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Steven Pearlstein
Steven Pearlstein
The Post
Business Section
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Archive: Past columns by Pearlstein
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U.S. Energy Policy
With Steven Pearlstein
Washington Post Financial Staff Writer

Wednesday, April 9, 2003; 11 a.m. ET

In his column today, The Post's Steven Pearlstein writes: "Once again, a president ... has proposed a comprehensive national energy plan in the context of Mideast tensions, volatile prices and increasing dependence on foreign sources. And as before, politicians are determined to solve the crisis by micromanaging energy markets, this time through a potpourri of incentives to get consumers and producers to do what they otherwise would not." Read the full column.

Steven Pearlstein was online on Wednesday, April 9 to discuss U.S. energy policymaking. An edited transcript follows:

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Baltimore: Wait, deregulation makes sense?!? What about the California energy crisis?

Steven Pearlstein: I knew I'd get this question. I spent a couple of months reporting the California energy debacle and studying electric markets. A greater degree of deregulation makes sense in that part of the energy world, but not total deregulation -- or as one economist put it, a different kind of regulation. The reason is simple: there are various parts of the electric system that were, are, and will always be natural monopolies. So the design of the system is very important, and California's design was badly flawed. It would be wrong to draw the conclusion from California that regulation of electricity and every other facet of the energy market, or all markets, is the way to go. That's an unfair rap, just as it would be unfair for conservatives to say that because communism failed, ANY regulation of ANY industry is a bad idea.

Boston: Steven: I'm not a fan of the Bush environmental agenda, but I think they are correct about the need to rationalize the gasoline formula rules. Over the 1980s and 1990s, the oil companies figured out that they should cut back on the number refineries in order to improve margins. Every spring, you can almost be certain that there will be one or two refineries that have significant, production impairing accidents as they shut down, do maintenance, turn around, and restart for summer gasoline production. When these accidents happen in California or the Midwest, with special blends, you get price spikes now because there is no excess capacity capable of supplying gasoline to these isolated markets.

I'd favor fewer, cleaner national formulas for gas, but I have a sense that this may not be in the integrated oil companies' interest. I think they benefit from the price spikes. Wouldn't it be a better use of legislative efforts to focus on factors like refining capacity, where we can influence our market, rather production, where we are really price takers in a global market? For example, I don't see much of an effort to improve accident prevention at refineries, even though EPA data show this is one of the most accident prone sectors.

Steven Pearlstein: Whoever you are, you clearly know more about all of this than I do. There is a refinery capacity problem, and no doubt it is exacerbated by the different formulas in different regions. But the key here is to make sure the refinery market is competitive. There has been a lot of consolidation in that segment, particularly among the so called independents, who may be now so big that they are acting like major oil companies. The Federal Trade Commission, which has kept an eye on this, has to watch out for market manipulation and oligopoly behavior. The market should work here just as long as there is real competition, including price competition and possibility of entry, as well as access to foreign refined product. The rap on the industry is that it divides up the country, with each region dominated by a single supplier.

Arlington, Va.: You wrote today that environmental regulations that are inhibiting exploration and development of domestic energy sources should be "revised." What are you proposing? Are you suggesting that energy development once again trump environmental safety?

Steven Pearlstein: Your questions betrays the kind of black-white thinking that the environmental groups bring to this. I am suggesting that there are places where a little bit of flexibility or weighing up of economic interests with environmental could open up some promising areas. The enviros view is that ANY threat of environmental degradation trumps EVERY other interest. They are the absolutists here. I am suggesting, for example, that offshore drilling for gas has been successful off the coast of Newfoundland and now essentially supplies much of the natural gas for New England. There are probably similar opportunities off the East Coast and Gulf if the blanket moratorium were lifted. Will they be unsightly for those traveling out by boat? Sure. Is that worth it? Yes, if the size of the reserve is big enough, in my opinion. The stuff out in the West is probably more complicated but it is clear that at least a quarter of the federal lands are effectively off limits, much more than the 9 to 12 percent estimated that are off limits by statute. For large pools that can be accessed without all sorts of water-polluting technologies, we might want to consider giving up a bit of wilderness feeling on national forest land to get some energy. The idea that national forests should now be treated the same as wilderness area and national park, which is what the environmental community has been peddling, seems to me wrong. National forests are for multi use, including energy exploration, to some degree.

Washington, D.C.: Last week the Bush administration enacted the biggest fuel economy standard increase in 20 years. Why didn't your newspaper make more of this story?

Steven Pearlstein: No comment. I would say that fuel economy standards are the most important environmental issue I can think of right now and it is disappointing that the standards are not higher, since this is the best way to quickly reduce global warming. Fault the environmental community for not giving in on some drilling issues in order to get a better outcome on global warming. Very few people will ever get to Alaska. Everyone is hurt by global warming.

Oakland, Calif.: Speaking of regulation, is there support in Congress for requiring oil wells to trap greenhouse gases such as methane? Currently, remote wells simply release or burn these gases thus wasting resources and contributing to greenhouse gases. Technology exists (and has existed since the 1940s) to convert these gases to liquids, but it is cheaper not to do it.

Steven Pearlstein: I know nothing about that but what you say sounds like a good idea to me. And if means gas is more expensive, so be it. Compliance with reasonable environmental regulation should be a cost of doing business.

Athens, GA: Thanks for taking my question Mr. Pearlstein,

When you talk in your column of the failure of wind and solar power to "take off" despite all the "Carter-era incentives" it is important to keep in mind the following:

1. Over the past 50 years the federal government has provided, in direct program and off-budget subsidies, about $4.5B and $1.5B for solar and wind power, respectively.

2. Over that same period of time, federal subsidies for nuclear, oil, coal, and natural gas were approximately $145B, $283B, $71B, and $76B, respectively (notice the absence of decimal points here).


3. In the first 15 years of federal subsidies to nuclear energy (1947-1961) the subsidies amounted to approximately $15.30 / k W h.

4. During the first 15 years of federal solar and wind subsidies (1975 - 1989), the subsidies amounted to approximately $7.20 and $0.46 / k W h, respectively.

Furthermore, the market prices of fossil fuels do not include the deleterious effects on human health and environmental quality associated with their extraction, production, and consumption - another form of subsidy.

Efficient markets produce efficient allocations. Conversely, inefficient markets produce inefficient allocations. If market solutions to our energy woes are what you propose, how do you propose eliminating the price distortions that currently pervade energy markets?

What do you think would be the result of federal investment in renewable energy development commensurate with the level of investment the fossil fuel and nuclear energy sectors have enjoyed?

Steven Pearlstein: Sounds like you are proposing a version of one bad turn deserves another. I'd have the government out of the subsidy business completely. Now you also raise the question of whether a tax should be placed on energy sources with large environmental costs, to reflect the costs to the economy and society that aren't captured by the wellhead or pump prices. That may be a good idea. Too bad politicians don't have the guts to propose it.

Alexandria, Va.: Here's my beef with deregulation of electricity markets: There's no real call to action by consumers. As practiced here in Virginia, the default selection is the local power giant. Users aren't really made to weigh the various options and costs, they can just cruise by. And that's what most consumers will do, b/c they're busy people who'd rather not worry about it. Markets only work if people are made to shop.

Steven Pearlstein: There are even ways to structure a deregulated retail electric market so that people who don't have the time or attention to shop can be assigned randomly to vendors rather than default to the incumbent monopoly. Worth considering, anyway.

Laurel, Md.: There are at least two ways that energy prices are our economy's biggest wild card other than perhaps war:

1. Energy consumers usually have no choice but to buy a particular kind of energy and don't have the ability to substitute

2. Energy is usually sold on a spot-market, not a long term contract

Why hasn't our economy designed in more substitutability in case of shortages of particular kinds of energy, and why isn't more energy sold long term?

Steven Pearlstein: I don't know that you're right about long-term contracts. If so, there may be a regulatory bias against it that should be considered, in the case of electric utilities. And it was the hope of the deregulators that some vendors of retail electricity would offer fixed rates for a period of time that they could offer because they had secured fixed price, long-term supply.

Bethesda, Md.: We're always told here in America that we don't pay a fair price for gas -- i.e. it's way too cheap and that we should be paying the high prices Europeans pay. What's your take on that? Are the European energy markets so over-regulated that prices are too high? Or are Europeans paying a fair price?

Steven Pearlstein: Gasoline is already heavily taxed, but mainly as a way of imposing a user tax on those who use roads and highways. Maybe the tax should be higher to reflect the social costs of burning carbon and causing pollution and global warming. That's the carbon tax idea that Gore floated briefly before getting shouted down. Its not a bad idea, as long as it can be made flexible and gradual enough not to be economically disruptive.

Mt. Lebanon PA: I'm a professional engineer and an Alaskan ex-pat. I don't support the opening of ANWR as doing so addresses no long term energy need of our nation. Gas-guzzling and polluting soccer-mom tanks patrol the seldom-maintained roads and highways. Environmental pollution of all forms is on the rise. The globe gets hotter as the planet's population soars. New, unknown disease appears. Where is the G.W. Bush administration's plan for effective, real, concerted effort to not stem but reduce the threats to our very existence? An energy plan based on "1950s Full Steam Ahead" is no plan. Except for widespread disaster. Thanks much. HLB

Steven Pearlstein: I hold now brief for the Bush plan but I think we have to dismiss the environmentalist fantasy that conservation and solar power can provide all the extra energy we are going to need over the next couple of decades. Its a lovely thought but it ain't gonna happen and it would be a BAD idea for the government to try to make it happen through regulation and tax tinkering. We need to tap some of our untapped supply, even as higher prices and technology advances finally make alternative sources of energy, including conservation, more attractive to energy consumers. Again, you've adopted the environmentalist black-and-white, all-or-nothing vocabulary. There is something in between the Full Speed Ahead plan you attribute to the Bush administration and the Environmentalists fantasy. Just tapping the Alaskan and Canadian McKenzie Delta gas fields would be a huge step, so why don't we get cracking on that one.

Manassas, VA.: We all know how bad Enron was -- ethically speaking. But was their vision of a free market for energy something you agree with?

Steven Pearlstein: Let's be clear about Enron. They manipulated markets. They participated in accounting fraud. They finagled prices and defrauded parties with whom they entered into contracts. All of these are illegal behaviors, and should be severely punished. But they do not cast serious doubt on whether energy markets can operate on their own with some form of non-interventionist regulatory oversight by government.

Bethesda, Md.: I guess my real question is: Is gas so expensive in Europe because of taxes, or are there market forces at play?

Steven Pearlstein: Gas is so expensive in Europe primarily because of taxes.

Washington, D.C.: Just an observation on the comment an earlier questioner raised. That "methane" gas in the oil wells is natural gas. At $4.00 - $5.00 per mcf, most producers recover it for sale. Where they can't, the constraint may be whether adequate pipeline capacity exists to move it -- or perhaps whether a pipeline can be permitted under various environmental laws.

Steven Pearlstein: Thanks.

Washington, D.C.: OK Mr. Pearlstein, let's say you are the chairman of the Senate Energy and Commerce Committee, and you're writing the energy bill. What are the top three things you're going to make sure you change about the current energy regulatory structure?

Steven Pearlstein: Well, we've now talked about a couple of them. Speed up development of the Alaskan pipeline. Identify some big on and off-shore gas reserves that can be tapped and figure out ways to tap them sooner rather than later. And pour some serious government money into basic energy research into hydrogen and other alternative fuels/energy sources that can be used by everyone in developing real product for relatively markets. I also think FERC is on the right track in terms of creating regulated regional electric grid monopolies.

Silver Spring, Md.: You said a lot about the 'black-white' worldview of 'enviros' in response to an earlier question. But the Bush administration and a lot of people in the energy industry have the same worldview. Don't you think the White House could transform the debate somewhat by conceding that global warming is a problem THAT REQUIRES ACTION instead of a problem that we just need to deal with?

Steven Pearlstein: Your observation about the Bush administration has some truth to it, although there are thoughtful people in the administration and the Bush plan was actually better than the Congressional bills in some respects. But I'll stick to my point that the environmental movement has become its own worst enemy with its inflexibility and its instinct of looking at any loss or concession or tradeoff as an environmental disaster. It may be good for keeping membership up but it doesn't lead to good public policy.

Washington, D.C.: I was a kid in the 1970s and remember being told that the oil would be gone by the time I reached adulthood. Well, it's nearly 30 years later, and gas is still plentiful. I guess what I'm getting at is: Is the fact that the doomsday predictions of the 70s never happened impeding real debate/reform of energy policy in the U.S.?

Steven Pearlstein: There was a school of thought back then that the world would be bumping up against all sorts of limits by this time, which has been largely discredited. But we should be careful not to conclude from that we can go on using up resources in our wasteful way without cost.

Washington, D.C.: Who on Capitol Hill "gets it" when it comes to energy policy, in your opinion?

Steven Pearlstein: I'm sorry to say I don't know enough about Congress and its energy deliberations to say. It appears from the outside like the extremists and self-interested members (i.e. their districts have big energy interests) on both sides dominate the debate on the tough issues, which is the problem. They hold out for complete victories rather than looking for middle grounds.

Sacramento, Calif.: Here's something I've never understood about energy policy. If the world's oil reserves are finite wouldn't it make more sense to use up all the foreign oil first and to save American oil for when Saudi Arabia, Iraq, Iran, and Venezuela run dry? Why is it to our advantage to use domestic oil aside from the relatively few people who own large investments in domestic oil fields and the like?

Steven Pearlstein: Its an interesting thought, but we probably ought to hedge our risks a bit more than that. After all, if somebody suddenly comes up with a way to make hydrogen energy or make nuclear energy safe, then all of our oil reserves would suddenly become worthless, and we would have paid needlessly for all that imported oil. Also there are the national security questions: if you are totally dependent, you could be held up by producers or their cartel.

New Orleans: You never answered the question about global warming. Why is there such a struggle not to have a dialog on this issue?

Steven Pearlstein: There is plenty of dialogue on global warming. It's just that the dialogue has lead to the wrong outcome. The Bush administration and their industry allies complain that to comply with the Kyoto Treaty's goals, it would increase the price of energy and that would be a bad thing. I don't think that's right. Raising the price would be a good thing if managed correctly. It would encourage conservation and induce production and alternative fuels. Moreover, the higher price would reflect the true cost of oil and gas, including the social costs.

Falls Church, Va.: What states, do you think, have devised strong electricity deregulation laws?

Steven Pearlstein: Don't know enough about it. Sorry.

Steven Pearlstein: Thanks, folks. See you next week.

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