which likely includes proposed regulatory and tax changes to prod greater production of oil, gas, coal, and nuclear power, as well as tax credits for hybrid gas-electric vehicles, and some measure of support for conservation efforts.

In seeking to prepare the ground for the plan's reception, the Bush team has been stressing obvious negatives - such as California's blackouts and gasoline nearing $2 a gallon - as proof that the US needs a concerted national energy approach. Occasionally the rhetoric even approaches the apocalyptic.

"What people need to hear loud and clear is that we're running out of energy in America," Bush said earlier this month.

Administration officials would be the first to say that private-industry efforts, not Washington mandates, are the keys to solving American energy woes.

But what neither they - nor, to a certain extent, their environmentalist opponents - have been highlighting is that private firms haven't been sitting around waiting for the Oval Office to produce an eight-volume study on coated paper before moving to take advantage of current shortages.

Prices peaking at the pump?

Take gasoline. Since the end of March, refiners have ramped up production by almost 650,000 barrels a day, according to the federal Department of Energy.

Regular gasoline prices might still stay higher than last summer's $1.53-per-gallon average. But the current price spike is likely to peak soon.

"We should see prices begin to drop by the first week of June," John Cook, petroleum division director at DOE's Energy Information Administration, told a House hearing on Tuesday.

Longer term, US oil and natural-gas companies plan to boost their exploration and production budgets by 19 percent this year, according to a Lehman Brothers estimate. Financial markets expect that both gasoline and natural-gas prices will continue to drop. Futures contracts for natural gas to be delivered this December are hovering at about $5 per million BTUs - half the level of a year before.

Electricity, with its patchwork of state-by-state regulation, is a more complicated picture. But there, too, the trendline is up.

Many of the new power plants the Bush plan is expected to call for are already in planning stages. A projection from RDI Consulting holds that over the next two years as much as 75,000 megawatts of new generation capacity will go on line. That's more new juice than was produced during the entire decade of the '90s.

In using the short-term energy crunch as a selling point for his plan, Bush is at the very least practicing basic politics. The price of gasoline is a pocketbook issue - if it skyrockets, any administration would be well-advised to at least appear to be concerned.

But he is also using the short-term problem to try to enact long-term changes in America's energy future. Energy production is far from an absolute free market: Government does everything from approving the location of power-transmission lines to controlling oil and gas exploration on vast federal lands in Alaska and the Rocky Mountain West.

Similarly, environmentalists and other opponents of the "drill more" approach would like to seize the moment to steer the US toward a more pro-conservation government policy.

What about conserving?

Favorable tax treatment of oil and gas firms has helped keep prices low at the pump, encouraging Americans to buy gas-guzzlers. Meanwhile, government regulations that set fuel-efficiency standards for new cars have been devalued, as Americans have migrated to light trucks, SUVs, and other vehicles that aren't subject to the tightest rules.

"Cheap gas prices are in part a consequence of a pattern of public-policy decisions," says Michael Maniates, a political scientist at Allegheny College in Meadville, Pa. "Many people on the energy-efficiency side of the debate would say, 'Give us the same degree of tax preference that you're giving the supply side, and then we'll let the free market work.' "

(c) Copyright 2001. The Christian Science Monitor