Last week it looked like the Obama administration had decided to be sensible on at least one energy issue-the export of LNG. It approved a new license (for Freeport LNG) for export to countries with which the US has no free trade agreement. But the WSJ reports that new Energy Secretary Ernest Moniz is thinking of putting on the brakes again. Because we need more studies. No. Seriously:
Mr. Moniz showed caution about the existing studies. Speaking to reporters after a speech to an energy-efficiency conference here, he said he was “committed to doing a review of what’s out there in terms of impact analyses” before approving more applications to export U.S. natural gas. Critics have said last year’s study didn’t rely on the best data available.
“Right now we have no plans of commissioning new studies, but everything is on the table until I have done my analysis,” Mr. Moniz told reporters after his first public remarks as energy secretary
Sorry. We don’t need no steenkin’ studies. The whole idea smacks of central planning. The presumption should be that if firms are willing to risk their private capital, the benefits exceed the costs. Any analysis should be restricted to potential externalities. Real externalities. Not pecuniary ones.
But these “impact studies” are all about pecuniary externalities. Namely, they focus on the effects of exports on prices of natural gas, and the effects of natural gas prices on consuming industries (like petrochemicals). But these price effects are not true externalities that lead to inefficient allocation of resources. Indeed, restricting exports because of these effects would cause a misallocation of resources.
Pecuniary effects do have distributive effects. In the case of LNG exports, they affect the distribution of rents between gas producers in the US and foreign consumers on the one hand, and domestic gas consumers on the other.
And that’s what the need to get an export permit does: it permits the government to affect the distribution of rents. That, in turn, gives rise to rent seeking. And corruption.
In this context John Cochrane mentions the Indian “permit raj”: there you need to get a permit for everything. This gives those with the authority to grant permits incredible power. Power they use to enrich themselves and secure political support.
That is exactly what can go on here. Those hoping to get a permit have an incentive to exert influence, through lobbying, campaign contributions, and supporting public campaigns on issues favored by the administration. They also realize that they face substantial risks if they oppose the administration on other issues: “Nice little LNG terminal proposal you have here. Would be a tragedy if something happened to it.”
The government has no business being in this business, beyond perhaps-perhaps-addressing real externality issues. But even there, other mechanisms (e.g., liability for pollution) may be preferable to a permitting process. (Look at how Russia used environmental regulations to drive Shell out of Sakhalin II: any power to permit can be used to expropriate of hold up the party seeking the permit.)
In the US, energy, and particularly the international trade of energy, is particularly raj-like: Keystone II is another example. This destroys value in myriad ways. Beneficial investments are delayed, or not made at all, either because the government stops them directly, or the risks and costs of getting approval undermine the economics. Real resources are used to influence policy. Since energy investments involve big dollars, the losses can be big too.
People often lament the lack of an American energy policy. I disagree. We do have an energy policy, and the Energy Raj is a big part of that policy. A better policy, by far, would be no policy at all. Would that the DOE adopt the motto: “Don’t just do something! Stand there!”
I’m not holding my breath, though. The benefits of the raj to the rajahs are far too great.