Bush’s Energy Policy

President Bush has been talking up the idea of a national energy strategy again. Personally I always find these claims that “we need a national strategy” rather disappointing. Disappointing in that I don’t think the government is all that good at doing things (generally speaking).

I made my decision. I know what is important for this country to become less dependent on foreign sources of energy, and that requires a national strategy. Now, when I first got elected, I came to Washington and I said, we need a national strategy. And I submitted a national strategy to the United States Congress. And it has been stuck. And now it’s time for the Congress to pass the legislation necessary for this country to become less dependent on foreign sources of energy. (Applause.)

And the most important component of our strategy is to recognize the transformational power of technology. Over the last quarter century, technology has radically changed the way we live and work. Think about this: Just 25 years ago — for a guy 58 years old, that doesn’t seem all that long ago — (laughter) — if you’re 24 years old, it’s a heck of a long time ago. (Laughter.) In the 1980s, most Americans used typewriters, instead of computers. We used pay phones, instead of cell phones. We used carbon paper, instead of laser printers. We had bank tellers, instead of ATMs. (Laughter.) We had Rolodexes, instead of PDAs. And for long family trips, we played the “license plate” game — (laughter and applause) — instead of in-car DVDs. (Laughter.) We’ve seen a lot of change in a quick period of time, haven’t we?

While the second paragraph is true, the reason we have had all these developments is that there was a profit to be had. In other words, the prospect for profit lured in investors for research and development. There was no national strategy to develop DVD players or computers, and if we could go back and implement one we’d probably end up with sucky computers and DVD players. Funding basic research strikes me as a reasonable role for government. A national energy strategy on the other hand strikes me as nothing more than an opportunity for rent seeking and corporate welfare.

I do agree that more nuclear power is probably a good idea and that there probably should be a very serious look at and overhaul of the regulations for nuclear energy. Other countries have been using nuclear power safely for decades. One problem with increasing nuclear power in the U.S. are the hysterical environmentalists who ironically want to cut CO2 emissions, but at the same time don’t want to switch to nuclear power which emits no CO2. Another problem, which is derived in part from the previous problem, is the exorbitant costs due to the regulations on nuclear power. So while this would be a good direction to go in, I doubt that we will go in that direction.

Here is a startling fact,

A secure energy future for America also means building and expanding American oil refineries. Technology has allowed us to better control emissions and improve the efficiency and environmental performance of our existing refineries. Yet there have been no new oil refineries built in the United States since 1976.

In the last 29 years there have been no new oil refineries. This one of the main reason that we see sudden and dramatic price spikes for gasoline. Add on top of this the regional restrictions on the types of gasoline that laws permit and you have an industry with a tremendous amount of market power and the slightest reduction in output can drive prices up very high. The reason? Envir0nmentalism and NIMBYism (and its more extreme cousing BANANAism).

And existing refineries are running at nearly full capacity. Our demand for gasoline grows, which means we’re relying more on foreign imports of refined product.

We could also get rid of the regional differences in gasoline. For example, California requires specialized refining for the gasoline used in the state. If the price jumps, gasoline refined to fit the requirements of another state cannot be used to mitigate the price spike in California. In short, these regional differences result in market power and price volatility in these regions. Having a uniform standard for gasoline would reduce this effect and could help make the world market for refined products more competitive and it would be cheaper than building new refineries. Of course, a new refinery in a given State/congressional district sure is a nice way to throw some pork to a Senator/Representative and his constituents.

Advances in technology will also allow us to open up new areas to environmentally responsible exploration for oil and natural gas, including the Arctic National Wildlife Refuge.

This will do very little to the domestic price of oil. I know this is a favorite theme of conservatives, but geesh they either are totally clueless about economics or are throwing a nice porky bone to contributors or something. To see the problem ask yourself this question: at what price does domestically produced oil sell for? Same as price in the world market? Well, then why would we expect to the oil form ANWR to be so cheap? Are the oil companies going to suddenly develop a massive case of “patriotism” or something and sell the oil from ANWR for half price? I don’t think so. They will sell it at the prevailing market price. Granted, theoretically a new source of oil would reduce the price of oil, but the Saudis and other oil producing nations have increased production in the past and it has had little impact on the price of oil.

Will it reduce our dependence on foreign oil? Kind of. Kind of in the sense that we wont be buying as much from them for awhile, but the world price would still be prone to price spikes if something disrupted the supply of oil from the Middle East. So in terms of the impact on prices, the economy (inflation, growth, etc.) it will have little to no impact and we will still be dependent on Middle East oil in terms of prices.

We’ve proposed $2.5 billion over 10 years in tax credits that will encourage consumers to buy energy-efficient hybrid cars and trucks, and we need to expand these incentives to include clean diesel vehicles, as well.

Big deal. $250 million a year is literally chump change when it comes to car sales. It would be like looking under the cushions in your sofa and collecting the loose change and putting towards your rent/mortgage and then crowing about how wise you are. This is a tiny idea that will have very little impact. Consider this, according to this article in 2002 $250 million would cover slightly more than 2 dealers in Ward’s top 500 dealers in terms of revenue from new car sales. This is a tiny idea and braying about it is ridiculous.

Overall Bush’s plan looks like a pork fest and wont do much to help the high price of oil in an appreciable way. Personally I’d rather he did nothing and let the high prices induce people to drive more fuel efficient autos. Further, the high prices would make alternative energy sources look more attractive in terms of current technology and research into developing even better technology.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. John Thacker says:

    The “build new refineries on closing military base sites” seems at least a decent idea. Reuse old brownfields. We do need new refineries.

  2. Kappiy says:

    Very well-thought out posting. Increasing CAFE stanadards would be a very easy way for the feds to increase fuel-efficiency. Remember when these were initiated in the 70s there were done under the rubric of enhancing national security. Ford had to push them through a reluctant Congress and they remain one of the most impressive aspects of his legacy. There is no reason Bush shouldn’t be pressing for their enhancment for the same reasons.

    Of course one problem is that our energy policy is directly related to both transportation and land use. Consider the fact that nearly half of our oil consumption is used for transportation. Transportation is a function of land use policies–which are generally set at the local level, but are enhanced by federal dollars.

    If the feds made calculations in the transportation bill that favored more energy-efficient modes, there would be incentives to change to more intensive land use policies on the local level.

    Currently we have a government–dictated system of land use policies in the exurban areas of high growth that pretty much commands people to use a very energy inefficient type of technology for mobility.

    Markets can be useful for many things, but I am not sure about land use regulation. What is needed is a type of regulation that combines a comforable level of environmental safety with mechanisms for encouraging market choice.

    Right now, in most areas of the country there are no choices and this is contributing to energy waste.

    Bush’s policy–and his stupid comments last night about the wonders of technology–are reflective of both a lack of creativitiy for thinking about the issue of energy use and a fundamental lack of understanding of the role of energy in other aspects of policymaking.

  3. John Thacker says:

    Increasing CAFE standards would be a very easy way for the feds to increase fuel-efficiency.

    But not to decrease fuel use or (especially) emissions, a point people often miss. CAFE makes cars more fuel efficient. What does it mean when your car is more fuel efficient? It’s cheaper to drive farther. What happens when it’s cheaper to do something? You do more of it.

    There’s a decent amount of evidence that raising CAFE standards increases emissions, and has little to no effect on fuel consumption. The extra miles driven counteracts the benefits.

    The best way to get people to use less fuel is for prices to be high. People will choose to buy more fuel efficient vehicles anyway. That’s what’s happening now. A higher gas tax would always help, too. (The problem with cars being a large purchase that lasts for many years applies with both options, though.)

  4. John Thacker says:

    Here a link to an AEI-Brookings Joint Center on Regulation look at CAFE, discussing how studies show that higher CAFE standards cause more miles to be driven. Also note that CAFE standards are rising currently anyway– see the official Federal site here.

    In April of 2003, the National Highway Traffic Safety Administration promulgated a final rule establishing the average fuel economy standards for light trucks that will be manufactured in the 2005-2007 model years (MYs). The standards for all light trucks manufactured is set at 21.0 mpg for MY 2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007. This rule is effective May 5, 2003.

    I don’t think that you have the right to accuse anyone of “a lack of creativity” or “a fundamental lack of understanding the role of energy” considering both your ignorance of current CAFE standards and your apparent non-understanding of their second order effects of more miles driven.

  5. Myopist says:

    “One problem with increasing nuclear power in the U.S. are the hysterical environmentalists who ironically want to cut CO2 emissions, but at the same time don’t want to switch to nuclear power which emits no CO2.”

    So we come up with a way to shut up said hysterical environmentalists. This isn’t the 1980s anymore: the Democrats have no reason to give cover to the Greens, and a couple of extremely good ones for grinding that party’s collective face into the dirt. How about we let ’em?

  6. praktike says:

    Sadly, No!

    Rolling back pollution protections, as some advocate, to allow refinery expansions is also not the answer. Although refinery capacity is a factor in today’s higher gasoline prices, environmental regulations are not the reason for tight refinery capacity, according to the DOE, the Environmental Protection Agency, the General Accounting Office, and even oil industry executives. Consider the market fundamentals: refiners reap higher profits when capacity is tight, so they actually have a disincentive to significantly expand production. In fact, oil executives have stated that the reason they did not expand refining capacity in the 1990s is that the low profitability of the business did not justify the investment.13

    In June 2002, the Bush administration nevertheless went forward with a wholesale weakening of the Clean Air Act’s preconstruction permitting requirements for refineries even though the agency concluded that these requirements — namely, New Source Review — had “not significantly impeded investment in new power plants or refineries.”14 Besides disregarding the conclusions of EPA staff, when making this decision the administration ignored information from the DOE, which concluded that environmental requirements accounted for only a very small share of the refining industry’s decline in profitability in the early 1990s.15 And even a top executive at refining company Valero emphasized that it was “the poor margins that had the biggest impact, not the environmental rules.”16 Lastly, the GAO concluded that the industry criticisms cited by EPA in support of the new NSR loopholes and exemptions were self-serving and unsubstantiated.17

    Bush officials and others also blame clean-fuel standards for tighter gasoline supplies, complaining that “boutique” gasoline blends drive up prices. However, oil refiners themselves insisted on the current menu of formulation requirements as an alternative to a unified national standard. And in spite of loud complaints, the number of fuel requirements is often exaggerated. For example, in 2001 when ExxonMobil created a map to advocate against clean fuel requirements, it showed 48 different requirements. However, the company multiplied requirements by three, claiming that this accounts for low-grade, mid-grade and high-octane gas. This conveniently ignores the fact that most companies create their mid-grade gas by mixing the other two.18 The EPA pegs the current number of requirements at 15 to 17, depending on the season.

    In addition, it is important to keep refining costs in context. In 2002, refining costs and profits were just 13 percent of the total average cost of gasoline, while 87 percent went to distribution, marketing and federal and state gas taxes, with the biggest slice (43 percent) going to pay for crude oil.19 Refining costs are typically a mere 15 percent of what we pay at the pump or just 30 cents of a $2 gallon of gas.

  7. Energy Policy Talking
    Steve Verdon posts a rather balanced analysis of Bush’s energy policy at Outside The Beltway . “President Bush has been talking up the idea of a national energy strategy again. Personally I always find these claims that “we need a…

  8. McGehee says:

    The Natural Resources Defense Council is against reforming emissions standards!? What a shock!

  9. The picture of the nuclear energy industry that Steve paints isn’t exactly complete. Click here to find out why.

  10. spencer says:

    The refinery issue looks like a red herring to me.

    If you index the price of gasoline and the price of crude oil over the last 20 years the ratio of the two measures has varied from a high of 100.25
    to a low of 99.75. In other words over the last 20 years using monthly data for crude and gasoline there has been no significant change in the price of gasoline relative to the price of crude oil. The data on monthly gasoline prices published by the Department of Energy does not show any big spikes in the price of gasoline that was not explained by higher crude prices.

    Over the last 20 years domestic crude oil production has declined significantly. Why do we need more refining capacity? What would they refine?I know, imported crude oil. But why import
    crude rather than refined?

    Over the last 20 years most existing refineries have been rebuilt in place in a way that expanded capacity. The Federal Reserve use to publish data on refineery capapcity — but quit when they revamped the IP data. But when the data was available it showed refining capacity growing at about a 1% rate, or about the same rate as the growth of demand .

    Finally, refining has been a poor profit industry and many existing refineries have been
    very happy to sell their facitilties at low prices.

    So my question is why is refining an issue at all?

  11. David C says:

    Though I haven’t researched the issues a lot yet, the “build new refineries on closing military base sites” sounds borderline brilliant to me, mainly because it’d be a great way to do an end-run around the NIMBYs and fanatical environmentalist types.

    At first glance, it looks like the sort of “energy policy” that might be economically sound – mostly aimed at dealing with externalities like NIMBYism that the market isn’t currently able to overcome, as opposed to command-economy or corporate welfare type stuff.

  12. John Thacker says:

    but the Saudis and other oil producing nations have increased production in the past and it has had little impact on the price of oil.

    Umm, no. When they’ve increased production it has reduced the price of oil, and when OPEC has cut production in order to raise prices it’s raised prices. Of course, they are a cartel, so they work to restrain production and keep prices high (not TOO high, in order to spur investment elsewhere). Oil’s been in a nasty cycle– remember the $15-20 a barrel oil almost 10 years ago? Well, that caused a big decrease in oil investment and exploration. (It also caused OPEC to tighten up a bit, since they were in a cheating phase.) Right now there’s also a big speculative bubble; inventories are actually fairly high right now, but investors are really buying futures expecting the price to go up.

    However, ANWR isn’t likely to provide enough oil to make a real difference in oil prices, sure. All oil is equal on the buying market. (Though OPEC restrains its own production so it’s good to have alternatives.)

  13. John Thacker says:

    pratike–

    I can point you back with several studies that show quite different results on New Source Review. What’s more, the logical argument for the problems it causes are quite easy to understand. While it may not have caused large reductions in the building of new power plants, it certainly reduces the incentive to install new pollution controls on old power plants. Under New Source Review, if you repair or maintain your old 1950s technology on your power plant, you’re fine and don’t have to change anything. But if you want to reduce emissions by installing cheap but cleaner 1980s technology, you’re not allowed to do it. Suddenly your grandfathered-in plant becomes an expensive New Source, and you’re required to use the absolutely newest technology to improve it. Yet you’re still allowed to keep using the oldest, most polluting technology which is grandfathered in. Insane. New Source Review is dumb; a set of decreasing tradeable emissions credits without New Source Review would enable individual power companies to achieve the same emissions savings more cheaply by installing newer technology on their older plants instead of spending tons of money on the latest and greatest on their new plants while not improving their ancient power plants at all.

    And yeah, the big gas companies have indeed argued for the current boutique system, away from a national standard, at times. At least, whichever one felt that it could game the system best has. Rent-seeking from the government? Shock. Certainly it’s stupid.

  14. Current thinking is that most OPEC countries are now producing at their maximum potential, given their current oil business infrastructure, along with increasing demand from India and China, and further OPEC quota rises will result in little additional oil.

    Since many of these countries are ruled by authoritarian dictators or quasi-dictators, it isn’t surprising that their oil production is not very efficient. Saudi Arabia is the only one that could pump more today, but even their economy is so messed up that GDP per capita is dropping.

    Of course, every oil producing country is trying to maximize long-term gain, because eventually the oil will run out, so they balance producing more and making more money with decreasing prices and making less money, as well as producing less and making oil users become more efficient as the price rises.

  15. cosmos says:

    If vehicles were more fuel efficient, people might drive farther on vacations, but daily commutes would be the same.

    The problem with nuclear power is NOT “hysterical environmentalists” — it’s not as cost-competitive as a combination of higher efficiency and renewables. Nuclear is “centralized”, expensive, and takes a very long time to build. See details at Rocky Mountain Institute, ‘General Energy Policy’

    Arctic Refuge oil will not lower world oil prices any more than the almost 1
    million barrels a day currently coming from Alaska.

    The EIA says that “technically” (ignores cost of production) recoverable Refuge oil would
    only replace other declining Alaskan sources. And they admit that OPEC controls world oil prices.

    NRDC’s Senator ‘Murkowski Watch’ debunks the deceptions used to promote drilling in the Refuge

    Here’s a map showing Bush’s 2,000-acres in the Arctic Refuge

    US Fish&Wildlife, ‘Potential Impacts of Oil and Gas Development on Refuge Resources’

    NRDC’s ‘Slower, Costlier and Dirtier, A Critique of the Bush Energy Plan’