Gideon's Blog

In direct contravention of my wife's explicit instructions, herewith I inaugurate my first blog. Long may it prosper.

For some reason, I think I have something to say to you. You think you have something to say to me? Email me at: gideonsblogger -at- yahoo -dot- com

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Monday, October 11, 2004
 
Whew! Holidays are finally over. Still digging my way out of an avalanche of old emails at work, but thought I'd take a brief break to blog about something that people think ought to matter in this election: energy policy.

Gregg Easterbrook, who usually has interesting things to say even when I ultimately conclude he's wrong, has a surprisingly awful piece in The New Republic about Kerry's energy policy. He's trying really, really hard to make Kerry sound great on the subject and to make Bush sound terrible. And he's totally unconvincing at both efforts.

Let's start off by debunking a myth: that we are dependent on Persian Gulf oil and could reduce that dependency by reducing oil consumption.

Now, it is true that we import an increasing share of our oil, much of it from the Persian Gulf region. But we are only dependent on that source of supply in the trivial sense that a sudden distruption of that supply would cause economic dislocation. We're not dependent in the more profound sense of having no practical alternative sources of supply.

If Saudi Arabia were the only or practically the only source of crude oil in the world, then certainly we would be very dependent on that country for our well-being, because we could not easily adapt to a decision by Saudi Arabia to cease selling us oil. It could take years, even decades, and trillions of dollars to re-tool our transportation infrastructure to run on something other than oil.

But Saudi Arabia is not the only or practically the only source of crude oil in the world, nor is the Persian Gulf more generally. Quite apart from Russia, Nigeria, Mexico, Venezuela and our own dwindling domestic sources of supply, the oil sands of Alberta have more oil readily accessible by existing technology than Saudi Arabia does. Ultimate reserves may be five or six times that.

The reason we don't import all our oil from Alberta is price. Saudi oil costs about $1 per barrel to pump. It's profitable to pump it at virtually any conceivable market price for crude. Oil can only be extracted from the sands of Alberta after an expensive process - at $50 a barrel, it's profitable, but at $25 a barrel (where oil would probably settle if geopolitical risk vanished overnight, according to a recent statement by Saudi Arabia's oil minister) the cost of extracting the oil is well above the value of the crude thus produced.

The simplest way to rid ourselves of "dependence" on Persian Gulf oil is to simply stop buying it. That would impose an immediate cost on our economy, because the price we would pay for oil would go up. But our dependency would be eliminated overnight. Of course, the economic impact of refusing to buy oil from the Persian Gulf would be the same as the economic impact of their refusing to sell it to us. And this is the terrible economic damage that we purportedly go to war periodically to prevent.

Easterbrook talks about how, if we increased fuel economy in modest ways, we could stop buying oil from the Persian Gulf. But we wouldn't stop buying oil from the Persian Gulf. We might even buy a *greater* percentage from there if we were more efficient - because if we consumed less oil, then the law of supply and demand should drive oil prices *down*, which in turn would mean a greater market share for the lowest-cost producer, which is Saudi Arabia. This is exactly what happened from the mid-1980s through the early 2000s: a collapse in oil prices led to greater demand on Persian Gulf oil specifically as more costly sources of supply stopped producing.

He also says that if we stopped buying oil from the sheikhs, then even if China and India and Europe continued to do so that would be their problem rather than ours. Okay. Let's think about that. Right now, America is much, much less dependent on Mideast oil than Europe, Japan or China. Nonetheless, we're the ones intervening in the region. What does that tell you about the correlation between oil "dependence" and military intervention? Perhaps we're intervening on their behalf? Okay, let's think about *that* for a minute. Japan has no domestic sources of oil. If we stopped buying oil from Saudi Arabia, and told Japan "guys, if you want oil, deal with them yourselves" what would be the impact on American relations with Japan? Well, either Japan would have to arm itself and prepare to conduct "wars for oil" to protect its source of supply. Or they would have to tilt towards China, and let China conduct said wars for them. Or it would have to tilt more strongly towards the Arab states - who, no doubt, will be more pro-American after we refuse to buy oil from them. Does no one remember that Japan's search for secure oil supplies was a major motivator of WWII?

Again: the oil in the ground is valuable. Saudi Arabia doesn't have most of the world's oil, much less the only oil in the world; it has the most *valuable* oil because it's the cheapest to extract. Owning that valuable resource gives the Saudis power. If we want to take away that power, the only way to do that is to take away - or destroy - the resource.

Now, I don't want to overstate the case here. Would it be prudent for America to reduce geopolitical risk to its economy? Yes. So it's not crazy to talk about finding other sources of oil or other energy sources altoghether, or even reducing consumption. But we should be clear about what we're talking about: improving the performance of the American economy by reducing the shock impact of political events in the Middle East. We're not talking about starving the sheikhs of the Persian Gulf of their oil revenue, and we're not talking about ending any concern we have about the security of that region.

So with all that background in mind, let's look at the actual case Easterbrook makes.

1. Easterbrook credits Carter's energy policy - higher fuel-economy standards coupled with deregulation of the natural gas market - with having broken the back of OPEC. But what broke OPEC's back was the determination by the Saudis to bankrupt the Iranians, which in turn was a consequence of the Iranian revolution. Oil prices didn't collapse until the mid-1980s. Meanwhile, deregulation is miles away from Kerry's energy approach, and CAFE standards distorted the auto market, and perversely encouraged the SUV craze (because trucks were exempt, and SUVs evolved from trucks). What, in turn, fueled our new "dependency" on Mideast oil was low oil prices, not some change in policy.

2. Easterbrook mocks Bush for supporting hydrogen fuel cell research. But while it is true that fuel cells are a long way from being a practical transportation fuel technology, they are the *only* plausible post-petroleum technology out there. Yes, fuel cells are an "energy medium" rather than a source of energy. That's the point: they are an energy medium that is *appropriate for transportation.* We already have ample alternatives to oil for our *electricity* needs - we get roughly 50% of our electricity from coal, 20% from nuclear, and 20% from renewable sources, which overwhelmingly means hydropower; only 10% comes from oil. Talk of achieving energy independence by transitioning to a hydrogen economy is still science fiction. But if we're going to invest money in pure research, this is a reasonable venue for it, because hydrogen is still far enough from commercial viability that private sources of funding are going to be relatively scarce. And if you want to power your car with solar or wind power, as Kerry seems to want, you will need hydrogen fuel cells as a medium.

3. Apart from an increase in MPG standards for cars and SUVs, Easterbrook describes Kerry's policy as follows: against drilling in Alaska; against nuclear waste storage at Yucca Mountain in Nevada; mandating 20% of electricity from renewables by 2020; and billions of investment in clean coal. All of these positions are - as Easterbrook himself admits - either poorly conceived or actively counterproductive.

- Both Easterbrook and TNR support drilling in Alaska, for the simple reason that it can be done, and can be done cleanly, so why not do it?

- Opposing Yucca amounts to either (a) opposing nuclear power (thereby increasing American dependence on oil and on fossil fuels generally) or (b) supporting the current, much less safe method of storing waste, in "rusting holding ponds . . . located close to cities." Easterbrook describes opposition to Yucca on safety grounds as "scientific illiteracy." Nevada is a state Bush dearly needs to hold, and his apostasy on Yucca (along with demographic changes, to be fair) put it in play. But Easterbrook thinks Kerry deserves the profile in courage award for energy policy.

- Kerry's definition of renewable energy sources does not include hydropower, because Greens hate dams. But there are no plausible other sources of large-scale power generation from renewable sources, and as Easterbrook himself notes, dams could be made much more efficient to deliver a lot more power. Again: why is his renewables plank a point in Kerry's favor if it is so stupidly conceived and so obviously based on pandering to green sentiment rather than a serious effort to promote domestic energy production?

- Finally, clean coal. This is, as Easterbrook notes, something Bush has pushed as well. It's no reason to back Kerry. And good technologies already exist; the problem is price. Easterbrook says a "cap and trade" approach to carbon would promote use of these technologies more effectively than regulation or subsidies, and laments that Kerry hasn't proposed this. Guess what? Cap and trade was an important part of *Bush's* response to Kyoto. Yes, it's gone nowhere. But who seems more amenable to a market-based approach to getting clean coal tech actually into use? I'll also note that Bush is the one who has emphasized that one reason utilities don't upgrade is that old plants are grandfathered in and exempt from many regulations that hit new plants, and renovations may result in a plant being reclassified as new, hence subject to more regulations. Again: who has the real handle on the problem? It sure doesn't sound like Kerry.

4. This leaves one and only one issue which Easterbrook says Kerry has got right and Bush wrong: MPG standards. Bush has opposed raising these standards or changing how SUVs are regulated under them; Kerry has pushed both. Sounds like a straightforward win for Kerry. Except that Easterbrook knows, and says in the article, that the existing CAFE framework for increasing these standards is a lousy, and terribly inefficient, way to promote the result of higher fuel efficiency. Nonetheless, this is the framework that Kerry advocated working through when he was a Senator. Now, as a candidate for President, Kerry has had to change his tune for fear of losing Michigan's electoral votes. So he supports subsidies instead of a regulatory approach: tax credits for people who buy fuel-efficient vehicles and $10 billion in subsidies to the auto companies to retool to produce these vehicles. But there are a few problems with this. First, the Clinton Administration threw money at Detroit for years to help them develop and produce fuel-efficient cars, without notable results. Second, there already is a tax credit for buying hybrid vehicles, and the vehicles are very popular at current gas prices. The reason there aren't more of them out there is that they aren't profitable for auto companies yet. But they are clearly the future, and the auto companies know that, and are already trying to figure out how to get there profitably.

5. The economically efficient way to get people to buy more fuel-efficient cars is to raise the price of auto fuel. That's happening now thanks to Bush's smashing success in increasing the geopolitical risk premium on Mideast oil production. Another couple of wars for oil in that part of the world and we'll have definitively disrupted supply, thereby ending our dependency once and for all. But seriously: the market is already responding to higher prices. One test of whether a candidate is serious about the subject of energy is whether he respects that. Kerry doesn't, and the best evidence is that he's criticizing Bush for filling the Strategic Petroleum Reserve rather than releasing it to lower prices. This is so perverse it's disgusting, and it's a repeat of Al Gore's and Steve Forbes' similarly absurd statements about the SPR in the last Presidential election. The purpose of the SPR is to provide a cushion against a sudden disruption of supply. Right now, that cushion is provided by the Saudis, who can instantly pump just about any amount of crude. If the Saudis embargoed us, or if there were a disruption of their pumping capacity caused by terrorism, war or natural disaster, other sources of supply would take a bit longer to come online. That's what the SPR is for. It is not supposed to be used to manipulate the price of oil, and it most *certainly* is not supposed to be depleted at *precisely* the point in time when risks of supply disruption are higher than normal. Bush is doing exactly the right thing, and Kerry's response shows a lack of seriousness about terrorism as well as about energy.

Easterbrook admits that Bush's energy bill isn't nearly as bad as people made it out to be. In fact, the right way to characterize it - as with too many pieces of legislation lately - is a basically good bill buried under a mountain of pork. Drilling in Alaska makes sense. Rationalizing nuclear power insurance makes sense. But these are the elements for which it is criticized by the Democrats generally and by Kerry specifically.