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.cb THE TRUTH ABOUT ENERGY


	Everyone is always grumbling that the Government isn't telling
the people the truth about energy.  Now the Government in general and
the President in particular is always telling the people various truths
about energy, but people still suspect that the "real truth" isn't
being told.  I agree, and here is my candidate for the "real truth",
that is, the most important facts.

	First, because we are paying more for energy our standard of
living has had to decrease.  The Government hasn't told us this, so
everyone feels that he has been mistreated when his own standard of
living decreases, redoubles his efforts to increase his wages or prices,
and this accelerates inflation.  If we resigned ourselves to the
fact that our standard of living had decreased, agreed to wait longer
before buying a house or car or vacation or television, then there
would be less struggle for income, and the rate of inflation would decline.

	Why are we paying more for energy?  First, OPEC is charging
us more for oil.  In my opinion, this is unfair of them.  The technology
and the markets were created by us, and our oil companies had contracts
with them that were incompatible with a cartel controlling the market.
However, we and the other industrial countries did not choose to
try to enforce these contracts.  Partly this was because we regarded
our oil companies as the beneficiaries rather than ourselves, and
they aren't popular.  Besides that, much liberal opinion believes that
we were exploiting the OPEC countries and that it is right that they
should get back at us.  In my opinion, we gave more than we received
and had a right to enforce our contracts.  Anyway we didn't.

	A second cause of increased energy costs is environmentalism.
In the first place, anti-pollution regulations have required expensive
scrubbers and other devices.  Many people think we are better off for
it, but the individual doesn't visualize himself as having laid out
say $300 this year for his cleaner air and regard it as a worthwhile
expenditure like an air conditioner.  Maybe if people bought clean
air retail by buying a gadget, they would feel better about it as
they do when they buy an air conditioner.  However,
technology doesn't offer us the option of buying reduced smog retail;
we must do it by regulations that impose expenditures on utilities,
manufacturers, and automobile buyers.  However, when a politician
or a journalist says "we must have strict regulations", it often seems
that the means have supplanted the ends, and the person has come to
love regulation for its own sake.  We may call this the "regulatory
ethic" and put it alongside the "work ethic" on our shelf of idols.

	Besides the costs of complying with regulations, there are the
costs imposed by the disputes and procedures themselves.  Delays tie
up capital at high interest rates.  Armies of Government and environmentalist
lawyers and bureaucrats write endless writs and regulations and read
the replies prepared by armies of business lawyers and bureaucrats.
Unfortunately, many people like this kind of work much better than
working with their hands, so it is very hard to ever demobilize
bureaucratic armies.

	When we count costs solely in dollars, we forget that these
costs mainly represent labor.  When we pay excess prices to Saudi
Arabia, this means that many Americans spend their time making things
the Arabs want rather than things Americans want.  For example, on
an airplane recently, I met a young architect who was working on
designing palaces for Saudi Arabians; I'd prefer he were designing
ski areas for us.  Likewise, I would rather see more automobile workers
than more lawyers.  (The U.S. now has 20 times as many lawyers per capita
as Japan has and four times as many as we had in 1960).

	What are the consequences of increased energy costs?  We can
get some line on it by considering the situation in the U.S. in the
last century when the cost of heating with firewood in terms of labor
was much higher than the costs we now have.  At that time, inability
to keep a house warm was a major cause of crowding.  For example, old
people who could no longer chop wood or weren't close to an available
source often froze or moved in with relatives.  People often closed off
rooms during the winter in order to have less to heat.  I remember
living on a farm for a while as a boy when the chamber pot would be
covered with ice in the morning.

	Most likely, we won't have to go back to nineteenth century
levels of crowding even if our energy policies are quite bad; technology
provides an enormous cushion.  However, the effect of increased heating
costs will mainly be crowding.  We will, so to speak, huddle together
for warmth.  It will be harder for grown children to afford apartments
of their own.  People who now have apartments will have rented rooms.
It should be noted that between 1950 and 1965, (I apologize for not
looking up more recent statistics), the number of households in the
U.S. increased by 26 percent while the population increased 15
percent.  We took a good part of our increase in productivity in the
form of the personal freedom of living independently.  Many people
in the "public policy community" think this is bad for us and that
we should live together more.  The "public policy community" often
uses the words "we should" when they contemplate making regulations.
The astute reader might conclude that the present author resents
and fears "the public policy community".

	Another consequence of an energy shortage is, we are told,
that people should live closer to their work.  In the abstract, that
sounds fine, but it means that people living together will get to
choose whose work to live close to, and who gets to commute for an
hour or two a day.  I don't suppose this consideration will make
the women's movement regard getting more energy as important, because
that movement, like many others, thinks more about who it considers
its enemies than about what will benefit its constituents.  In this
case, its common enemy with the environmentalists is "corporate
America".

	Many people think that energy shortages are inevitable, but
I think that is a mistake.  We can have all the energy we are likely
to want.

[Digression: A few years ago, it was fashionable to fit the increasing
energy consumption to an exponential curve and show that if things
continued as they were, after some time the whole Earth would be
red hot.  If one fits an exponential curve to the production of
beef cattle in the United States between 1850 and 1860 (I am guessing),
an economist like Robert Heilbroner could conclude that unless something
were done, by 1940, each American would have to eat a cow a day.  The
absurdity of projection of production without attention to what the
production will be used for is apparent in the case of cows - no-one
would suppose that beef production could rise much above our ability
to eat the stuff, but because energy is more abstract than beef, and
people don't have a clear picture of where it goes, such absurdities
are not rare.  The afore-mentioned Heilbroner wrote a whole book about
it without once asking what the energy would be used for.  At present,
of course, the Chicken Little's are mostly running in the opposite
direction].

	Oil and natural gas are running out, so we must replace them.
Some of their uses are easy to replace and others are harder.  The
easiest use to replace is generating electricity.  Nuclear energy
was cheaper even before the 1973 quadrupling of oil prices.  It is
almost criminal that we are still burning oil and gas to produce
electricity.  The question is not merely one of making new electric
capacity nuclear, but one of replacing the 30 percent of our electricity
generated by oil and gas with nuclear.  Fortunately for the U.S.,
when nuclear plants are impeded by environmentalism, coal burning
plants also work.  Other countries don't have the coal and therefore
have no choice.

	In a time of inflation, the costs of nuclear plants or other
capital intensive plants present a peculiar appearance.  Namely, past
plants look great, and future plants look terrible.  For example, the
nuclear plant of the Sacramento Municipal Utility District seems to be
generating electricity at .5 cents per kilowatt hour while new capacity
runs three to five times as much.  Actually, this is an illusion.  The
number of man hours required to produce a plant hasn't changed much.
New plants are more elaborate, but the industry has presumably learned
how to increase its manufacturing productivity.  The problem is caused
by inflation and regulation.  The existing plant is capitalized at so
many dollars, and the regulators allow a certain rate of return on those
dollars.  The fact that the money received for the electricity won't buy
the man hours required to build another plant or replace the present one
when it gets old doesn't influence the regulators.  On the other hand,
when money has to be borrowed to build a new plant, even if its
construction involves the same number of man hours as the old one, the
prospects look terrible.  It is necessary to borrow the money at a
high interest rate and pay interest on it for a long time before the
plant goes into service.  It would be better to allow charges for electricity
that reflect the current replacement cost of the plant.  Then new
plant could be financed by selling stock which the stockholders would
buy, because the value of their stock would stay the same in real dollars,
i.e. would increase in nominal dollars at the general inflation rate.

	Because nuclear energy is attractive economically and produces
mainly electricity, one can expect other uses of energy to convert to
electricity in so far as this is practical.  Home heating is converting
to electricity on a large scale even at very high costs.  These costs
are being mitigated by spending more on insulation, in some cases by
installing heat pumps, and alas, by selling smaller houses for more money.

	The most difficult long range energy problem is supplying
vehicles.  Fortunately, oil isn't dead yet and can be made to last
for quite a while if we economize on their use for the production of
electricity and for heating.