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pinion Both Candidates Avoid Reality on Oil


Energy policy was front and center in all three presidential debates and has rivaled employment as the defining issue in this election. For all of the back and forth on the subject, there were several critical issues which were never touched, leaving many Americans scratching their heads and trying to decide which candidate sounded most convincing. But as long as both sides avoid honest conversation with the American people, we remain unlikely to move toward a consensus on this key issue of economic, environmental and foreign policy.

The price of gasoline at the pump has always been seen as intrinsically connected to the way Americans feel about the prospects of the economy. In presidential elections, most campaign professionals will admit that given the chance to endow an incumbent president with one generic advantage, it would be cheap gas prices in the months preceding the election. But the way we equate prices at the pump with a president's energy policy is deeply flawed when it fails to consider the vast array of factors beyond the White House's control, or incorrectly considers those within it.

While there are several things the White House can influence when it comes to gas prices, there are many more that it cannot. Oil is sold on world markets. Rising demand in other nations is beyond the control of the United States. As global demand increases, it puts further strain on supply, tightening reserves and driving up price. Whereas small increases or decreases in our domestic production could once have very meaningful effects on total supply, the growing global demand has muted that dynamic to some degee. Simply put, even somewhat significant gains in production anywhere, are quickly offset by rising demands everywhere.

The United States produces about 9 percent of the world's oil, while consuming about 23 percent of it. But remember, oil that is recovered from North Dakota, Texas or the Gulf of Mexico still ends up all over the world. What the candidates didn't really get into is the effect that high prices per gallon have on the oil industry. There is a lot of oil that we've known about for quite some time, yet was not cost effective to recover when oil was at $30 or even $50 per barrel in recent decades. Once prices hit $100 a barrel, it became cost effective to drill for much of that oil, which is a big part of the reason there are more oil derricks in operation on U.S. land right now, than anytime in history. We're drilling more than ever before, but that has much more to do with the cost per barrel than the President's policies. So while you certainly can't fault the administration for there not being enough supply if we're pumping historic amounts, the White House can't really take much credit for the huge upswing in supply either. Both are a result of functions beyond the Presidency.

The problem with the idea that simply drilling even more oil will bring down prices, is that much of the oil we're currently recovering would not be viable at lower prices per barrel. So, as prices fall, supply falls with it, offsetting the “new” oil's impact on supply. Both candidates oversimplify the issue by suggesting that oil is oil and a barrel here is equal to a barrel there. That's simply not the way oil markets work. Oil companies tend to recover different oil, based on where market prices are and the cost of recovery in different regions. A president is not going to do much to change that.

Oil companies want to increase drilling still, because they need to find a way to keep up with the constantly growing demand of developed and emerging economies at current prices. We are currently only forecasting about 40 years in which estimated supply can keep up with the arc of demand. Their strategy is to keep oil above $100 per barrel so that all of the oil they are currently recovering remains viable, while new oil offsets demand increases – not so that it facilitates lower prices, which would lead to demand being further strained by wells that are no longer cost effective. Unfortunately, most of the vast reserves of oil the U.S. is supposedly failing to tap, fall under the very expensive to access category, meaning domestic drilling's potential impact to lower prices at the pump is even further limited by this dynamic.

The other impact on oil prices is speculation, and here is a place where Romney could attack the White House. President Obama has threatened on at least three occasions to “crack down on oil speculators” who drive up the price of each barrel by manipulating futures markets. In the past, the CFTC, which regulates such trading, did not have the votes to enact meaningful reform. But earlier this year, the President had his first appointment to that board, giving him the swing vote needed to reverse the previous 3-2 against reforming oil speculation, by requiring that those who buy oil on the futures market take actual possession of the barrels of oil – clearing the way for legitimate futures investors who provide liquidity and stability to remain in the market, while getting the purely speculative investors who never intend to take a possession of a single barrel, but wreak havoc on price out of it.

Thus far, the president has been still on the issue and Romney's been silent about it as well. This leads me to believe that Romney has no intention of doing things differently. Whether this is pressure from the oil industry to help keep prices high, or a genuine belief that by curbing speculation, prices might indeed fall, rendering too much of the oil we're recovering cost-ineffective, is hard to say. If it's the former, that's par for the course. If it's the latter, I'd like to think that there are better ways to balance supply and demand in the markets than by allowing wealthy investment firms to gouge the U.S. consumer – like perhaps a green energy tax to keep prices per barrel where they are at while providing much-needed revenues.

Here's where policy gets tricky. If we're not having these sort of honest debates, it's impossible for the average American to understand that there's no real way to lower the price they pay at the pump short of directly subsidizing it, which again is likely to increase demand as drivers abandon conservation and the increase in sales of inefficient vehicles rise, as they always do. So if the administration were to say, we're curbing speculation, but enacting additional taxes to support prices in order to keep output at it's current level, it would be attacked for not passing along the non-existent savings to cash-strapped consumers. Like I said, this isn't exactly simple stuff.

In the long-term, the U.S. should, above all else, aim to reduce demand and expand cleaner alternatives. Someone once said that talking about energy policy without talking about climate change is like talking about tobacco and not mentioning cancer. The idea that we're somehow going to enjoy a modern fossil-fuel boom, digging up dirty shale oil and fracking for natural gas is misguided to say the least. For their part, the White House has made several blunders on green energy, the first of which was the idea that it was a good way to create immediate jobs during an economic downturn. The portion of the stimulus that went to green energy was never going to post the sort of immediate dividends that were promised, and it seemed like a stubborn way to try and kill two birds with one very expensive stone. In the end, we didn't even wound either bird, while casting a Hope diamond into the forest. 

Where the administration has done well is in terms of improving CAFE standards and beginning to incentivize better decisions in the marketplace – an area where the government can impact supply and demand. This is an example of good government at work. For decades, the market failed to correct the need for more fuel efficient vehicles, often because of perverse incentives to do the opposite. During much of George Bush's two terms, consumers enjoyed a much larger tax benefit for buying an SUV than a fuel-efficient hybrid, via a farcical tax loophole that allowed business owners to depreciate the full value of a two-ton plus vehicle, at first up to $75,000 then $100,000. The break was supposedly to help farm owners purchase work vehicles, but was intentionally vague enough to apply to a dentist buying a loaded Hummer.

But while encouraging the development of hybrids and electrics is good policy in theory, efficiency incentives could still be enacted more effectively. First, the breaks apply evenly to hybrids that don't get very good gas mileage because the juice from their secondary electric engines is used mostly for additional power, rather than to boost fuel efficiency. In this scenario, there is incentive to buy a hybrid that returns only 25 mpg, while there is no such incentive to purchase a gasoline vehicle that gets 45 mpg. If the tax incentives to producers and consumers were tied to MPG, rather than drive-trains, we'd accomplish more success in both areas.

The unfortunate reality is that most alternative vehicles are neither profitable for manufacturers or economically sensible for consumers, even with such incentives. It might make more sense for the government to reward all good decisions in terms of fuel-efficient vehicle purchases and punish poor ones more severely through the tax code. Over time, consumer-driven changes in vehicles will reflect a conscious effort to reduce demand through increased efficiency, while the profitability of such purchases are sustained in a way that is not the case today, when the most efficient vehicles have the lowest profit margins across the board, while the least efficient have the highest. We need to arrive at a place where demand for smaller, premium, up-market vehicles that return 50 mpg or more is outpacing today's high-end market, which tends to be much less efficient. We're moving in that direction with cars like the new Ford Fusion Hybrid and its sibling, the Lincoln MKZ, which is much closer to a Mercedes than a Prius, and we need to continue that progress at a rapid pace because such changes have much more potential impact on energy policy than drilling in ANWR.

But again, it seems as though Romney has even less interest than the president in terms of these sort of forward-thinking approaches. A recurrent theme at the RNC was deregulating the auto industry, rather than making automobile manufacturers comply to expensive rules that hurt profits and limit consumer choices. His line about the President wanting to stop the rising oceans and him just wanting to make sure Americans can get a job, spoke to this perspective. In times of economic woe, we are quick to abandon all interest in the evironment (does anyone remember hearing the words climate change often in any of the debates?), which is suddenly tarred as a job killer.

This argument brings us back to some sort of contrived Libertarian ideal, in which government best stay out of the marketplace and let consumers and producers figure things out, while tying the sort of technological advances that will be required to meet future energy needs to the failed green job initiatives of the stimulus bill. This sort of backward thinking is unlikely to help us meet the very real challenges we will face in the near future and certainly not going to result in a situation where we're once again driving massive, oversized vehicles powered by cheap fossil fuels. But as long as we're not having conversations about why those days are gone forever, it will remain an easy dream to sell.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. You can also follow Dennis on Facebook. Sign up for a free email subscription and get The Bradenton Times' Thursday Weekly Recap and Sunday Edition delivered to your email box each week at no cost. 




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