The wrong road to fuels of the future

The wrong road to fuels of the future
By Steve Chapman
Copyright © 2006, Chicago Tribune
Published August 27, 2006

Socialism failed because the governments that embraced it couldn't solve the basic problem of economics: what to produce and how much. In the old Soviet bloc, warehouses filled up with things people wouldn't buy while consumers stood in long lines in the hope of getting what they wanted. Thanks to that experience, we're smarter than to think the government is better at judging what to sell than, say, Toyota or Target.

Well, most of the time we are. But every so often something happens that causes normally rational people to decide that supply and demand are useless, so only the government can make sound production decisions. That something can be summarized in three words: high gasoline prices.

Three-dollar gas has driven Gov. Rod Blagojevich to embark on a novel effort. He wants to spend $1.2 billion to help build plants to manufacture ethanol or biodiesel from corn and soybeans and to convert coal into natural gas and diesel fuel. Renewable energy, he promises, will provide half of the state's motor fuel needs by 2017, which will "free consumers from the grip of foreign oil" and "stabilize energy prices."

This venture may sound like a liberal Democrat reverting to the energy policy of Jimmy Carter. But it also brings to mind another president--George W. Bush. His Advanced Energy Initiative includes subsidies for everything from solar and wind power to ethanol made from switch grass. The other day, the Department of Energy unveiled a $2 billion program of loan guarantees to cultivate new energy sources.

All these ideas rely on the same discredited theory: that the government is competent to decide how to satisfy consumer needs. No one likes handing over a stack of $20 bills to fill up the gas tank. But if modern science offers feasible ways to produce cheaper sources of motor fuel, there is no need for this type of government intervention. And if it doesn't, there is no point.

We hear a lot about the boundless potential of ethanol and biodiesel. But as onetime University of Texas football coach Darrell Royal said, "Potential means you ain't done it yet." Despite decades of federal help, ethanol still meets only a tiny share of our energy needs.

If things are ever going to change, the time is now. Gas prices have more than tripled since 2002, and even after adjustment for inflation, they are higher than at any time since the early 1980s. Alternative fuel suppliers merely have to offer something cheaper, and they would have Big Oil on the run. Instead, they prefer to rely on handouts from government.

The Energy Department, showing a flair for bureaucratic euphemism, says its loan guarantees "enable the department to share some of the financial risks of projects that employ new or significantly improved energy technologies." Meaning: If a venture doesn't work out, taxpayers get the bill.

But why should they? Electronics firms and computer software companies routinely manage to develop risky innovation without federal help. If investors are willing to risk their funds nurturing a new technology, it's probably worth pursuing. If they are only willing to risk your money, it's probably not.

The Blagojevich plan shows how absurd this game can get. Illinois is not about to free itself from dependence on foreign oil, which fills 60 percent of the nation's petroleum needs. Even if the state could replace half of its oil use with alternatives, the shift would more likely displace domestic supplies than foreign ones, because the latter are generally less expensive. Nor would it "stabilize" oil prices, which are set in a world market too vast to be visibly affected by what happens in Illinois.

Reducing oil consumption, in an effort to weaken oil-producing nations and combat global warming, is a perfectly sensible idea. But asking the government to decide the best alternatives is like asking the government to decide what products Home Depot should stock. A better way is to raise the price of oil through stiff excise taxes--and then let competitors fight it out to see who can offer the most practical, affordable substitutes. That's making use of the approach that has made our economy so prosperous.

But if we really think the government can make better decisions than those produced by the market, let's not leave the job to amateurs. After all, there are a lot of seasoned economic planners from the Soviet Union who are looking for work.

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E-mail: schapman@tribune.com