ast week, just months after cutting government funding for research and development of new efficiency advances and renewable energy, Vice President Dick Cheney announced that he would solve America’s energy security crisis by building a fleet of new fossil-fuel driven electric power plants. “Without a clear, coherent energy strategy, all Americans could one day go through what Californians are experiencing now, or worse.”

Futurist/Politician Cheney asserted that the only way to meet the increase in demand would be to mine new sources of oil and gas, including development of the Arctic National Wildlife Refuge (ANWR).

In the last three months, the Bush administration has further emphasized rolling back environmental protection laws for fossil fuel-burning power plants, and has abandoned attempts to reach an international treaty on global warming $mdash; all in the name of energy security.

At least they are being consistent.

Unfortunately, what the new administration has ignored is that energy security and reliance on fossil fuels are fundamentally incompatible. If in ’73 the U.S. had been primarily dependent on domestic renewable resources, there would hardly have been the same hoopla over electricity prices as there is in California. While vehicle transport and several kinds of industrial manufacturing will continue to rely on oil and other fossil fuels sensitive to international market prices, there is no mandate whatsoever that electricity production be sensitive to the same.

Pessimists, predictably, return to the age-old argument that renewable power is more expensive than fossil resources. For the moment, let’s leave this contention alone. Assume with me, however erroneously, that fossil energy is cheaper than renewable energy. Assume with me also that the environmental consequences from fossil consumption such as global warming, respiratory illness, and birth defects do not really exist.

Relying on fossil fuel energy to carry us through even the next 10 years will be a disaster. The U.S. Geological Survey estimates that proven U.S. oil reserves will last only another 25-40 years as long as the U.S. continues to supplement its energy demand with imports from abroad. New oil drilled on U.S. soil including in ANWR and other preserved lands will not even come online for another seven years. This gives OPEC at least another seven years of exceptional profits before it has the option to dump prices and quash the new drilling sites.

Natural gas is a little different. Available U.S. gas reserves may last as long as 15 years. If Cheney builds his new energy strategy around gas, however, this figure could be less than 10. Coal, while still plentiful in the U.S., becomes more costly to mine as underground seams get deeper with time.

The U.S. has already consumed more than 40% of its proven reserves. Again, experts at the U.S. Geological Survey suggest that coal will only remain competitive if the U.S. continues to import from overseas, creating an even more serious energy security problem, as most of this coal will need to come from Russia and China, states which have previously been uncooperative with U.S. policies.

An argument in favor of renewable energy is not an argument in favor of isolation. There are one-thousand-and-one other commodities traded between the U.S. and other states that have no bearing on fossil fuels. Plus, increased investment in renewable technologies could even tie together key states for international security in an increasingly protectionist world. Japan and the Netherlands, for example, currently manufacture the world’s most efficient wind turbines. Solar cells have seen significant advances in Germany and Great Britain. The U.S. even stands to become a major exporter of fuel cells once the market for these units develops both domestically and overseas.

Energy security is not the primary reason that the U.S. must reconsider its policy to increase its reliance on fossil fuels; that I reserve for fossil energy’s clear environmental costs, which have received enough attention already. At a time when our politicians consider a marginal price hike in oil to be truly an energy “crisis,” we must seriously rethink our willingness to make oil and other non-domestic fossil fuels the mainstay of America’s growth energy economy.

It wasn’t just a typical case of poor planning. In California, blackout warnings for San Luis, Cupertino and numerous other counties have continued for weeks at a time. Electricity bills for consumers have doubled and even tripled in some regions. And skyrocketing electricity prices have forced many small businesses to close.

That California is suffering an energy crisis hardly needs to be proved. But deregulation was meant to spur new markets in electricity, to facilitate the workings of that oh-so-reliable invisible hand and provide low-cost power more efficiently and more consistently than before. It wasn’t a bad idea – in theory.

Based strictly on market principles the system should have demonstrated beautifully the virtues that laissez faire capitalists extol: lower prices, greater supply, efficient resource allocation, and economic growth. And as the rest of the United States, and indeed the world, think about emulating California’s elegant new system, it is mildly surprising to note that not only have deregulation’s apparent virtues failed to materialize, but that California’s energy economy has been nearly brought to its knees. In fact, a return to government regulation of the industry through rate freezes and public purchasing have been the only elements saving California’s energy economy from catastrophe.

They said capitalism wasn’t supposed to fail like that.

Deregulation had a heady start. First proposed in ’95 by former governor Pete Wilson, the advent of deregulation would have coincided with an election year. A little political ambition; a number of fast and furious meetings with the rabid chairman of the legislature’s Energy Committee, Steven Peace; and a $5.3 million lobbying campaign on behalf of California’s three major utility companies produced the idea that California’s state-controlled electricity sector could be streamlined by ending government price controls and at a benefit to consumers. The state would then sell off its assets (conveniently to the same power utilities that had just spent so much in lobbying) and allow operators to sell power at whatever profit the market could bear.

Economists first extolled the value of deregulation, saying that lower prices and state spending (not to mention all the government revenue accumulated from selling off state assets) would have a positive effect on California’s economy. Combined with the state’s burgeoning computer industries, California’s new economy boomed. Success, right? Except that California’s new economy began to consume power at a rate unheard of in the old economy. Power producers couldn’t keep up with the new demand and brownouts resulted. Not surprisingly, the shortage created higher prices, sometimes doubling or tripling what the regulated industry had charged. Businesses witnessed skyrocketing overhead costs. Inflationary pressures followed and while many firms went into debt or temporarily closed their doors, consumers bought less to compensate for higher energy bills. The great California "boom" begun under the previously regulated regime was brought up short just months after the switch

But economists said that the damage would only be temporary., that the principles of the free-market economics still hold, even if it happens to take a little longer than expected. Unfortunately, deregulation advocates may have miscalculated again. In ’96 when deregulation was first proposed, forecasts expected only 2-3 years for new power supplies to come online and bring down the rise in prices. At the end of 2000, only 10 of the 300 firms who had expressed interest in the new system had actually constructed new plants and begun to provide power. Their excuse? They would need the protection of price controls in order to make the high capital costs of electricity plant construction worth the risk. Foiled again. Even now, the future is bleak. Despite high prices and considerable demand, the immense capital costs for new plant construction and the remaining volatility in energy prices continue to discourage investors from new plant construction. The result has left power supplies in the hands of a few large suppliers (again, the same firms whose expensive lobbying produced deregulation in the first place).

Still, the deregulation economists assured us the plan would still work if we just gave it enough time- until yet another market failure became apparent. Electric power has few substitutes. If you don’t have electricity, you can’t turn on your computer, you can’t work. Ultimately you can’t earn money. Hence businesses and even homeowners will pay just about anything for reliable power. When the grid is "hot" – that is, when power is at peak demand and all available producers are stretched – suppliers can charge nearly anything without fearing competition, even if competing firms were to exist. The electricity industry makes enormous profits as customers wind up paying as much as several thousand times the usual price, if only for a few hours, until peak demand subsides. In San Diego, where nominal electricity prices have hovered around 5-8 cents per kilowatt-hour, peak period prices have jumped to as much as 500-600 dollars per kilowatt-hour. Worse, power producers discovered that in a market without competition, power availability could be held in check creating artificially low supplies that would inflate prices. "Peak" prices during periods of low demand suddenly became common. While power providers ran off with obscene profits, consumers ultimately suffered.

There is no question that free markets have produced some of mankind’s greatest material successes in history. But in the American fever to streamline, to decentralize, to make flexible, and to privatize more and bigger sectors of the modern economy, some economists have failed to see that free markets are not necessarily a better solution. In California’s case, laissez-faire economics did not produce lower prices, better supply, more efficient resource allocation, or economic growth. Instead, California has become an example of market failure in epic proportions. As deregulation continues to remain the economic fad of the new millennium, states should think long and hard about the poor example set by California, and whether deregulation is really in society’s best interest..