Low-Energy Fridays: Why doesn’t the U.S. nationalize energy production?
One persistent notion in energy policy is that energy production across all types would operate better if nationalized. The conclusion seems reasonable: Because energy consumption is often a “natural monopoly” that must be regulated anyway, and because some state-managed energy producers already exist, it would be simpler to just nationalize everything. The theory is that this would simplify energy production decisions and supply chains. But the reason not to nationalize boils down to one word: efficiency.
Globally, a ton of energy production is managed by governments. Oil, gas, and coal production in most foreign countries, particularly developing ones, is managed by state-owned enterprises. The United States even has some nationalized energy production in the form of power marketing administrations (PMAs), government-owned companies that manage dams and other electric generating resources built as part of the New Deal.
The appeal of putting energy systems under government control is that they are functionally simpler— and because energy is an issue of national interest, state-owned enterprises can respond to energy-security concerns that a privatized entity would not. Because energy prices are largely similar across the world, and the electricity prices between the PMAs and competitive markets are relatively close, it’s easy to understand why one might see no real advantage to private, competitive markets.
But there are differences—and some big ones, at that. The first thing to keep in mind is that prices for energy commodities that can be traded like oil or gas are formed in a global market subject to competitive forces. The United States’ profit-motivated private energy industry is responsible for the relatively low global oil prices we enjoy today because U.S. oil production has significantly increased in recent years, bolstering supply relative to demand in the global market. So even though many countries have nationalized energy production, the value of that production is still subject to market forces, and competitive, private markets incentivize more production than politically managed nationalized ones.
Another problem with nationalized energy production is that state-owned enterprises make investment and production decisions based on the demands of the state—and, consequently, political desires that may or may not align with what’s best for a nation in the long term. Venezuela and its national oil company, Petróleos de Venezuela, S.A. (PDVSA), are a good example. Oil has been a source of massive wealth for Venezuela, and for many years, high oil prices—combined with the country’s rich production—kept the government flush with cash, used for government subsidies that propped up a socialist economy. However, the politicians managing PDVSA had more incentive to use revenues to increase subsidies and shore up support rather than to maintain profitability. As a result, oil exploration to increase future production was neglected. Eventually, PDVSA’s production fell, oil prices dropped due to increased global production from private companies, and oil-funded subsidies ran out.
Today, Venezuela is considered a failed or failing state that struggles to provide basic needs like food and electricity to its populace. While Venezuela’s troubles aren’t due to bad energy policy alone, the situation highlights how a nationalized industry lacks incentives for long-term sustainability unless it comes from political direction (and politicians are finicky).
Venezuela is an extreme example, and some could point to U.S. government-owned energy companies like the Tennessee Valley Authority as exemplifying the pragmatism of political stewardship in energy production. But it is important to remember that this all exists on a spectrum, subject to the quality of policymakers’ decision-making.
Privatized energy production doesn’t hinge on whether people make good or bad decisions, because producers that make bad choices will lose to competitors and go out of business (called “creative destruction” in economics). Fundamentally, investors in private competitive markets risk their own capital and are incentivized to make good choices; in nationalized markets or state-owned enterprises, they risk other people’s capital and lack incentives for good decision-making. This is also one reason why competitive electricity markets like the Electric Reliability Council of Texas lead in renewable energy deployment: investors will risk capital to capture a profit opportunity. And if they fail, the consequences fall on them, not the public.
Ultimately, while nationalized energy systems can be functional, they lack the incentives for efficient outcomes that private competitive systems offer. The absence of competition can obfuscate these inefficiencies, but when we compare state-owned to private enterprises, the advantages of the latter become more apparent.