Sharp rises in oil prices bring out the worst in many of our politicians. Their first instinct is to find someone to “blame.” Their second step is to try and increase taxes on oil companies.
The third step, if the price increases fail to reverse themselves over a few months, is to conjure up billion dollar programs to subsidize development of “alternative” sources of energy and “energy saving improvements” by home owners and others. Take a look at the Administration’s original energy budget for 2012, which called for $29.5 billion in spending, a 12% increase over 2010 levels. And add in a yearly $6 billion cost in biofuels tax credits as estimated by the Congressional Budget Office.
A fourth step, normally taken with more speed by Republicans than Democrats, is to relax government-imposed restrictions on the use and development of known existing energy resources, e.g. oil, gas, nuclear and coal.
Why the Mess? In 1984, Richard Vietor of Harvard’s Graduate School of Business published a readable, balanced and comprehensive historical survey, “Energy Policy in America” since World War II. His bottom-line conclusion at the time was that we never seem to get it right. Nothing much seems to have changed since then.
A powerful and long-standing assumption driving bad policies is that if the U.S. imported less oil from abroad, the more insulated the U.S. would be from world crude oil prices. This supposition, as Nicolas Nivola of Brookings has emphasized, is flat-out wrong. In the case of the United Kingdom, which has been self-sufficient in oil since 1980, British consumers have been no better insulated from wide swings in world oil prices than Americans. As Nivola puts it, "petroleum is priced in a world market and no country, even a net exporter, can stop the world and get off" (unless, I would add, you impose draconian price controls with predictably dire consequences).
At the same time, the economic impact of a sharp rise in oil prices is substantially less than it was in the 1970s. This is because we use 40% less energy (of all forms) per dollar of GDP than 25 years ago.
Nivola also takes to task Secretary of State Clinton’s argument that “we need to become less dependent on regimes that are going to undermine our security.” Presumably the way to do this is to buy less oil from Iran, Venezuela or other unpleasant oil-rich regimes. But we haven’t knowingly bought a barrel of oil from Iran since 1979 and that doesn’t seem to have influenced their behavior or oil production at all.
Nivola’s bottom line is worth serious consideration: “In the end, living standards are lowered, not secured, by the monomaniacal pursuit of energy independence.” The continuing ethanol boondoggle is Exhibit A in support of this statement. (Newt Gingrich, please take note.)
Why the Monomaniacal Pursuit of Independence? Political science suggests an explanation for persistently wrong-headed energy policies. Peter Gross of Butler University provides a convincing explanation: wrong-headed energy policies emerge
when effective policy choices would be unpopular and doing nothing would also lack general voter support . . . the only politically viable choice is to pick something that in theory resolves the conundrum even if in reality it has little chance of producing . . . net benefits . . . A determination of the final outcome is far enough in the future that money spent today will further a political goal (winning the next election) while the ultimate costs and benefits can be ignored.
A nice,concise explanation for the “Do Something!” mantra of populist politicians.
Reality Today. After finally giving in to political pressure late this past week and announcing a loosening of restrictions on off-shore drilling in Alaska and the Gulf of Mexico, the Obama administration has followed the standard four-step political scenario since crude oil first topped $100 a barrel earlier this year.
But a reversal of “step three” billion dollar spending programs is hopefully in the cards if on-going budget deficit negotiations bear real fruit. In addition, Big Oil has signaled they will not protest (too much) if their favorable tax breaks (in the form of industry-specific tax deductions or “tax expenditures”) disappear in a general assault on tax code loopholes. Finally, there is growing appreciation for the implications of massive shale gas reserves in the U.S. and abroad. Thanks to private sector entrepreneurs, shale gas production is already impacting energy prices here and is likely to do so abroad, as well.
Is it possible that “action-forcing events” are going to over-ride Professor Grossman’s pessimistic view of the way our political system works?
