Guzzling Government Gas

Why we don’t need the government to help direct a possible natural gas transition.

It’s no secret the US has become something of a natural gas-producing powerhouse in recent years. Technological advances in extracting shale gas have made previously uneconomic sources attractive and profitable.

A phenomenon that’s far from shocking to classical economists, who generally expect when the price of one good goes up significantly (say, traditionally sourced and extracted oil), consumers are increasingly incentivized to either purchase less or find suitable substitutes. Fortunately, those same higher prices that decrease demand some also make it economically feasible (and potentially ultimately profitable) for suppliers to seek and develop cheaper alternatives.

But in some areas, employing alternatives can be quite complicated. One often discussed area in which this is true for energy is transportation. Many suppose we’ve identified and begun developing a gasoline alternative—cheap natural gas. But how do you facilitate the necessary (and sizeable) shift among consumers for transportation? After all, you’d need widespread adoption of natural gas-driven autos, trucks, etc. You’d have to build a network of natural gas fueling stations—or at least add pumps to existing gas stations. Such a transition clearly entails a significant outlay of capital—but who’s to fund it? Unless everyone acts in relative unison, it seems a difficult (and potentially risky for those who move first) proposition.

It seems politicians are prepared to come to provide economic incentive—in the form of the NatGas Act, which would provide a 50% tax credit (up to a maximum of $100,000) for installing natural gas filling stations and would encourage people and companies to buy more natural gas-powered vehicles.

Well, problem solved, right? Perhaps, but we reserve the right to be skeptical. After all, the government has a pretty poor track record of choosing winners and losers (*cough, Solyndra). Then, too, what if something more efficient, cleaner, cheaper and more easily distributed were developed in the near future? Will we go through the relatively expensive transition to natural gas, only to presumably then transition to the new miracle fuel? Or, will we ignore the potentially better innovation because of the public funds already outlayed? Or or or?

Part of the benefit brought by the market’s gradual transition to new technologies is it allows the private sector to vet them and determine whether they’re in fact the better solutions to puzzles at hand. And if something better is discovered mid-transition, it isn’t so economically (or politically) painful to change horses mid-stream. Or . . . run multiple horses in the same race! Markets, when allowed to run rampant, allow for multiple solutions to similar problems—let the buyer pick and choose for him/herself, not a bureaucrat.

Which is why we remain, as ever, skeptical of government attempts to intervene in the market’s and economy’s relatively free functioning. In the current case of natural gas, it seems one large shipping company is already switching some trucks along the Los Angeles–Las Vegas corridor to natural gas—and installing the fueling stations to support the transition. All sans government regulation. Maybe if that company experiences success, it makes similar transitions elsewhere. And maybe it encourages other companies to try the same—maybe newcomers pay for use of the already-installed fueling stations, so stations either add pumps or folks build entirely new ones.

And before you know it, the relatively small investment made by one company in one corner of the country makes its way across the continent. Transition achieved, driven largely by market pressures, not politicians holding their fingers to the wind.

We’re not suggesting this is the way the natural gas story necessarily plays out—as mentioned, some new technology could always come along. But unless and until the private sector and free market forces align to achieve the transition independently of government involvement (or, at least, with relatively minimal involvement), it’s not likely the most economically efficient course to take—meaning government subsidies, tax credits or other means of prematurely spurring it are likely not the best uses of taxpayer dollars.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.