Wednesday, January 05, 2011

The Results of Energy Policy

The combination of an energy event yesterday in Washington, DC that I was unable to attend and a comment I received on Monday's posting got me thinking about energy policy in the context of the new year and the start of the new Congressional session today. National energy policy has been debated throughout my adult life, whether the policy of the time was clearly articulated and effectively executed or not. The most important question is not what the policy says, but what it does and whether that aligns with what the nation really needs its energy industry to deliver. In my view our current energy policy is on the wrong track, and the new Congress and the spirit of bi-partisan cooperation that emerged in the recent lame duck session provide an excellent opportunity to revise it along more effective lines.

I would summarize our current energy policy as being focused on promoting greater efficiency and the development and deployment of new energy technologies, in order to reduce our dependence on imported energy from unstable or unreliable sources, and to reduce our emissions of greenhouse gases, more than 80% of which are associated with our production and consumption of energy. That sounds fine, but in practice the effect of that policy appears to be replacing low-cost energy with higher-cost energy, while attempting to maximize the employment associated with producing clean energy, rather than minimizing its cost.

What are the results so far? Well, the significant reduction in US oil imports that we've experienced recently is attributable mainly to the weak economy and high unemployment, rather than to improvements in vehicle fuel economy or domestic biofuel production. And the reduction of greenhouse gas emissions that has occurred in the last several years has mainly resulted not from policy-related measures to expand wind power or replace incandescent lights with compact fluorescents, but from two events with little connection to energy policy: the recession--particularly the slowdown in US manufacturing--and the unexpected growth of natural gas production from shale resources. That might not be a fair gauge of what current policies could achieve in the future, but it's clear that an energy policy that depended on economic weakness for its success would be contrary to our national interest.

For decades the de facto energy policy of the US promoted cheap and abundant energy to sustain economic growth. We live in more complex times, but focusing most of our current energy efforts on solutions that are still small-scale and high-cost seems unlikely to do much for the economic recovery. If we were really serious about fueling the recovery, we'd be at least as interested in promoting abundant, low-cost energy at a scale suitable for the needs of a $14 trillion economy, and for which employment gains in the energy industry didn't come at the expense of productivity. A study on the trade-offs between resource access and new taxes on the oil & gas industry that was prepared in conjunction with the release yesterday of API's "State of American Energy" report provides a case in point.

An international energy consultancy analyzed the potential production and employment gains associated with expanded access to the domestic resources that are currently off limits in places like the eastern Gulf of Mexico, the Atlantic and Pacific coasts, and the Arctic National Wildlife Refuge. They also looked at the federal revenue and employment impact of higher taxes on the US oil & gas industry, along the lines of a series of proposals from the administration and Congress in the last two years. They found that access to off-limits oil and gas could yield up to an extra 2.8 million barrels per day of oil and gas liquids and 6.6 billion cubic feet per day of gas by 2025, with direct and indirect gains in employment of more than 500,000 workers. By contrast, increasing taxes on the industry would not only reduce production and employment, as domestic opportunities become less attractive than those elsewhere, but also reduce total federal revenues from taxes, royalties and leasing, following a brief uptick in the initial period after their introduction. Although I'm not sanguine about the chances for increasing access when the administration has just reversed its earlier expansion, that would at least be more consistent with an effective energy policy than raising taxes on the production of energy.

We have a long, bi-partisan tradition of well-intended but ineffective energy policy, and the current policy continues that trend, even if its shortcomings differ significantly from those of past policies. The good news is that we have many more options and choices than we did when the US energy policy debate began in earnest in the 1970s. What we need now is a policy that recognizes that most of these sources, old and new, are important for our present and future energy security, but that what we chiefly require is abundant low-cost energy to fuel an economic revival strong enough to help shrink our enormous federal, state and local fiscal deficits and resulting massive debts, which also have solid bi-partisan pedigrees. It should also put us on a path to lower emissions from whatever sources can deliver them on a meaningful scale and at a cost that we can afford.

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