Government Does Energy. The Three Stooges Do Plumbing

I had the enormous pleasure, yesterday, of dinning with Ron Bailey. Ron is the science correspondent for Reason magazine. I have known Ron for several years, having run into him at various conferences and colloquiums. He was passing through Aberdeen on his way back from Montana, and he was kind enough to look me up. Professor Schaff and I took him to Mavericks Stake House. If you think this is a shameless exercise in name dropping, you are quite right.

I would like to balance the ledger by bringing the awesome power of South Dakota Politics to support his publications. His last book, Liberation Biology, is a wonderful argument for new technologies that, he assures us, will improve human life. If you are worried about the pernicious, Syfy Channel effects of genetic engineering, or the like, Ron will persuade you that the promise exceeds the peril. He has been working on a new book, and to judge by what he told us, you will want to reserve a copy on Amazon.

You can go to Reason's website to read his dispatches from the road. His most recent piece explains the history of the Great Plains Synfuels plant near Beulah, North Dakota.

Construction of the plant was first proposed in 1978, just months after the creation of the new Department of Energy during the "energy crisis." Natural gas production in the U.S. had been declining since 1971 and nationwide shortages were causing schools and factories to close in the winters as gas was diverted to home heating and cooking...

In 1980, Congress created the Synfuels Corporation, endowing it with $20 billion with the goal of eventually building as many as 22 enormous coal gasification plants, each one producing 300 million cubic feet of natural gas per day. Since coal gasification was an unproven technology in the U.S., natural gas pipeline companies were reluctant invest in it. The federal government rushed to the rescue. The Department of Energy helped create a public/private partnership with five natural gas pipeline companies that agreed to put up 25 percent of the cost of building a demonstration plant while the government supplied the remaining 75 percent in the form of loan guarantees. Out of this bold alliance between business and government was born the hugely ambitious Great Plains Coal Gasification plant.

The plant was built at a cost of $2.1 billion and shipped its first thousand feet of natural gas in July 1984. Due to escalating costs, the plant was scaled back to half size so that it was designed to produce 150 million cubic feet of gas per day. In the meantime, the hapless Jimmy Carter unknowingly had already undercut the rationale for constructing a massive coal gasification industry by a simple change in policy—he deregulated the price of natural gas. It turned out that the country wasn't running out of natural gas; it was running out of natural gas with a government imposed price cap. That old truism—only governments create shortages—was once again proven correct.

Allow me to summarize my interpretation of this story. In the 1970's the U.S. government created a shortage of natural gas by price controls on that energy source. That same government then tried to remedy the shortage by investing billions of public monies in a technology that private enterprise was unwilling to support. After the Synfuels plant had been built, the same government removed the price controls. The plant ceased to be economically viable. The Department of Energy bought the plant back at a loss and then sold it, again at a loss.

Today the plant is modestly profitable, but only when natural gas prices are high and only because the current owners didn't have to pay back the loans or otherwise cover the cost of building the plant in the first place. I think I got all that right.

That is what happens when the U.S. Government does energy policy. If you look at history of Cap and Trade legislation, you will see the same bogus projections, the same willful ignorance of economic principles and recent history that was at work when Jimmy Carter was President. The only bright spot in this coal dark picture is that the ability of Congress to do monumental mischief looks about to be cut short.

Comments

[Donald Pay]

What happens when you don't understand history is you draw the wrong conclusions.

You have not stated the entire history here. Synfuels were defeated twice in Congress after first being proposed by the Ford Administration. Synfuels had Republican support. Opposition has always come from environmentalists, principally, who saw synfuels as a destructive corporate welfare give away that would have negative environmental consequences.

It was well known by environmentalists that the natural gas "shortage" was a result of two natural gas markets--one regulated and one not. The interstate market was regulated by the feds, the intrastate market was more or less unregulated (maybe some minimal state regulation). The natural gas companies manipulated this market to jack up prices in the unregulated market while creating an artificial "shortage" in the regulated market. The gas didn't materialize because of government policies. It was always there, but it was a market manipulated by the natural gas industry.

Finally, the price of natural gas fell during the Reagan years because of a recession and energy demand reduction policies instituted at the state level.

[George Mason]

We can always depend upon Donald to proffer the conspiracy theory. It is one thing Jimmy Carter can take credit for, and deserves it, is that he did begin the deregulation of industry that helped foster the economic boom of the '80's and from which we still benefit today. The deregulation of natural gas and airlines under Carter and of oil under Reagan reduced prices overall and led to greater efficiencies. This benefited every citizen of this country by lowering costs of any good or service dependent upon travel or transportation (which covers just about everything). Unfortunately we began to see a move toward reregulation in the '90's and 2000's which is some of what we are suffering from today. Government meddling and regulation of business and industries like insurance, banks, automobiles,petroleum and health care have been driving prices up and we will soon be seeing severe shortages if this trend is not reversed. The market will regulate itself by answering the needs of the participants. Government has never been capable of meeting the market or anticipating its changes. The more government interferes in the market the more dismal the prospects for a strong and growing economy. We became a great nation because our forefathers understood this and fought the King of England because of it.

[Donald Pay]

Well, there you go again, Mr. Mason, not learning the right lessons. You would think the Republican created failures of Enron and the financial collapse would have driven home the lesson, but ideologically driven worship of the market stands in the way of learning lessons. The same thing is happening now with financial reform, with conservatives so religiously devoted to a failed ideology that they are taking money Wall Street made from the federal bailout to assure Wall Street can recreate what brought us down. Yeah, you don't want regulation that strangles business, but you have to have regulation that reasonably protects the public from excesses.

[Donald Pay]

By the way, Bush's 2005 Energy bill included corporate subsidies for synfuels, tar sands and shale oil. There's your government meddling.

[Donald Pay]

By the way, Bush's 2005 Energy bill included corporate subsidies for synfuels, tar sands and shale oil. There's your government meddling.

[George Mason]

Donald; You are a little confused while you are attempting to confuse. There should be no subsides for synfuels etc. That's the point which you conveniently missed (or incapable of understanding). It is a poor allocation of funds and causes distortions in the market. Enron failed due to fraud which was an attempt to cover up the huge bet that ENRON was making that Clinton would go even bigger into wind subsides. If the government would stop meddling in business then the bailouts would not be necessary. It is government actions that have led us here. The idea that more government interference is going to get us out is on the order of dousing a fire with gasoline.

[Donald Pay]

You need to read up on Enron. You have no clue what you are talking about.

[KB]

Donald: If subsides are a bad idea, and they are, it doesn't matter who sponsored them.

[Donald Pay]

Yeah, tell that to Koch.

[George Mason]

Donald, Donald, Donald. Your obvious lack of experience and education in practical, real world economics is a deficiency for which there is neither time nor space in this blog to address. Enron is an example (and a metaphor) for corrupt governance not an example of why government subsides are a good thing. Enrons leaders bedazzled the board of directors and shareholders with promises they could not deliver on (much the way Obama got elected). Too few people on the board looked at the numbers and questioned how they were calculated. Fastow, Skilling et.al proclaimed nothing was wrong (ala Barney Frank and Chris Dodd). Meanwhile Fastow and Skilling were skimming large sums from certain departments of the business (see Jamie Gorelick and Franklin Raines). The crooks kept proclaiming that expenses were assets while no one noticed there was no money in the bank (like the CRA worked out). As you are obviously not aware Enrons two largest businesses are two of the most heavily regulated industries. Electrical generation and transmission and natural gas transmission. Now you can change the subject again.

[Donald Pay]

Yes, government, corrupted by the energy industry, and purposely made unable to regulate. Sounds about like what happened in the financial industry.

Oh, here's a subsidy carved out by one of those supposed free market supporters:

http://thune.senate.gov/public/index.cfm?FuseAction=PressReleases.Detail&PressRelease_id=2daafef7-f5c6-4efd-8de6-3c7a8b7e2aa7&Month=9&Year=2008