A credit implosion threatening US prosperity magnifies the costs of errors in energy policy, of which the federal government has committed far too many in recent years. While attention now properly focuses on keeping a liquidity crisis centered on bad mortgage debt from strangling the US economy and infecting the rest of the world, energy cannot for long stay in the shadows. It’s too important to economic health. And politicians have mistreated it for too long.
Hopeful signs glint in the gloom. Congress this month dropped moratoriums in effect since the 1980s on leasing of undrilled acreage on the Outer Continental Shelf. And, in his first debate against Democratic presidential contender Barack Obama, Republican John McCain gave voice to his politically bold opposition to subsidies for fuel ethanol.
But those are isolated exceptions to a national orientation toward energy that remains fundamentally wrong. They should arise instead as part of an energy strategy fully integrated with responses to the immediate crisis. Aligning energy with economic imperatives, however, requires a political discussion more enlightened than anything heard lately from the American political machinery.
Urge to spend
Both presidential candidates and most lawmakers, for example, still wail against imported oil for reasons that are at best skewed and at worst xenophobic. Foreign oil surely is less desirable than domestically produced energy. At the point of consumption, though, it beats any energy, domestic or not, that costs more.
Such economic verity escapes notice in the US, which commits itself to ever-growing public spending on noncommercial energy forms that promise minor contributions to supply. This urge to spend money on energy whose only appeal is that it isn’t foreign oil needs to be brought under control. It has opened up a budgetary drain when national fiscal health is in jeopardy.
The natural linkage of energy and fiscal policies doesn’t end there. First word of a proposal to use public funds to buy $700 billion worth of bad mortgages seemed to ease equity markets but weakened the US dollar, which had been recovering from the abysmal levels it reached in the first half of this year. Apparently, currency markets worried about the bail-out’s budgetary effects. When the dollar weakened, the price of crude oil rebounded in line with the inverse relationship evident earlier this year before falling anew when the deal collapsed and concern turned to economic health and demand for oil.
Obviously, the dollar’s value isn’t the only factor in oil-price movements. Some economists say the relationship is illusory. But the strong correlation that emerged at a time of exceptional dollar weakness shouldn’t be ignored. A government rescue of the financial system, hardly a sure bet at this writing, would expand the federal budget deficit and weaken the dollar if unaccompanied by economic growth, which will be difficult to achieve under any circumstances. The weaker dollar, if the crude-dollar correlation outweighs demand questions in traders’ minds, would raise the nominal price for crude and lower growth prospects.
These interconnections compel the government to reject anything that expands the deficit without sound economic reason, such as limitless expenditure on energy forms that do nothing but perpetuate fantasies about energy independence. They also compel the government to favor anything that promises to generate incomes and tax revenues, boost domestic energy supply on a meaningful scale, and—oh, yes—trim oil imports. Leasing of federal land, on the Arctic National Wildlife Refuge coastal plain as well as the OCS, serves those goals. The need is urgent.
Clarifying vision
The credit crisis thus erects a framework within which the US can address energy as a central element of economic strategy. The very real threat of economic collapse should clarify America’s energy vision. Correction of past mistakes can shed costs from the economy and federal budget, neither of which should have to carry extra baggage through the perilous course ahead. And development of commercial supply from natural resources can help strengthen the economy and balance national accounts.
At this anxious moment in history, the US must, at last, get energy policy right.