12/15/2011 05:36 pm ET | Updated Feb 14, 2012

Energy Politics Supercycle Falters

Markets run in cycles; we are all at the mercy of ups and downs in the macro and micro. Commodities markets, including those for energy, are often held to the dictates of "supercycles." Infrastructure for commodities is so expensive, development timelines are so lengthy and the underlying shifts in demand and supply occur over such long phases that energy prices and resulting investments rise and fall over decades, not months.

The modern energy economy was born in one great supercycle around the middle of the 20th century, and we are still its heirs. In the wake of a privately sponsored boom in energy technology development and deployment in the 1920s, the U.S. government responded to the inequities of the Great Depression of the 1930s by investing in huge electrification projects, choosing technologies, firms and energy types by fiat as it went.

World War II brought the federal government even further into the heart of the energy sector, a role it found nearly impossible to relinquish as the hot war ended and the Cold one began, making nuclear power development and energy security matters of national security.

The U.S. federal government helped build today's cheap energy overdraft, but the model by which regulators chose projects, technologies and fuels for favorable treatment to guarantee broadening access to power and transport is also reflected in today's energy standoff, and contributes to a looming crisis in the sector.

It is arguable that the upswing of the regulation-led supercycle began to end with the oil embargo of the 1970s. Nixon, Ford and Carter experimented with compelling both supply-side development and limiting growth in demand; their efforts met with mixed success at best. Reagan, Bush and Clinton tried selective deregulation to encourage investment, first in natural gas and oil, and then in electricity infrastructure. Americans under these administrations continued to enjoy the benefit of the huge availability of energy built up in preceding decades, and administrations tinkered around the edges, often extracting regulatory prices like tightened environmental standards in the same sectors where they walked back market and trading regulations.

The inability to reconsider the energy market as a whole has hindered energy policy throughout its history in the U.S., but as the need for investment and modernization grows, pressing against the looming background of aging infrastructure, the chorus of industry complaint has grown into something like an emerging consensus.

In recent weeks, AOL Energy reporters have again and again heard the phrase "the federal government should not pick winners and losers." We have often heard it from the same executives and firms who have often benefited from a federal policy of picking favorites, and many of whose very business models have become dependent on wrinkles in regulatory decisions rather than addressing supply and demand issues with greater innovation.

Arguments persist over the details, over the extent to which research and the early stages of commercialization should receive support financial or otherwise, but the range of players pressing for what they see as an equal playing field is impressive.

For decades, the cost of regulatory selection was the price of hugely expanded access, and technological innovation built on the underlying pace of change. That model no longer works, and businesses operate in a world of constant fear that changes in Washington, D.C. may leave their investments unable to access markets, whether they are wind power projects unable to link to transmission or oil refinery owners who still do not know when they might be able to process Canadian crude brought through the proposed Keystone XL pipeline.

Everyone, regardless of political conviction, benefits from intelligently and economically designed energy infrastructure. With business decisions increasingly being made in Washington hearing rooms rather than corporate board rooms, companies are regretting the deals they've made that fail to reflect economic realities and regulators are adrift, defined by process and an understandable predilection for established ways of doing things.

Consensus is elusive and easily challenged, but heading into the 2012 presidential campaign with a clear-eyed vision for what the energy policy future should look like is the industry's duty. Without gathering around principles that can guide future decisions based on market realities as well as the inevitable role played by political perception, energy companies will have no one to blame but themselves if the status-quo regulatory system keeps them hidebound in the operating structures of the past.

This AOL Energy Comment reflects the observations of the editorial staff and the author, in this case Managing Editor Peter Gardett. All views and comments are entirely the author's own.

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