Posted by: dstieglitz | April 30, 2010

RETURN OF THE OIL MONSTER

            Have you noticed that the oil monster is stalking us again? Despite a lackluster economy, gasoline has crept above $3 a gallon and oil is trading around $85 a barrel. 22 months have passed since July 2008 when Congress blamed big oil companies and futures traders for $147-a-barrel oil.  But what did they do to avoid a recurrence of skyrocketing prices? Virtually nothing. When oil dropped to $34 a barrel in early 2009, Congress forgot about it.  Hopefully, it will be a while before oil gets to $147 a barrel again, but analysts predict steady price increases as the economy recovers and world demand grows. Now that Congress has passed a $1 trillion health insurance reform bill, maybe it can also pass a comprehensive energy reform bill. After all, most of us use more energy than health care in our daily lives.

            The recession has only delayed the inevitable since the factors that fueled unbelievably high oil prices in 2008 still exist:

  1. The U.S. imports over half of the oil it consumes – about 4 billion barrels/year,
  2. A large part of the world’s easy oil is controlled by dictatorships,
  3. The thirst for oil is growing in China and other emerging markets, and
  4. The U.S. is unlikely to started new drilling in coastal waters any time soon.

We may not see record gas prices in 2010, but the rate-of-increase in prices will depend on the speed and strength of the economic recovery and the energy policies implemented (or not) by Congress. 

            President Obama’s decision to approve new oil and gas drilling off the coast of Virginia, Alaska, and the eastern Gulf of Mexico (even though rescinded) increases the odds of a bipartisan energy deal. By expanding domestic oil production and guaranteeing nuclear power plant loans, Obama seems to be approaching energy issues in a middle-of-the-road way.  The Energy Information Administration (EIA) projects that even with rapid expansion of renewable energy, fossil fuels will still provide three-quarters of U.S. energy in 2030.  Fortunately, new technologies developed by U.S. oil companies are producing economically viable discoveries in surprising places. For example, the EIA estimates that a hundred billion barrels of oil could be recovered from the Bakken Formation in North Dakota, the largest domestic oil discovery since Alaska’s Prudhoe Bay. In addition, the shale gas discovered in Pennsylvania, home to America’s first oil wells, could supply years of natural gas reserves for the U.S. and produce nearly 100,000 new jobs in the state. 

            The worsening oil rig accident off the coast of Louisiana will delay new off-shore drilling for years while Congress investigates the accident, bashes oil company executives, and discusses tradeoffs between the environment and the economy, and tradeoffs between one environmental risk and another. For example, drilling in Pennsylvania and Alaska will produce huge reserves of natural gas, the cleanest fossil fuel for electricity generation and industrial uses; and delivering the new gas and oil through pipelines will avoid the high risk of pollution from tankers. Similarly, using nuclear power and natural gas power plants to generate electricity would replace aging coal-fired power plants, the dirtiest fuel in terms of CO2 emissions. Furthermore, coal mines are an ecological disaster and a hazard to the lives of coal miners. 

            President Obama’s version of the cap-and-trade bill would auction carbon permits to industry.  Some of the $100 billion raised annually would go to low-income Americans in tax credits to offset higher energy prices, some would fund R&D and commercialization of solar and wind power, and some would be invested in training workers to move from lost manufacturing jobs to “green” jobs. Unfortunately, prospects for a cap-and-trade bill with a comprehensive energy strategy look dim. For example, raising the federal gas tax (stuck at 18 cents/gallon since 1993) would encourage conservation, increase demand for electric cars, reduce emissions, raise tax revenue, and reduce oil imports since more than half the oil used in the U.S. is consumed by cars and trucks.  But a gas tax increase unfortunately is politically more poisonous than the carbon taxes. 

            Energy reform goes way beyond the threat of rising gas prices to include the issues of global warming and U.S. competitiveness in world markets. As the cap-and-trade bill limps through Congress, both political parties are sadly sticking to hardened positions – positions that have produced a 30-year energy stalemate dating back to President Carter and the Arab oil embargos. The oil crises of 1979 and 2008 shocked politicians into recognizing our unhealthy dependence on foreign oil.  But as each crisis subsided nothing was done to prevent the next from happening.  The political parties are so thoroughly owned by special interest groups, and so determined to make each other look bad, that they have put the country in such a bad place that we must do everything all at once:

  • Drill for oil and gas off our coasts and in our mountains,
  • Build wind farms off New England and in farm country,
  • Guarantee loans to build new nuclear power plants
  • Tax CO2 emissions and raise gasoline taxes,
  • Implement stringent efficiency standards, and
  • Offer incentives for R&D programs and conservation. 

Are any politicians courageous enough to support these changes? 

            Energy reform offers something for everyone – and will cost everyone something too. To slow global warming, stimulate the economy, increase employment, and improve our position in world markets, the U.S needs a 3-pronged energy strategy:

(1) Development:  Invest in solar, wind and nuclear energy sources to deliver a reliable supply of cheap, clean energy; and distribute it through a modern high-voltage transmission system.

(2) Efficiency:  Mandate efficiency standards for cars, factories, offices, homes, and appliances to reduce power demand and emissions.

(3) Conservation:  Encourage Americans to literally turn off their lights and drive less by making conventional energy more expensive.

The country might make these advances by itself over the next 20 years, but Congress can accelerate progress by passing an effective energy reform bill.  I’m not optimistic because one or more special interest groups are against every potential provision of an energy bill. To the extent politicians are afraid of taking action for fear they might not be re-elected, the problem is really the voters – that’s you and me and the messages we send to our representatives.

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