Streetwise Professor

May 22, 2013

The Energy Permit Raj

Filed under: Commodities,Energy,Politics,Regulation — The Professor @ 9:09 pm

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.

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  1. Are you saying, “the Raj has a hammer”?

    Comment by Strigidae — May 23, 2013 @ 2:57 am

  2. The most favorable spin I could put on this story is that Moniz told Sen. Wyden during the confirmation hearing that as Sec’y he’d take a new look at the studies, and so now Moniz is publicly saying he’s taking a look as a matter of Congressional relation-tending.

    Sure, it would have been more fun had he just called Wyden an anti-science troglodyte for ignoring over two hundred years of economic history, economic growth, and economic theory which is nearly unanimously in support of free trade, but confirmation hearings are not the best places to call Senators idiots.

    Comment by Michael Giberson — May 23, 2013 @ 7:17 am

  3. What was old is new again, or to be more accurate, more visible. The model here is the Tammany Factotum George Washington Plunkett’s definition of honest graft vs. dishonest graft. To him honest graft was when you knew a subway line or road was going through, you bought land, or dolling out jobs to friends; that sort of thing. Now this is formally defined as illegal. Dishonest graft was taking money or being directly bribed.

    When you think of it, the triumph of Campaign finance reform has been to make Dishonest graft honest – favors for donations, – heaven forfend that there is any linkage! Note that the current attacks on organizations are against advocacy groups – that is speech – not disclosed direct political donations. Also not that no one has as of yet criticized seriously the practice of one pol giving money to another, or at least party campaign funds. Bribery is deferred: you get paid off in favors, or after you leave office, or for your kids and have the perfect vehicle for doing so.

    New York state was particularly egregious. 20+ years ago, when a pol retired he/she got to keep the money. This was too much even for NY – now it goes into a “charitable” foundation controlled by the pol.
    Money, however is still fungible – just need to act like a pretzel to get at it.

    The energy Raj, indeed the whole permitting process simply adds more fuel to the fire or give the pols more places they can extort money. The problem is that unlike GWP’s forms of graft, this is far more complicated, requiring larger transaction costs. Coase, anyone?

    as this process continues we have again increased the “need” for a parasitic class whose only value is the knowledge as to how to manipulate the system The real direct costs of this can be calculated – look at lobbying budgets. The indirect costs, however cannot and are probably staggering.

    Time to burn the edifice down.

    Comment by Sotos — May 23, 2013 @ 8:34 am

  4. I believe it was Richard Epstein who coined the term ‘givings power of government’ to describe the conditional (and often arbitrary) power of the Permit Raj. Epstein’s 1993 book “Bargaining With The State” offers a thorough review of welfare effects (and the effects on individual liberty) of the ‘givings power’ and shows how it complements the better-known ‘takings power” of government.

    Comment by Jim Overdahl — May 23, 2013 @ 8:44 am

  5. To quote one commentator from 1991: “This is all nonsense, “breathtakingly dumb,” to quote would-be President Gore. The United States has no more need for an “energy policy” than it has need for shampoo policy or a socket-wrench policy. Fuel is just one good among many. And we are no more “addicted” to energy than we are to silicon or aluminum or anything else that goes into producing the goods and services traded in the U.S. economy. It is not evil to use oil to make things.”

    Some idiocy is perennial.

    Comment by srp — May 24, 2013 @ 6:20 pm

  6. @srp Along those lines, here’s what I wrote in my last WSJ energy experts contribution:

    What steps can—and should—local, state and federal governments take to encourage energy conservation?

    The same steps that they should take to encourage rutabaga conservation: Steps that ensure that buyers and sellers internalize the costs and benefits of their decisions, whether it be the decision on how much energy to consume and produce, or on how many rutabagas to eat and grow.

    Energy is not some magical good that is fundamentally different from other goods or services. Yes, energy production and consumption arguably have more external effects than the production and consumption of rutabagas, but these effects are amenable to economic analysis, and such analysis should be the basis for public policy.

    Fetishization of “energy conservation” is dysfunctional. Prices that reflect the costs and benefits of consumption and production provide the incentives to do the right thing. Get the prices right, and people will do the right thing. That’s what governments at all levels should focus on.

    Energy is a basic input to myriad activities that generate value. Energy conservation for conservation’s sake inevitably restricts inefficiently these value-generating activities. It is always necessary to trade off costs and benefits: Conservation tends to focus obsessively on the costs, with no regards for the forgone benefits of reducing consumption.

    Don’t be energy penny wise, and energy pound foolish. Don’t fetishize energy. Treat it like any other good or service, and analyze it using solid economics.

    The ProfessorComment by The Professor — May 24, 2013 @ 6:53 pm

  7. boooo, energy… $$$$… fat cats… capitalism… colonialism… environmental aggression… political corruption… no, no, no… 🙂

    Comment by MJ — May 25, 2013 @ 7:05 am

  8. Any thoughts on water?

    Comment by James Samuel Cyrus Black — June 3, 2013 @ 4:27 pm

  9. @James-what specifically re water?

    The ProfessorComment by The Professor — June 3, 2013 @ 6:24 pm

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