Mises Daily

Home | Library | Don't Let the Planners Take Charge of Energy

Don't Let the Planners Take Charge of Energy

April 29, 2006

Well, the Republicans have some ideas for reducing the price of gasoline.

Don't laugh before you hear the details, among which: Congress will send a $100 check to American families to compensate for fuel costs, they will force more money into ethanol, and they will step up prosecutions of any gas distributor who sells for a price above that which the government approves.

Okay, now you can laugh.

If it is widespread energy that you want, government is the last place you should turn for a solution. Iraq is a good test case. A report from the US Comptroller General shows that energy production in Iraq is still lower than the bad old days when Saddam was in charge.

You know, energy: as in the stuff that keeps the lights on, the cars running, the internet roiling, the medical equipment humming, the televisions squawking, and the ovens baking. Without it, we are reduced to where all of society was between the beginning of recorded history and the early twentieth century.

The US has been managing Iraq for years. Before the war, Iraq produced 2.6 million barrels of oil per day. Iraq now produces about 2 million barrels per day. Before the war, Iraq's generation capacity was about 4,300 megawatts. Current capacity is 4,092 megawatts, which is actually a decline from this time last year.

This isn't because people are using solar power. Living standards are declining. And guess what? Iraq has price controls on gasoline, and prosecutes violators. Nor is there a shortage of money: the supposed reconstruction effort is plowing through tens of billions of dollars, most of it going to private companies on the dole.

The amazing saga of the Al Fatah pipeline, now coming to light, is a case in point. This pipeline, 130 miles north of Baghdad, is (or was) the main pipeline that linked Iraq's northern pipelines to refineries and to Turkey in one of the most oil-rich parts of the world. It is (or was) critical not only to Iraq but the world supply of oil.

The pipeline was bombed by the US when it hit the Fatah crossing bridge. The bombers did not know about or understand the damage it would cause to the pipeline, or even that the pipeline was there. The general who ordered the bombing said that he was trying to stop the "enemy" from crossing the bridge but in the heat of battle, that just means people, so this action alone constitutes a violation of the old-world rules of war that forbid bombing civilian infrastructure.

When rebuilding time came, Congress allocated $680 million in 2003. Kellogg Brown, & Root got the contract – part of a total $2.4 billion no-bid contract given to the parent company Halliburton – and many more hundreds of millions followed.

They had decided to put new pipelines under the Tigris using "directional drilling" that require fantastic amounts of money and time. Despite every warning against it – including some coming from reports commissioned by KBR – the company went ahead.

The contracts the KBR awarded in turn specified only that drillers drill every day, not necessarily complete the job. Why? Well, apparently the subcontractor had looked into the deal and seen that directional drilling in this area was a disaster in the making. Plus the subcontractor was being asked to work in a war zone.

So the subcontractor managed to get the work order to do as much as they could do for six months, but with no requirement that the job be completed.

The drilling began with the goal of putting 15, 30-inch pipelines beneath the Tigris at shallow angles. But it immediately became clear the ground would not stay solid enough to create holes that would stay put. The area was a fault zone filled with rocks, boulders, and gravel, and so every time the drillers would make an imprint, the ground would roll back into place. Nothing larger than a 26-inch pipe would go through.

Four months later, after endless amounts of digging and waiting and delays, KBR notified a contracting officer in Baghdad that three-quarters of the money was gone. The camp was suffering relentless bombardment. The crew members were charging as much as $100,000 per day – money paid by you and me – to keep up the appearance of progress.

It was at this point that the Army Corps of Engineers sent out a US geologist named Robert Sanders to look at the work being done. What he found was ghastly: alongside the bombed out bridge and land, there was a 300-foot long trench created in the course of drilling and yanking and ripping and tugging. When Sanders talked to the workers and supervisors, they all agreed: the whole idea was nuts from the beginning. "No driller in his right mind would have gone ahead," he told the New York Times.

The US government in Iraq blasted KBR for having plowed through the money with nothing to show for it. The penalty? A cut in the bonus fees on the job, but that's all. For its part, KBR claims that the Army Corps had received constant updates about its work and that KBR had been instructed to continue.

Those millions gone, the US approved another contract for $66 million, this time going to Parsons Corporation and Worley of Australia. They had a totally different idea in mind. They would lay the pipes in the trench and put them in concrete. The Army Corps now says that the project is completed. But one problem: the state-owned North Oil Company says that oil is still not flowing through anything at Al Fatah.

Many people look at all this situation and see graft (Halliburton is closely connected to the Bush elite), lack of accountability (KBR should have heeded warnings), a poorly written contract (why pay for work instead of results?), cost overruns (no private company in a free market would spend money this recklessly and stay in business), terrible military strategy (the general who ordered the bombing in the first place should have known), and improper oversight (there are chains of command that should have stopped this fiasco before it went out of control).

But it is a mistake to look at government projects in hindsight and observe all the ways in which it might have been better managed. The more fundamental question is why does management never work as it should? Even if every problem identified by the various reports and the New York Times exposé had been solved, there would have been other problems that could be easily identified in retrospect.

Indeed, the same can be said of any government project gone wrong, from Stalin's campaign for wheat production, to FDR's farm program and TVA, to Bush's public school reforms. We are forever reading scandalous stories about huge government programs that turn out not to have amounted to anything, given millions away to friends of the powerful, and are rife with bungling, incompetence, cost overruns, and everything else bad.

The answer to this seeming mystery rests with Mises's analysis of bureaucratic management . There is no profit and loss system – a lack of rational economic accounting – when property is not privately held and where markets do not permit consumer input and a transfer of title to capital.

And note that this critique applies whether the project is being administered directly by the state or contracted out by the state. No matter how perfectly crafted the contracts are, the main incentive of the private firm is to obtain and spend the grant money. If there are no consumers with the power to judge the final project as a consumable good, the result will be chaos.

Even more fundamental questions are raised by the Fatah case. Many on the left say that the Iraq War has been about spilling blood for oil. But while lots of blood has been spilled, there is no evidence of increased oil – a fact which is reflected in the high price for gasoline at US pumps.

All Iraqi oil is still owned by the Iraqi state. All questions of how the system will work to pump, transport, and refine the oil in the ground are left to the state, which itself is incapable of rational economic decision making.

If the US had invaded Iraq and engaged in outright theft of all oil wells, and then handed the ownership of those wells to private firms, it would have been unjust, egregious, and probably would have inspired even more hatred of the US within Iraq (which is probably why the US didn't do it), but this much we can know: the oil would probably be flowing by now.

The Bush administration energy policy in the US, just as in Iraq, relies on command and control and nothing more. It is a form of low-level socialism and can be expected to produce results along the same lines as the much-heralded effort to get oil flowing in Iraq, a country where the stuff is as common as fog in Northern California.

If the Bush administration, or the Democrats, are given total charge of getting us energy, it will be about as accessible here as it is in Iraq, a country where cars are abandoned for lack of fuel, black markets abound, and the lights flicker on only rarely.


Lew Rockwell is president of the Mises Institute and editor of LewRockwell.com. Rockwell@mises.org. See his  Lew's Columns on Mises.org .

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute