The unintended consequences of a public policy are nearly always inevitable, and are often quite difficult to anticipate. Worse, they tend to turn the intended result of the policy around and produce the opposite outcome in the long term. We can see the evidence of unintended consequences when we impose rent controls, wage restrictions, and zoning laws, all widely-recognized examples. Policies to deliberately increase the scarcity of oil and gasoline, and reduce consumer use, can also confound the intentions of their authors. It is entirely possiible that higher oil prices now will lead to greater production and use of energy sources like oil and coal in the not so distant future.
The recent push to regulate carbon dioxide emissions—with an emphasis on oil consumption as an energy source—is the focus of climate commission studies in North Carolina, and a topic addressed in a recent JLF Spotlight report. Whatever one’s belief about altering global temperature through policy change, it is clear that comprehensive Kyoto-style policies would dramatically raise the cost of using oil and gasoline as energy sources. Higher prices have a predictable effect on consumer use of oil, whether or not the environmental impact is achieved.
Rising prices in the petroleum-based energy market seemed to be welcomed by some, who viewed higher prices as a way of discouraging oil consumption (breaking the ‘oil addiction’), and encouraging the development of geothermal, wind, and other alternative energy sources and technologies.
What the alternatives advocates apparently did not realize is that there are price incentives on both sides of the energy market. When prices rise, it is true that consumers adopt fuel-conservation strategies. It doesn’t matter whether this affects everyone, or affects everyone equally. The point is that consumers face the correct incentives—to conserve on the more precious good—and some will do so.
The other side of the story reveals why prices are such an excellent coordinating mechanism in the first place. Consumers react to higher prices by cutting usage, but suppliers react by attempting to increase supply. This makes sense. When something gets more scarce and expensive, this is exactly what business does and should do ——entirely in their own interest, and incidentally to the benefit of others.
Here’s where the unintended consequences come in. Higher per barrel oil prices have made oil production techniques that were simply uneconomical, lucrative on a large scale. The petroleum industry is already engaged in oil exploration and production in one of these new avenues: tar sands. Huge tar sand deposits are located in Canada’s Alberta Province, and also in Venezuela. Recovery from these sources is energy-intensive, and the amount that will be produced ultimately depends on economic feasibility. The higher the price per barrel of conventional crude, the more likely it becomes that the Athabasca and Venezuelan Orinoco deposits will be developed.
On a parallel track, higher energy prices and worries about energy security are moving the coal industry to develop clean coal energy generation techniques. Industry sources claim that domestic supplies of coal may be able to supply as much as 60 percent of U.S. energy needs by 2025, using a (now) cost effective clean coal technology.
Given the current policy climate, it is likely that consumers will face an energy situation that bears the visible handprint of government and of regulatory manipulation. But as tar sand and clean coal efforts demonstrate, regulation cannot entirely eliminate the invisible hand of market coordination.
If the anticipated consequences of scarcer oil and higher prices are to drive consumers away from (especially foreign) oil, the unanticipated consequences make the more expensive tar sands and coal more economically feasible.
Policy makers often ignore both the invisible hand and the unintended consequences of policy. But to understand why the U.S. is considering costly tar sand and expensive clean coal development, you need to understand that despite the social choice engineers, an invisible hand continues to lead change in the direction that consumers and entrepreneurs actually want to go.