Government versus Economic Reality

In August 2005, the government announced new fuel efficiency standards for automobiles. These will apply to the 2008 to 2011 model years and will mark six straight years of higher fuel requirements. The new Corporate Average Fuel Economy (CAFÉ) regulations will ratchet up standards for the entire industry, but the biggest changes will be for light trucks. This category, which represents half of all vehicles sold, includes sport utility vehicles, minivans and pickups. These “gas guzzlers” are particular targets in a time of rising gas prices. The government says the new regulations will save 10 billion gallons of gas over the lives of vehicles bought 2008 to 2011. Environmentalists claimed that wasn’t good enough and demanded stricter standards to conserve even more gasoline. This is just one more example of people believing government is superior to the free market in determining what people should buy and sell. And it won’t be the first time they’re proven wrong and the results turn out opposite to predictions. History offers no reason to expect the result will be any different this time around. When political policy clashes with economic reality, bet on reality.

The entire policy of energy conservation has been based on ignorance of basic economics, let alone the history of energy resources. When a product or resource becomes cheaper or is used more efficiently, consumption increases! Instead of “conserving,” people use it more readily—and even find new uses for it. When James Watt’s steam engine was more efficient than its predecessor, the Newcomen engine, demand soared. People found alls sorts of new uses for steam power. When computers declined in price to where practically everyone could afford them, demand soared and people found all sorts of new uses for them. The same thing happened earlier with electricity. And when automobiles became smaller and more energy efficient because of the Arab oil embargo in 1973, people drove MORE—not less—because they could go further with the same amount of gasoline. Gasoline consumption rose for two decades as energy efficient cars flooded the roads.

Energy conservation was a total bust—but that was irrelevant because the government and environmental alarmists were dead wrong about the resource. Instead of the predicted oil shortage, there was abundance. From 1970 to 1991, the world’s proven oil reserves (that is, known to be in the ground, not just estimated) nearly doubled, from 523.5 billion barrels to 1,003.3 billion barrels. And estimates beyond the proven reserves tripled, from 1 trillion to 3 trillion barrels. They have since increased further. Another “crisis” was averted not by the “far-sighted vision” of government officials and alarmists looking out for our future but by the quiet actions of the marketplace.

It is tempting to say that the Big Government advocates have learned nothing from our experience over the last 35 years. But their ignorance extends far beyond that. In 1865 the English economist Stanley Jevons wrote: “It is wholly a confusion of ideas to suppose that the economic use of fuel is equivalent to diminished consumption. The very contrary is the truth….It is the very economy of its use which leads to extensive consumption. It has been so in the past and it will be so in the future.”

For more on the futility of government automobile regulations, see my 3,000-word booklet on the subject.

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