In part four of our study on free markets, we looked at how governmental intervention in the supply of a good or service affects the price of that good or service. Using crude oil as an example, we observed how just the announcement of a lift in the ban on offshore drilling in the United States caused a reduction in the commodities price of crude oil. We also observed that the reinstatement of the ban has caused an increase in the commodities price.
This led to the question, why would the government want to restrict the supply of a commodity such as crude oil if it would result in an increase in price to the consumer. To answer this question we must look at how environmentalism has affected decisions on drilling for crude oil in the United States.
The government agency responsible for environmental regulations is the Environmental Protection Agency (EPA). The agency began operations on December 2, 1970. With the publication of Rachel Carson’s Silent Spring in the same year, public awareness of humankind’s environmental responsibility increased leading to the formation of the EPA (Lewis, 2009). Its mission was to insure clean air and water but as time has went on; the EPA has grown into a large bureaucratic organization that has lost sight of its original mission.
Initially the EPA's mission was to insure clean air and water. As it accomplished these goals, the bureaucracy began regulating economic activities it saw as damaging to the environment using the clean air and clean water acts (Environmental Protection Agency, 2010). This has led to restrictions in drilling and exploring for crude oil. Oil companies wanting to explore and drill for crude oil know they will need to spend millions in seemingly endless litigation in the hope they may gain permission to drill in an area they believe contains crude oil. Is it any wander these oil companies opt to drill for oil in other countries that have fewer restrictions on exploring and drilling for crude oil.
On April 2, 2007 in the Massachusetts v. Environmental Protection Agency ruling, the U.S. Supreme Court essentially ruled that carbon dioxide (CO2) is a pollutant, giving agencies such as the EPA legal standing to regulate anything emitting CO2. Since all animals and people, as well as machines people operate (e.g. automobiles and coal-burning power plants) emit CO2, the EPA can now regulate virtually everything people do, even what they exhale.
This is a dangerous decision that could actually lead to additional environmental damage. Since plants inhale CO2 and need it to live, a drastic reduction in CO2 emissions due to regulation could result in a reduction in plant life. Since plants exhale oxygen, this could lead to a reduction in oxygen in our atmosphere thus endangering all life on the planet. Perhaps we need to rethink the whole idea of CO2 as a pollutant.
These increased regulations put our economy at risk. Since high litigation costs make it unprofitable to drill for domestic oil, Oil Company’s purchase and extract oil from foreign sources. Many of these sources are in the turbulent Middle East meaning that when tensions rise in the area, we are at risk of a disruption in supply like what occurred during the oil embargo of the 70’s. Since the goods we purchase need to be delivered to their destination using vehicles (e.g. planes, trains, trucks) increases in the price of crude oil raise the price of everything we buy.
To solve this problem, we need to remove politics from the environment. I do not know of any sane person who wants to harm the environment we all have to live in. If, however, a company exists that purposely harms the environment, the free market needs to cease buying their products, putting them out of business. If their harm to the environment is not intentional, we can give them time to clean up their mess. If they fail to do so, the free market can quit buying their products, putting them out of business.
There needs to be a reduction in the role of the EPA to that of an agency informing the public of potential harms to the environment. Armed with this knowledge, an educated public who wants to live in a clean environment can decide what activities to curtail, what products not to buy, and demand products that are friendlier to the environment.
Due to its finite supply, the use of crude oil to produce energy will need to be replaced with an alternative source at some point. As oil reserves diminish, the price will automatically rise due to diminishing supplies. At some point, the market will demand a cheaper alternative, and some entrepreneur will develop it as they do with any product or service the market demands. This leads to the topic of our next lesson, what happens when the government artificially manipulates demand.
References
Environmental Protection Agency (2010, March 4, 2010). Laws and Regulations. Retrieved March 4, 2010, http"//www.epa.gov/lawsregs/
Lewis, J. (2009, September 10, 2009). The birth of the EPA. Retrieved March 4, 2010, http://www.epa.gov/history/topic/15c.htm
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