Price and energy politics

Oct. 15, 2007
In US energy politics, the prime mover is price. Yet politicians fortify their energy initiatives with other, seemingly steadier motives, probably because they’ve learned that prices fluctuate.

In US energy politics, the prime mover is price. Yet politicians fortify their energy initiatives with other, seemingly steadier motives, probably because they’ve learned that prices fluctuate. Favorite motives of the day are global warming and energy independence.

In fact, however, neither of those issues influenced energy politics generally until prices of energy, especially gasoline, reached levels the public found outrageous. Energy then became a public concern with gravity enough to pull global warming and independence into orbit. This happened perhaps just before and certainly after Hurricanes Katrina and Rita jolted oil supply. Before then, global warming and independence were discrete causes. Energy in general aroused little public excitement.

New pressure

Because prices rose, politicians feel new pressure to do something about energy. Worse, an acrimonious presidential election campaign buries discussion of the issue beneath the fevered exaggerations and outright lies that political discourse has become. With both major political parties jousting under the banner of energy against the twin demons of foreign oil and global warming-on battles against which it is possible to spend limitlessly to no avail-an appeal based on price might be the only hope. A study released last month by the US Energy Information Administration therefore deserves more attention than it has received.

Conducted at the request of Sen. James Inhofe (R-Okla.), the study examines the 25-by-25 proposition frequently discussed in Washington, DC, under which 25% of the electricity and 25% of the liquid transportation fuel sold in the US in 2025 would come from renewable energy sources. Inhofe asked EIA how much this might cost. Inhofe deserves credit for asking the question.

No government can manipulate energy use without require sacrifice by energy users. US energy users should know how implementation of the 25-by-25 proposal would affect them. In its study, EIA gauges the effect as the difference between price and other projections it makes for the proposal and corresponding reference-case forecasts in its Annual Energy Outlook, with some adjustments.

In the case of retail electricity prices, that difference in 2030 would be 0.5¢/Kw-hr, a 6.2% increase, in 2005 money. To meet the legislative goals, electricity generation from biomass and wind would have to be more than 10 times current levels. Use of coal and natural gas in power generation would fall. Annual consumer spending on electricity would track the reference-case projections as prices of fossil fuels fell through 2022. After that, the annual expenditure under the legislative proposals would outstrip the reference-case projections, becoming $16 billion (3.9%) higher in 2030.

The price effect of the 25-by-25 proposal on transportation fuels-politically more reactive than electricity-is much greater. Against reference-case projections, the retail price of gasoline would be higher by 10¢/gal (5%) in 2020, 28¢/gal (1.3%) in 2025, and 24¢/gal (1.1%) in 2030. The diesel fuel disparity would be even greater, EIA says. Overall, the proposal would raise consumer expenditures on all liquid transportation fuels by 5.4% in 2020 and 8% in 2030.

Hitting the renewable-fuel targets would require ethanol and biodiesel supply to increase during 2005-25 by a factor of 12. EIA points out that such an increase would raise food prices, with corn, for example, costing $6.25/bushel in 2025 instead of $3/bushel in the reference case. And the higher energy prices would reduce economic activity.

Consumption declines

Meeting the 25-by-25 goals would lower the use of fossil energy from reference-case projections: of coal by 23% in 2030, of natural gas by 26%, and of petroleum by 12.1%. Asked if they would support those consumption declines, most Americans would answer affirmatively. Asked if they would favor those consumption declines at the cost of the price increases EIA projects for electricity, gasoline, diesel, and food, and the consequent damage to economic growth, most Americans might answer differently.

Not long ago, Americans didn’t know how much coal, gas, and oil they used. They didn’t care. What they cared about then is what they care about now: price. Told of EIA’s new study, they might begin to care supremely about what some lawmakers want to do to them.