A conflict of wishes threatens to steer the US away from sound energy choices at a critical time. The country, if energy politics accurately reflects the mood, wants to stop using oil. It also wants cheap fuel. It can’t have both.
US President George W. Bush invoked the first wish in his state of the union address Jan. 31. “By applying the talent and technology of America,” he said, “this country can dramatically improve our environment, move beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past.”
The second wish is manifest in tantrums Congress has been throwing since gasoline prices spurted after Hurricanes Katrina and Rita walloped Gulf Coast refining centers last year. First came charges of “gouging.” Then came an inquisition of oil company executives whose companies reported extraordinary profits in an extraordinary market. Soon lawmakers will try to pass a new “windfall profit” tax or punish the biggest producers with tax code changes on the handling of inventories and foreign taxes.
Cheap fuel
This all happens because Americans expect retribution when market conditions deny them cheap fuel. The expectation is no more realistic than assertions that the US can replace oil in meaningful amounts and have cheap fuel at the same time. Most errors of US energy policy start with fancies of this kind.
Two strong forces now amplify the costs of energy mistakes. Global population is growing. And populous developing countries are industrializing rapidly. These forces are raising global demand and intensifying competition for economic energy-mainly oil, gas, and coal. They are strong enough to offset gains in energy use efficiency in the developed world. It was inevitable, therefore, that demand would come to strain capacities to produce and refine crude oil and to deliver oil and gas to processing facilities and markets, as has happened since 2002. It was inevitable that prices of basic energy commodities would rise to signal the need for expansion of nearly everything related to supply.
There’s nothing sinister about this. It’s simply economic evolution: more people, more mechanized work, more travel, more vehicle mass, more electricity, more demand for primary energy.
While demand has been stretching the physical limits of supply, a resource evolution also has been in progress. Demand growth and depletion of old fields force producers to explore and develop increasingly challenging and costly resources. Oil and gas supplies thus tend to become costlier with time.
Policy should accommodate these changes. An evolution that pushes up costs of conventional energy helps alternative sources, which are “alternative” because of competitive disadvantages. With prices rising for oil, gas, and coal, alternatives are finding their economic footing. Policy should encourage the transition by letting markets guide adjustments these shifts in the energy landscape, which are too complex and too dynamic for governments to manage.
Trying to rush the process does more harm than good. Mandates, subsidies, and tax manipulations favoring specific energy forms can’t help alternative energy sources in general. As long as traditional energy forms remain economically preferable, they’ll hold commanding shares of the energy market, so political favors for specific fuels can only crowd out other, possibly better alternatives. Energy selection should reflect competition of cost and form, not of cronyism and political deals.
Supplemental supply
The aim for alternative fuels, moreover, should be to supplement rather than replace supply from hydrocarbons. Absent a technological leap not now in sight, fossil energy will retain its cost and form advantages for many years. It will, however, need help meeting challenges implied by current demand projections. That’s a rich opportunity for energy alternatives. Yet efforts to accelerate development of those sources at the expense of oil-to “move beyond the petroleum-based economy” at faster than market speed-can only strain economies.
If they continue, conflicted US energy wishes will breed costly policy mistakes, such as wasteful spending, taxes that discourage investment in future oil and gas supply, and limits on domestic exploration. They’ll constrain energy supply, raise prices, and create hardship. And hydrocarbons will still dominate the energy market.✦
