TCS Daily


The Ghost of Richard Nixon

By Herbert Inhaber - June 23, 2003 12:00 AM

Alan Greenspan, the chairman of the Federal Reserve Board, is not known for clarity. His frequent presentations to congressional committees are so often wrapped in cotton wool that Wall Street usually moves sideways after his speeches -- which may be precisely what he wants.

But the talk he gave recently to the House Energy and Commerce Committee, looking into potential natural gas shortages in the future, was as crystal clear as he ever gets. While Mr. Greenspan has touched on many subjects in the course of his career, he rarely has discussed energy, except in passing. I have checked his past speeches and can find no evidence of a talk devoted solely to looming energy issues.

Greenspan said that the nation has to expand its nuclear and coal resources, more or less in line with what President Bush has advocated. Nuclear and coal make up about three quarters of all electricity in the nation, with almost all the rest coming from natural gas and hydro. Although billions have been poured into renewables -- and Senator John Kerry, one of the Democratic presidential hopefuls, wants to pour billions more -- we have little to show for it.

But Greenspan had some words that may disturb both sides of the national energy debate. He said that even if we drill more in the Alaska National Wildlife Refuge (ANWR) and in the Gulf of Mexico off Florida, there is no way we can achieve complete energy independence. In the jargon of the oilmen, the U.S. is a "declining province." That is, in the long run we will have to import more and more of our fossil fuel energy. Greenspan encouraged drilling in places that are now off-limits, but did not make extravagant claims for it.

The talk of energy independence brings back faint memories of President Nixon's Project Independence, started after the first oil shock of 1973. It envisioned a nation with vastly more power plants, producing oil out of coal, and a host of other energy projects. For a Republican president, it was of interest that all of this was to be controlled, if not owned, by the government. Due to its high cost, Project Independence was abandoned.

Greenspan testified about the surge in natural gas prices. They have doubled over the last year. The increase could have been foretold. When states rushed to deregulate, so-called merchant energy companies, not associated with utilities, rushed in to build new electric plants. Almost all the plants they built, or are building, run on gas. Demand went up, and any economics 101 student could tell you what would happen -- prices rose.

While higher gas prices don't seem to have much advantage for ratepayers, in the long run, they will stimulate more drilling -- if we can open up areas that are now closed to exploration. Then prices will fall as new supplies flood the market. This up and down cycle has governed gas and oil prices for over a century.

Greenspan was looking farther ahead, to when North American gas deposits inevitably dwindle. This may be a few decades in the future, but the planning for that day should begin now, Greenspan says. Eventually, we will rely more on liquefied natural gas (LNG) from the Middle East and Africa. The principle behind LNG is simple. Gas that is ordinarily wasted by flaring is compressed into a liquid, and sent in ships to its destination. There is no way to build a pipeline (the way most gas in North America is transported) from Saudi Arabia to New York, so LNG is the only way to do this. Europe now gets LNG from Algeria, so the concept is not a new one.

Contrast Greenspan's words of wisdom with those of Senator Kerry. Recently the Massachusetts presidential aspirant he went to Iowa to deliver a speech, and you can guess what headed the agenda -- ethanol. The subsidies that prop up this industry are not much more than a handout to corn farmers. If President Bush went to Houston to make a speech at the Petroleum Club, choking on the cigar smoke and promising ever more handouts to the oil barons, he would be accused, and rightly so, of pandering. Should we apply the same standards to Senator Kerry?

Kerry demanded energy independence within the next decade. He might want to commune with the spirit of Richard Nixon before saying that again. Better yet, if he is averse to ghosts, he may want to talk to any economist, who knows that the costs of energy autarchy -- the technical name for energy independence -- would be far more than it is worth. We can grow bananas in Alaska, thus creating banana independence and staying out of the clutches of Central American dictators -- but they might cost $10 a bunch. Senator Kerry and his compatriots would be wise to remember the role that low cost providers play in markets of all kinds, not just for energy.

Kerry again sounds the note of greater energy efficiency. As I have pointed out in previous columns, greater efficiency is no panacea: it could well produce greater consumption, as the relative cost of energy to income falls. Then we would become more, not less, dependent on foreign oil dictators. Efficiency does not equate with less total consumption, although Kerry and others think it does.

When it comes to clarity and understanding, Sen. Kerry might want to take a page out of Chairman Greenspan's book.
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