Do you remember the day in July 2008 when the market price of crude oil peaked at $147 per barrel?
It was a fairly unnerving period in world economic history. Retail gasoline prices soared past $4 per gallon throughout the United States; they actually surpassed $5 per gallon in California. Automobile buyers flocked to fuel efficient cars like the Toyota Prius and the Honda Civic. And General Motors, the world’s premier manufacturer of the Hummer and other gas guzzlers, plummeted towards bankruptcy.
At that time, some Americans began calling for massive government intervention to address their energy problems. And even today, advocates of federal activism in the United States are complaining that China is pulling ahead in the race to establish a green energy industry. Nevertheless, despite these developments, private sector markets are now working to re-energize the world.
Natural Gas and Nuclear Reactors
Last week, for instance, three announcements from several organizations illustrated that our private markets are plugging away at reinventing our global energy system. Exxon Mobil announced that it had added two billion barrels of oil equivalent natural gas to its proven reserves last year in regions like Australia and Papua New Guinea. Mitsui of Japan agreed to join the American firm Anadarko in developing gas energy products from shale in Pennsylvania. And the American energy company NRG, the Japanese industrial giant Toshiba, and a Texas public energy utility reached a settlement to proceed with the construction of a new generation of nuclear power plants, the first nuclear facilities to be built in the United States in over thirty years.
Interestingly, these announcements were not made by sovereign oil companies in the Middle East, or by Chinese or French bureaucrats in Beijing or Paris. They did not focus on Arab government controlled oil fields, Chinese government financed wind farms, or French government managed nuclear power plants. Instead, they were made by American and Japanese firms that are collaborating to generate energy from relatively unusual places by employing innovative techniques.
Will America be able to satisfy its energy needs in places like Papua New Guinea and Pennsylvania? That might sound like a far fetched strategy to some people, but private sector firms in America and Japan are energetically exploring such possibilities.
Implicit in such announcements is a fundamental strategic choice regarding market economics and the development of national infrastructure. Chinese and French citizens, for instance, rely heavily on their governments to finance, construct, and manage national energy projects. That’s why the world’s largest electrical generation plant has been built on China’s Yangtze River at Three Gorges Dam. And that’s why France now generates over 75% of its electrical power from nuclear plants that are managed by government controlled Électricité de France.
Of course, over the years, the American and Japanese governments have managed numerous infrastructural projects as well. America’s network of interstate highways, for instance, was constructed with federal funds. So were the rocket ships, shuttles, and extraterrestrial probes that NASA launched into space. And so was Japan’s famous network of Shinkansen bullet trains that now cross the nation.
Nevertheless, America and Japan have always relied on private companies to leverage their governmental resources. The United States, for instance, depended heavily on firms like Caterpillar to build its interstate highways, and on Grumman Aircraft to design and build the Lunar Module for its moon landings. And Japan fully privatized its bullet train network in 1987.
Advocates for government driven approaches complain that Americans are slow to rally behind new technologies that require huge amounts of infrastructural investments. But advocates for private market driven approaches retort that the United States is far less likely to place full reliance on a single new infrastructural technology. When such new technologies fail or become obsolete, they believe, private sector approaches tend to distribute these costs across governments and private investor groups more widely.
Which Approach Shall Prevail?
So which type of economic approach shall prevail? The American system of relying on private firms to journey around the world, endeavoring to develop and produce energy resources to sell back in the United States, a system that has produced enormous wealth but that has generated monstrous recessions? Or the Chinese system, one that has created the world’s next economic super power, but that has displaced over 1.2 million citizens from their ancestral homes in order to construct hydroelectric power plants on Asia’s longest river?
Now that the market price of a barrel of crude oil has soared back towards $80 per barrel after falling below $33 per barrel early last year, we might well learn the answer to those very questions quite soon.
The established oil producers, of course, may be hoping that both approaches fail, leaving America and China no choice but to continue purchasing oil from traditional suppliers at ever higher prices. Nevertheless, the basic principles of market economics predict that higher prices will inevitably attract suppliers of alternative energy sources, like moths to a flame …
… whether that flame is fueled by oil, gas, nuclear, or some other energy source.