Tortoise and Hare

Kudos to Tom Friedman for being one of the few public voices reminding us (NY Times Select required) that our policy on Iraq is inevitably connected to our energy policy, and not via some conspiratorial notion of "Blood for Oil." A robust energy policy promoting conservation and alternatives might just be the best Plan B we could devise--in the medium to long run. But when he suggests to us and to aspiring Presidential candidates that there is any energy plan we can put in place this year that could have a big impact next year, he undermines the seriousness of his argument and of this issue. I may hold heretical views on gasoline pricing, but I confess I'm not creative enough to imagine a government policy that could put a noticeable dent in petroleum demand within a year, without exacting an unacceptably high economic toll.

I like round numbers, and here's a good one: one million barrels per day. That's the magnitude of change in the relationship between global oil supply and demand that I believe would be necessary to shift the price of oil by enough to get the attention of OPEC, over and above normal seasonal and random fluctuations. One million barrels per day (bpd) equates to 4.8% of the 21 million bpd of petroleum products that the US consumed over the last 12 months, on average. A million doesn't sound like such a big number, in our world of commonplace billions, until you realize that the entire contribution of our primary alternative fuel program, ethanol, might grow enough to reach 450,000 bpd this year. Adjusting for ethanol's lower energy content, that's the equivalent of about 300,000 bpd of oil. Doubling that--something we might be able to do in a year on a crash basis--would reduce petroleum consumption by a net 400,000 bpd vs. 2006. And that's ignoring what it would do to the prices of food and natural gas.

Mr. Friedman's energy advisor, Dr. Verleger, suggests a higher gasoline tax, and I'm finally coming around to that idea. But consider the magnitude of tax that would be necessary to cut gasoline consumption by 600,000 bpd, 6% of current demand, to get to that million. If a $1.00/gallon increase in the national average gasoline price between 2003 and 2006 wasn't sufficient to prevent gasoline demand from growing by 4.5% over the same period, then I wonder how large a tax would be required to reduce demand by 6% within a year or two. I can't imagine Congress or the White House approving something that large, short of a national emergency.

Now, you may conclude that my choice of a million barrels per day is arbitrary, though having spent my career watching the price of oil--and a good part of that time actually trading the stuff--I'm skeptical that much less than that would move a global market which has grown to 84 million barrels per day. You might also argue that a tax that consumers knew would be in place forever would have a different effect than a gradual price increase that no one was sure would last. Probably so, though I still think it would take more than 50 cents/gallon to convince our foreign suppliers that thirty years of rhetoric about energy independence are finally producing action. That doesn't mean we shouldn't try such policies; we just ought to be realistic about what they can achieve, and how quickly.

I'd honestly be happier if I were wrong about this, and that three years of high energy prices--combined with growing worries about climate change--have prepared the way sufficiently, and all that's necessary now is a little extra nudge to transform behavior ingrained over generations, turning us into a nation of energy misers. But there's so much inertia built into our capital stock and our lifestyles. I'm afraid that solving this problem is going to require a rare combination of commitment and patience. Any candidate telling me this can be accomplished quickly--without a lot of pain--is not going to win my vote.