Tuesday, January 30, 2007

Comments on Bush's State of the Union Address

I was very disappointed with Bush's talk about energy independence and alternative energy sources. Ethanol costs well over $100 per barrel. Oil costs about $50 per barrel. You are throwing out $50 for each barrel of ethanol you buy (actually it is even more than that since the energy produced by burning a barrel of ethanol is apparently less). Bush’s and the Democrat’s policy on this will just make us much poorer. I know the responses: that the price of ethanol is coming down. But that doesn’t justify a subsidy. Firms can take that into account just as they do with any other product. If they think that cost will come down enough that it will pay for them to produce the product, they will start producing the product.

The other claim involves energy security. This makes little sense to me. If gas is risky because oil might get cut off in a war or if there is a boycott, that causes the current price to rise to reflex that future higher price. That higher price then will be taken into account to see whether because of that risk we should be relying on other energy sources. The only justification that I can make for this last claim is that the threat of price controls prevent gas companies from profiting from those higher future prices and thus eliminate their incentives to do things such as store more gas today. The problem here then is the threat of government intervention in the market that is then used to justify more government intervention. There is no reason to believe that the government is going to get anywhere near to picking the right levels of investments here.

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