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US energy policy is “bone-headed”

February 8th, 2011 · 1 Comment

According to an editorial in the Oil&Gas Journal..
The article is right, but for the wrong reasons. It cites three reasons why Obama’s energy policy is wrong:

  1. It asserts that the government knows best what types of energy people should use.
  2. It stipulates numerical energy shares for specific types of fuel based on—what?
  3. And it taxes commercial energy to support noncommercial energy.

What got these guys at O&G journal going was this:

To pay for “innovation” in “clean energy technology,” the president said, Congress should repeal tax preferences for oil and gas companies. And he promised that, by 2035, 80% of US electricity “will come from clean energy sources.”

And then this:

Governments possess no special knowledge about energy. When they stray into fuel choice, a function best left to markets, they subject their initiatives to political influence. Governments legitimately can set standards for environmental and safety performance, and they legitimately can and should police competition. With fuel selection, though, the politicians who lead governments know mainly what kinds of energy their supporters want them to promote.

Indeed. However, the reality is a bit more complex because government policies are already heavily involved in energy, see the following figure (from here)
Fossil fuels are already on the receiving end of a host of subsidies and tax credits. What’s more, they impose cost on society which is not reflected in market prices (these are ‘external effects’ you’ve learned about in economics101).

So the status quo is hardly market ‘neutral’, but heavily skewed towards fossil fuels. But O&G Journal really isn’t at all warm to these facts, they go on:

Taxing commercial energy to support noncommercial energy destroys wealth.

Yes, most alternatives are not commercial (although if you take away all the tax brakes and subsidies for fossil fuel and include the cost for pollution, the picture could change quite a bit).

However, there is a fair bit of technological development going on in alternatives. It’s less than five years ago since solar panels were produced at anything upwards of $4 per watt, today, that’s less than $1 for the technologically most advanced. There is no reason to suggest that this evolution (inter-spiced with more radical improvements) will not continue in the future.

Partly, these improvements are the result of economies of scale and learning that would not have been possible if there wasn’t a market for these products. And since they are (mostly) not commercial, that market wouldn’t have existed without some form of government help.

A rational energy policy would put different energy sources on a level playing field and make the external effects internal (that is, let the price reflect the true cost to society). This isn’t at all what is happening, and it’s not what the O&G Journal advocates, even if they seem to, with their rather empty references to ‘free’ markets.

Now, that doesn’t mean we’re happy with Obama’s energy policy. Quite the contrary. We think that there is a tremendous opportunity in natural gas which would have numerous advantages if exploited more vigorously:

  • It’s way cheaper than oil
  • It’s way cleaner than coal (and considerably cleaner than oil)
  • It will, if pursued energetically, make the US much less dependent on foreign oil, with all the geopolitical and economic advantages attached to that.

The obvious use is in electricity generation, but it can also be used as a transport fuel. It’s not entirely without issues (there are some reasons for concern that frakking, the process by which gas in tight rock is released by using large amounts of water and chemicals might not be as safe as the industry has it), but there is no reason to assume that this is an unsolvable problem, considering the large price differential with oil.

Natural gas seems like the natural ‘bridge’ energy source (between dirty fossil and cleaner alternatives) to us. Indeed, in the very same O&G Journal, there were a couple of articles expounding the increasing importance of natural gas (here and here).

Tags: Natural Gas · Opinion

1 response so far ↓

  • 1 n // Feb 8, 2011 at 4:47 am

    AMEN!! good article….obama wants to destroy one of the strongest sectors in the US economy. Those tax breaks help support families for the hard working men and women out in the field. It cost way to much $$$ to risk hitting a dry hole without a tax break….Obamas and idiot when it comes to his energy views. He has been employeed as a Gov’t man and has never worked in the private sector….If you ask me a muslim president with the name Barrack Husein Obama, well that doenst suprise me if he doesnt care we support foregin oil, Hawaii will not even release his birth certificate.. i dont know about him, his energy views suck and so does his Obamacare..we need more people to take a stand