"U.S. Energy Strategy - Good Intentions, Bad Policy"

Sydney M. Williams

Thought of the Day

“US Energy Strategy – Good Intentions, Bad Policy”

March 7, 2011

In 2008, now Secretary of Energy Steven Chu, but then Nobel Prize Physicist and Professor of Physics and Microbiology at the University of California, Berkley, told the Wall Street Journal that we must find a way to boost the price of gasoline to the levels in Europe. According to Kimberly Strassel of the Journal, in her Friday column, gasoline in Europe sells for about $10.00 per gallon. Boosting gasoline prices to that level is easy. Raise taxes. In France, the tax on gasoline is 70% of the pump price versus 17% in the U.S. The bigger question is how big a hit would Mr. Chu be willing to let the economy take in order to achieve the goal of eliminating – all right, sharply reducing – fossil fuel consumption? Keep in mind, any consumption tax, as this would be, is regressive, not progressive, and it is difficult to believe that this is the message Democrats, who purport to represent the working man, would like to be sending. One cannot help suspecting that Mr. Chu’s functional reasoning may have given way to impractical idealism.

Gasoline prices in Old Lyme (without the help of any additional taxes) have risen from $2.94 a gallon to $3.74 this past weekend – a 27% increase in a matter of six months. For many of us, this does not represent a crisis; however; however, for lower income people who rely on their cars and trucks recent trends in energy costs – not to mention rising costs of food and clothing – make a mockery of those in Washington who continually reassure us that inflation is being kept at bay. The government constantly manipulates and distorts economic data. If the CPI were calculated using methodologies of 1990, the reported number for 2010 would have been 4.5%, not the 1.5% reported.

Unlike the summer of 2008 when speculators drove oil prices to $140 per barrel amidst a credit collapse and recession, today’s increasing energy and commodity prices – food, cotton, metals, as well as energy – appear to be driven by demand, based upon an economic recovery, and the desire and ability amongst those in developing nations to live better. Additionally, fear of oil shortages because of protests for a “freedom agenda” in Libya and other parts of the Middle East have obviously boosted prices.

There have been a number of responses from Washington regarding higher oil prices, but two bear mentioning. One was highlighted in an article in last Thursday’s New York Times, which reported that Senator Jeff Bingaman, Democrat from New Mexico and Chairman of the Senate Energy and Natural Resource Committee, “added his voice to the chorus, urging President Obama to be prepared to consider a significant sale of oil from the reserve (The Strategic Petroleum Reserve – SPR) to stabilize prices and temper any disruption in supply.” Yesterday, White House Chief of Staff, William Daley on NBC’s “Meet the Press” reiterated the same idea. Keep in mind, that of the roughly ten million barrels a day the U.S. imports, about 61,000 come from Libya. (However, since oil is a global commodity, disruptions in Libya will affect prices in America, if not actual imports.)

In the same article, the Times does mention that Representative Fred Upton, Republican of Michigan and Chairman of the House Energy and Commerce Committee, said that the Reserve should be left untouched for now and “tapped only in response to a severe disruption in supply.” (He also objected to a proposal – not widely known, in my opinion – in the President’s budget to sell $500 million worth of oil from the SPR to pay for other programs.) The Strategic Petroleum Reserve was established in 1975, in response to the 1973-74 OPEC oil embargo. It was finally filled about six years ago and has only been used a couple of times, once in 1991 during the build up to the First Gulf War and again in 2005, in the aftermath of Hurricane Katrina. The Reserve holds 727 million barrels – just over two months worth of imports. Its purpose is to alleviate a severe supply disruption, not to alleviate price increases.

The other response, which makes more sense to me, is to increase drilling and production within the U.S., both offshore and onshore, while simultaneously pursuing alternative means. Markets adapt to changing circumstances. When asked the question, what will be the value of the last barrel of oil produced, the answer most often proffered is, a lot. The truth is, though, the last barrel of oil produced will be worthless; for alternatives will have been found long before the last drop of oil is extracted. Whalers in Nantucket went bankrupt in the mid nineteenth century, with the advent of kerosene around 1850 and upon the discovery of oil in Pennsylvania in 1865. Most oil companies realize that alternatives are on the horizon, which is why one sees ads from Shell and others about the research they are doing in these areas. The least painful transition is one allowing costs to rise moderately, but gradually, while investing in nuclear, clean coal, wind and solar – all of which the oil companies are now doing.

The U.S. consumes just over 20 million barrels of oil each day, about 25% of the world’s consumption. Just under 50% is imported, about half of that from OPEC nations. The largest exporter of oil to the U.S. – and twice as big as Saudi Arabia – is Canada. Technology has driven costs of discovery, extraction and production higher. Reserves from unconventional resources, such as shale, natural bitumen and the tar sands, according to Wikipedia, considerably exceed the amount of conventional oil reserves, but are more difficult and expensive to extract. Those higher costs will benefit, over time, the development of alternatives.

Republican Governor Sean Parnell of Alaska made a compelling case in last week’s Wall Street Journal to end the EPA’s blocking of responsible exploration and development for oil in the U.S. No industry dealing with natural resources is without risk to the environment, as we learned so vividly last year in the Gulf of Mexico. But very few countries employ such regulatory rigor as does the United States. In not permitting responsible drilling in offshore deep waters of the U.S., onshore in places like the Bakken formation, or within the Arctic National Wildlife Reserve (ANWR) means that countries without such regulations, like Nigeria, will continue to pump oil without regard to the unbelievable contamination they are causing.

A temporary reprieve from higher oil prices, by selling reserves from SPR does not represent a solution to the longer term problem, nor does such a sale comply with the intention of the Reserve. To the extent that Mr. Chu’s philosophy is reflective of the administration, it indicates how out of touch with reality they are. There are more substantive steps that can be taken – increased drilling is the most obvious.

All of us want to see the day when nuclear, sun or wind powered turbines will generate the energy needed to run this nation – heat and cool its homes and offices, power its transportation systems, and operate its factories and defense facilities. But attempting to impose artificial restrictions, as the EPA is now doing, risks damaging the economy and causing far worse environmental damage in less rich areas of the world.