Obama Chickens Out on Energy
For a good example of how not to address America’s energy challenges, see President Obama’s new budget.
The budget proposes to slam oil companies with new taxes on their exploration activity. (More accurately: it will slow the rate at which companies can deduct their most important exploration costs.)
The Obama administration promises that the tax will not increase the price of oil to consumers. That seems probably right. US companies might be tempted to pass the tax onto their customers – but they compete against non-US companies that do not pay the tax, and that will undercut the US companies if they hike their prices.
Instead, US companies will likely cut back their exploration activities, leaving more of the world’s oil opportunities to non-US companies. It’s not obvious why the Obama administration would regard this outcome as desireable.
Meanwhile, their budget does nothing to advance the goals that the president claims to cherish.
Yes, it offers new aid to green technologies, including nuclear.
But here is the tragedy of green technologies: they do nothing to enhance American energy independence. They are technologies for producing electricity, and as such they substitute for coal. That’s a great gain for the environment, but since coal is of course mined in the United States, the substitution does nothing for national security.
The national security problem is oil dependence. Oil is the fuel for the world’s motor fleet, and there is no green substitute. Ethanol costs too much and exerts dangerous upward pressure on the price of food grains. As for the hope that green electricity might someday power green cars – that day is very far away.
No, the way we are going to move off oil is through steady, incremental improvements in efficiency. We’ve done it before. American consumers used no more oil in 1995 than they had used in 1979.
Americans switched from oil to gas furnaces in their homes. Utilities that had used oil to generate peak power likewise switched to gas. Motorists bought smaller, more fuel-efficient cars. Truckers converted from gasoline to diesel fuel.
After 1995, however, oil use equaled and then overtook the 1979 level.
In the 1990s, cheap oil invited Americans to save money by spending fuel. Consumers could buy more house for their money by driving more miles to work. Manufacturers could reduce costly inventory by trucking parts to factories as needed. Wal-Mart and other “big box” stories cut their costs the same way: less inventory, more trucking.
To reduce oil dependence, consumers must conserve and manufacturers must now innovate in the opposite direction. The only force that will drive this substitution is price, higher price. If government wishes to accelerate substitution, it must raise taxes – on consumption, not production.
A savage recession would be a bad time to raise taxes on consumers. But government could announce today a tax to go into effect two or three years from now. A higher tax on gasoline – or oil in the barrel – or carbon – any one of those would incentivize car makers and consumers to begin planning today for costlier fuel tomorrow.
But of course such an announcement would ignite complaint in an election year. And a recession-battered administration does not dare face it. Facing those political realities, a revenue-starved admjnistration piles its energy taxes where they will do the most harm, not the most good. Easier instead to blame the oil companies.
Candidate Obama promised that he would audaciously address the nation’s most pressing and difficult problems. President Obama has preferred to blame our troubles on unpopular industries: oil, health insurers, big banks. That old, cheap trick is not audacious, it’s not hopeful, and it’s not even change.
Originally published in The Week.