Wednesday, March 19, 2008

Crisis Management

I wanted to offer a few more thoughts after yesterday's lengthy posting about the nature of the energy crisis in which we find ourselves. Where before we thought we faced two very tough challenges, between energy and climate change, it's now clear we have three mammoth problems to overcome. Energy and climate must now be addressed in the context of a financial crisis, the full extent of which we don't yet understand, as we saw over the weekend. The only good news is that they're not entirely independent of each other. Efforts expended on one front can help with the other two, and finally identifying our energy concerns as a crisis might inject some urgency and move us past the current emphasis on "energy independence."

I'm sure some of my readers are surprised it's taken me three days to mention Bear Stearns. I have no idea what its bailout/fire sale means for the firm's energy group, which includes at least one family friend, and probably a few former colleagues. I can only wish them well. As Robert Samuelson noted in his Washington Post column yesterday, this financial crisis is different from any recent one, because of the enormous uncertainties involved in the interconnections between companies such as Bear, other investment banks (foreign and domestic), and the rest of the financial system. If the financial crisis triggers a major contraction across the entire US economy--an outcome that is hardly predetermined, no matter how much the media talks up this risk--it could dry up capital for urgent energy projects, even if expanding green energy becomes an economic recovery initiative. Nor do I see how the economy could fail to affect our response to climate change, at least with regard to any measures that would result in a net increase in energy costs or taxes on consumers. Rich countries tackle big environmental problems; countries that feel poor have other priorities. Will images of melting glaciers alter that calculus?

The conjunction of these daunting problems provides further incentives to shed our outdated ideas of energy independence. Someone recently sent me a copy of "Gusher of Lies: The Dangerous Delusion of 'Energy Independence.'" I plan to read it and review it here soon, but I didn't need it to tell me that we have no more hope of solving our energy problems autonomously than we do of managing climate change or restoring our financial system in isolation. Despite clarifications by the advocates of energy independence, including folks whom I respect, such as Tom Friedman and James Woolsey, that of course they don't mean actual energy independence but merely reduced dependence, words do matter. This is the wrong drum to beat in the current global economy, unless we all want to end up a lot poorer, overall.

Diversification, rather than elusive notions of independence, played a crucial part in getting us out of the last energy crisis, and it remains the killer strategy. Now it must encompass both geography and a much broader menu of energy choices. That includes many things we can do here in the US, by way of expanding renewable and conventional energy, improving vehicle efficiency, and bridging electricity from a variety of sources into vehicles. But if Brazil can make ethanol at a lower cost than we can, with fewer energy inputs and less environmental impact, are we really better off continuing to boost corn ethanol output that has already tripled since 2002, competes with food supplies, and might actually increase global greenhouse gas emissions? Crisis management across three dimensions will require tough decisions and ruthless prioritization. So far, we haven't even found the right way to begin this conversation.

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