McCain on energy

June 23, 2008
Sen. John McCain of Arizona, who will be the Republican Party’s nominee in this year’s presidential election, traveled to Houston last week to address energy policy.

Sen. John McCain of Arizona, who will be the Republican Party’s nominee in this year’s presidential election, traveled to Houston last week to address energy policy. His performance was not encouraging.

The senator offered one constructive proposal: allowing exploration of areas of the Outer Continental Shelf now closed to oil and gas leasing. But he couched the proposal in a self-contradictory tirade that exhibited scant understanding of his subject.

The speech was a huge opportunity. McCain is running against liberal Sen. Barack Obama (D-Ill.), whose platform contains nearly every government-centered mistake the US ever has made on energy: special taxation of producers, massive public expenditure on noncommercial energy forms, consumption mandates, and other horrors. To distinguish himself, McCain needed only to display economic judgment. He blew it.

What about ANWR?

While reversing an earlier stance to champion OCS leasing, the Arizona senator couldn’t bring himself also to support limited leasing on Alaska’s northern coast. “When America set aside the Arctic National Wildlife Refuge,” he explained, “we called it a ‘refuge’ for a reason.” Greenpeace couldn’t have said it better.

Incongruity didn’t end there. Apparently seduced by Washington’s compulsion to find villainy in fuel prices, the politician who calls himself a maverick took his turn lambasting energy speculators. “We all know that some people on Wall Street are not above gaming the system,” he said. But his suspicion of “reckless wagering” didn’t make him back away from support of the cap-and-trade scheme he proposes for emissions of greenhouse gases. Maybe he thinks righteously green emissions allowances will be less likely than dirty energy derivatives to tempt unscrupulous traders into misbehavior.

As a matter of fact, the speculators so popularly disparaged these days in Washington, DC, are essential to a market that dilutes an antique worry that McCain put at the core of his energy message. Conflating formation of the Organization of Petroleum Exporting Countries with the oil embargo of the early 1970s, he regretted that oil had become “a strategic weapon.”

Yes, Arab exporters—not OPEC, as McCain said—imposed a targeted embargo in 1973-74. But the move didn’t achieve its strategic purpose—ending US and Dutch support of Israel during and after the Yom Kippur War. The inconvenience it caused US oil consumers resulted more from market controls in place at the time than from disrupted supply. The changes the embargo uncorked in the oil market would have occurred one way or another.

The biggest change was that oil, previously sold under long-term, bilateral contracts, became an internationally traded commodity. Inevitably, a paper market developed alongside its physical counterpart. Oil prices, once nearly invisible and mostly static, came into clear view, subject to every change—or rumor about change—in relationships between supply and demand. A once-brittle market thus became fluid and much more adaptable to upset than it had been before. The adaptability makes it much less susceptible to politically motivated manipulation of supply.

McCain told his Houston audience that oil had been a commodity before the embargo but became a strategic weapon. That’s backwards. If oil is still a strategic weapon, it’s not a very powerful one, and the US deploys it more readily as a buyer than exporters do as sellers.

Military response

McCain described oil exporters as “often hostile and undemocratic regimes in the Middle East and elsewhere” and declared, “Oil revenues are enriching the enemies of the United States.” He made energy policy sound like a military response and came off sounding truculent, even dangerous. Not all Middle Eastern exporters are Iran, but McCain seemed little inclined to acknowledge distinctions.

McCain was right to emphasize, however selectively, the importance of long-neglected domestic energy supply. But he was wrong to advance as the central reason to do so a view of energy trade that can be described only as xenophobic. Treating energy as a military threat rather than an economic problem is a prescription for waste—or worse. McCain has time to demonstrate on energy sophistication wholly absent in his opponent. But he has a long way to go.