California's befuddlement is US energy prologue

California is long-fabled as a source of wealth and the birthplace of the New Economy. Now it is increasingly being seen as a threat by many who fear that its burgeoning energy crisis will accelerate the already surprisingly rapid downturn of the national economy.

Such fears are not entirely without foundation. California accounts for more than 10 per cent of America's gross domestic product. Any significant reduction of the state's production of goods and services due to blackouts or sharply rising energy costs could have a measurable negative impact on the total US economy at a moment of fragility.

Fortunately, that does not seem likely. Government officials, working with industry, appear committed to assuring a continued flow of energy to users. Consumers will pay more, but not enough to have national economic consequences, particularly in view of the fact that energy is only a small percentage of the production costs of most goods and services. Bankruptcy of any of the big utilities would, of course, be painful for some banks, but the amount of potentially bad debt is relatively small in comparison with the size of credit markets and is unlikely to have national macro-economic consequences.

In short, California's immediate energy woes are primarily the result of the state's flawed deregulation program; the consequences will mainly be felt within the state. The experience of states like Ohio and Texas, where deregulation is being implemented without California's problems, underscores this point.

This is not to say, however, that the rest of the nation has nothing to learn from California - or that the ultimate sources of California's energy shortages are unrelated to federal policies and broader national attitudes and developments. Behind the current energy shortage in the West lies an unusually low flow of hydroelectric power due to light rains and snows and a decade of no construction of new generating facilities in California.

Despite nearly 30 years of recurrent oil crises and the ultimate crisis of the Gulf War, the United States has been unable to develop a consistent and coherent energy policy through both Democratic and Republican administrations and congresses. This was not for lack of programs. There have been a plethora of initiatives, some of which even worked. But many policies that appeared sensible in isolation worked at cross-purposes, leaving little margin for error.

After the first oil crisis in 1973, the United States focused on improving energy efficiency. This effort was largely successful. From 1980 to 1995, final energy consumption per dollar of Gross Domestic Product declined by more than 25 per cent. This is one reason why the dramatic rise in oil prices during 1999-2000 did not cripple the economy as it did in the 1970s. For environmental reasons, the United States, both nationally and on a state-to-state basis, also launched energy-related initiatives to reduce consumption of petroleum and coal and to increase reliance on clean burning natural gas and alternative fuel sources such as wind and solar power.

These policies were well-meaning and with time could have produced a greater level of national energy security. But they soon collided with other policies that limited energy supply. The desire to shift to natural gas has been hampered by regulations limiting the domestic extraction of natural gas. The anti-nuclear movement and regulatory bias against fossil fuels in many states limited the construction of power plants that could have prevented the power crisis now gripping California. The move to balance the federal budget prevented the federal government from taking a more active role in the development and use of solar power. Reluctant to reduce consumer purchasing power and hurt US vehicle producers, Washington and the states have kept US gasoline taxes much lower than in most other advanced countries.

Just as important, the sense of urgency that spawned efforts to limit reliance on foreign energy sources all but disappeared. This left energy policy adrift, pushed in whatever direction the political winds were blowing. Perhaps nowhere is this phenomenon and its costs more visible than in California.

As in so many aspects of national life, California has provided Americans with a glimpse of the future. The new economy, it turns out, still requires the lifeblood of the old economy. The rest of the country should take notice and get serious about developing a national energy policy. Otherwise, California's past could be America's prologue.