The Gazette has carried an interesting series of articles, editorials and letters to the editor, regarding the energy “crisis”, including the case for and against drilling for new oil. In particular, a July 24 piece by editorial advisory board member Kristin Lynch argued against drilling for new oil. She instead suggests we develop a “long-term energy plan”. A number of Lynch’s points invite rebuttal.First, test your understanding of Aristotelian logic by considering her statement that “the definition of insanity is doing the same thing over and over again, but expecting diffierent results.” The problem is not that we have been drilling over and over again, but that we have not been drilling.Second, consider her statement, “But do we really believe that such a complex, geopolitical issue … can be boiled down to a simple matter of supply and demand?” Well, yes, I do believe it is a matter of supply and demand. But it is not a simple matter. The wealth of information that is distilled into market price through the forces of supply and demand is quite complex. Geopolitics is no more immune from the law of supply and demand than Lynch is immune from the law of gravity.Third, Lynch repeats the canard that it will take years before oil from new drilling would make it to market. Really? Oil companies are on record that new supplies from ofishore California would be on the market within one to two years. Further, commodities markets are forward-looking. Expectations of future supply-demand conditions are reflected in current prices. World oil prices have dropped more than $20 per barrel recently just on rumors of possible increases in future supplies.Finally, consider her statement, “And, rather than quick fixes, we must develop a serious long-term energy plan … It will take sacrifice, money, and time.” So, long lead-times are unacceptable for drilling but just fine for government planning?I suggest there is no energy crisis. According to the First Law of Thermodynamics, energy can neither be created nor destroyed, it can only be converted from one form into another.What we face is a choice of fuels to convert one form of energy, such as stored chemical energy, into another form, such as electrical energy. This is what we do when we burn oil or natural gas to create electricity. Or we can convert it into kinetic energy (the energy of motion) through an internal combustion engine. Fuel is the scarce resource, not energy itself.Economics is the science of how people choose to allocate scarce resources, that have alternative uses, to their “best” use. Thus, the energy “crisis” boils down to a matter of economics. Crude oil is a scarce resource. How do we choose how much to produce? Once produced, how do we choose how much to allocate to gasoline, heating oil, diesel, jet fuel, and other petrochemicals? Further, if we chose to produce electricity, how much do we produce from oil, natural gas, coal, hydro, wind, biofuels or solar?And, how do we know what is the “best” use? This is also an economic question. The answer is, “The best use is the one that provides the greatest satisfaction for the greatest number of people.” But how do we achieve that best use?In a free society we achieve that through the magic of free markets. A fundamental economic axiom is that human creativity responds to the incentive of price. In a free society, market prices tell us how much to produce, how much to consume, and how much to conserve, of our scarce resources. The alternative to market prices is command-and-control through central planning. If central planning provided a superior economic outcome, then the Soviet Union would have been the strongest economy on earth. Yet the American economy was vastly stronger. In America, by and large resources are guided by the invisible hand of the marketplace to their best use.I submit that the major problem with energy is government interference in markets. Taxes, regulations, mandates and subsidies all distort markets and prevent the necessary price signals from allocating scarce resources to their best use.In spite of government, high prices are starting to do their job. Recall that human ingenuity responds to the incentive of price. With high oil prices, consumers are demanding less and searching for alternatives, while producers are supplying more from existing wells and are eager to drill new wells. With high oil prices, alternative fuels and renewables become more economic for both producers and consumers.In a free society, prices and human ingenuity will provide the optimal energy portfolio. Prices will tell us how much energy should be converted from oil, coal, natural gas, hydro, wind, biofuels or solar.Which path we choose, markets or governments, will determine our prosperity. That choice will also determine our liberty, because economic liberty cannot be divorced from political liberty. If we choose government command-and-control over free markets, we choose less prosperity and less liberty.|To restate Einstein’s definition of insanity, “Why do we insist on the same solution again and again – central planning – and expect a difierent result?” It is due to the same lack of economic literacy that is frequently lamented on The Gazette editorial page.-Prentice, of Colorado Springs, teaches free-market economics to MBA students at UCCS, and is a board member of the limited government Forum.

Greg Norman hits off the first tee on the first day at the 2008 U.S. Senior Open on Thursday, July 31, 2008. Photo by Jerilee Bennett, The Gazette

Jerilee Bennett