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Subsidies Distort the Market

Posted By Nicolas Loris On July 28, 2008 @ 5:01 pm In Energy | Comments Disabled

There’s a lot of finger-pointing going on as to who’s to blame for the extraordinarily high oil prices. The primary targets are big oil and speculators and both are unlikely to be true (see here [1]for speculators and here [2]for big oil). Another target, rising demands from rapidly developing countries like India and China, is beginning to be heard and has a great deal of truth to it. Yet another target, one that is hardly ever discussed, is the number of fuel subsidies overseas. Keith Bradsher of the New York Times has a piece discussing this very topic [3]:

From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel. In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.”

Subsidies and price caps distort the market, which results in supply and demand imbalances, artificially high prices, and risky investment decisions. Price controls were thought to be the solution for expensive oil in the late 1970s but had disastrous results [4]. Similarly, government has chosen to subsidize wind and solar for decades. Maybe that is why they remain uncompetitive. The reality is that subsidies don’t promote new energy, they promote bad business. Now that consumers could really use some alternative energy, none is ready. How many boondoggles must America’s taxpayers fund before Washington gets it? When the government picks winners and losers, the special interests win and consumers suffer.

The best way to reduce the price of renewable energy is to NOT subsidize it.

The same is true for nuclear energy. Subsidies simply grow and perpetuate the same government dependence that helped set the U.S. nuclear industry back three decades [5]to begin with; nuclear power needs a 21st century business model that breaks the grip that government policy makers have over it.

New, transformational products are never the result of strict government policy. They emerge as entrepreneurs see market opportunities and funnel their resources toward meeting that demand. If wind, solar and nuclear can survive and compete in the market without federal handouts, then they should be welcomed as viable contributors to America’s energy profile.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/07/28/subsidies-distort-the-market/

URLs in this post:

[1] here : http://www.heritage.org/Research/EnergyandEnvironment/wm2003.cfm

[2] here : http://www.foundry.org/2008/07/02/whats-the-story-with-high-gas-prices/

[3] piece discussing this very topic: http://www.nytimes.com/2008/07/28/business/worldbusiness/28subsidy.html?partner=rssnyt&emc=rss

[4] but had disastrous results: http://www.heritage.org/Research/EnergyandEnvironment/wm2004.cfm

[5] set the U.S. nuclear industry back three decades : http://www.heritage.org/Research/EnergyandEnvironment/bg2086.cfm

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