Demand-Side Economics

It seems inevitable when Congress returns that there will be new energy legislation. Understandable. Civilizations cannot survive much less thrive without abundant, reliable energy supplies. The bellwether energy commodity, oil, is at prices at or near record levels, and turmoil continues in the Middle East, from which the world gets over one-third of its petroleum.

But having Congress patch together sweeping legislation from the cacophony of demands to fuel the national economy in this environment is like going grocery shopping when you’re hungry.


Worse yet, you could say, with all due respect, it’s more like sending a pack of hungry 10-year-old kids with fistfuls of money to the grocery store. You know what they’ll bring back. I’m not criticizing any specific proposals, but to coin the phrase made popular by HBO’s The Sopranos, “I’m just sayin’.”

The reality is that governments, corporations and individuals necessarily make bets, invest time and political and fiscal capital in energy solutions. Like everything else, this domain divides pretty nicely into two parts–demand and supply. Most of the discussion, from cocktail parties to Congressional caucuses, centers on supply.

But “demand” is the horse that comes before the “supply” cart. There wasn’t an electric utility industry before Edison started manufacturing light bulbs and electric motors, nor an oil industry before Ford (nyse: F – news – people ) and Lycoming started manufacturing internal combustion engines for cars and aircraft. Demand drives the supply market.

There are plenty of studies and books out there that purport to unravel the character of energy supply and demand, when in fact most of what’s out there focuses on the supply issues. Last month, the Department of Energy released “Facing the Hard Truths about Energy,” a study commissioned by the National Petroleum Council. The fruit of a year-plus of the labors of 350 experts convened in special panels yielded 422 pages, which certainly passes the heft test, but hardly clarified the matter nor, unsurprisingly, provided any dramatic insights. It is chock full of graphs and facts, and predictably has been roundly criticized by political opponents.

Forbes