Lynne Kiesling

Jeff Jarvis is writing a series called Issues 2004, and his post on energy policy from Monday tackles a lot of important questions and offers some recommendations. In addition, the comments on his post include a lot of good insights and thoughts.

Here are my thoughts. Jeff starts with his memories of the 73-74 oil crisis in the US, of which I largely remember sitting in line at gas stations with my mother, waiting to fuel up her 1971 Camaro and reading Laura Ingalls Wilder books (I was eight at the time). Perhaps it was a bit of a coincidence, but I do recall my father buying a Toyota in 1974 … and taking apart and rebuilding its catalytic converter several years later.

Jeff is correct that we have not reduced our dependence on foreign oil in the intervening 30 years. What is remarkable, though, is how much more economic activity we are able to create and enjoy with that level of oil dependence. In other words, we create more GDP per barrel of oil than we did 30 years ago. Still, we do consume a lot of oil, even if at the margin it takes less oil to produce an additional dollar’s worth of goods and services than it did then.

Of course, part of what’s going on here is that the technological dynamism of the past 30 years cuts two ways: newer technologies have become more energy efficient and deliver more value per unit of energy consumption, but what that means is that at the margin, the energy cost of new technologies is actually lower (all other things equal, including energy prices). That makes it cheaper to use these efficient technologies more, so in aggregate we may consume more energy because we pursue a larger volume of economic activity than we used to. That’s the nugget at the core of the GDP increase of the past 30 years. What’s unseen (to continue the Frederic Bastiat theme from earlier today) is one of the counterfactuals: how much economic activity would we have had without the technological change toward more energy-efficient technologies? Because what we see is an increase in energy use in absolute terms, we can indulge the predisposition to hysteria about energy use. Perhaps it’s overstated; but I do think, as one of Jeff’s commenters said, that it’s hysteria about wanting to sustain economic activity with energy prices as low as they currently are.

Jeff next tackles gasoline, suggesting a tax on inefficient cars that is paid as a wealth-transfer subsidy to owners of efficient cars. Such a streamlined policy would be more transparent than the Baroque web of federal/state/local gasoline taxes that we currently pay to subsidize the construction and maintenance of, for federal taxes, the interstate highway system. Some of Jeff’s commenters confront this Baroque tax system head-on, and rightly so. Dave Schuler paraphrases what he says in his own post on the topic:

So what should the federal government do about energy independence in general and dependence on oil in particular? In my opinion, the federal government should get the hell out of the way. This is a problem that the market is absolutely able to address. Government should stop providing false incentives and let the market operate. Don’t provide incentives for solar cells that take more energy to produce than they’ll produce in their productive lives. Don’t subsidize the production of ethanol that’s more costly in energy terms than the gasoline it displaces.

And, of course, the largest single subsidy that the federal government provides on the consumption of gasoline is called the Interstate Highway System. If the people in Massachusetts, or Wyoming, or Texas, or California want more highways, I believe that they absolutely have the right to build them. But they shouldn’t build them with money from Illinois or New York. And while we’re on the subject why is there an Interestate Highway in Hawaii?

I think that’s right; we do subsidize the use of technologies that are thought to have environmental benefits (such as solar and ethanol) that are less intense energy production technologies, which means that we use more resources to get the same number of BTUs of energy. The purported tradeoff is that we get less pollution in return for the increased use of resources to produce energy. That is a contentious topic — KP readers know that there’s a lot of research showing that ethanol production both is fossil-fuel energy intensive and produces emissions, while ethanol’s use contributes to ozone formation according to a new study that I linked to in this post. Solar panel production is prey to many of the same criticisms. Plus I think Dave’s right to point out that the Interstate Highway System is one of the biggest subsidies to energy use that we have, and that stopping that subsidy and pricing the use of the highway system would send accurate signals to drivers of the cost of their driving choices.

So if we ask the “compared to what?” question about gasoline taxes, I think in a frictionless world that the wealth transfer tax he proposes would create some of the incentives he intends. But reality is not frictionless, I don’t trust the government to implement the tax in a second-best efficient fashion, and I disagree with the top-down, control-and-manage mindset that claims to know what’s best for consumers (I’m not saying that Jeff is doing that, BTW, but many do). What if I’m a working immigrant with kids, and I scrape together enough cash to buy a secondhand but inefficient car so I can drive to work? If you tax my inefficient car and I can’t afford to buy it, you probably force me to either take a job accessible by public transportation or not work at all. That’s egregiously unfair. Energy costs are but one part of the complex lives we lead, and attempts to impose redistributive costs on us to change our behavior is going to reach up and bite us in unintended and unanticipated ways.

Jeff then asks about nuclear power. This September 2004 Wired magazine article looks at the academic research and the construction of nuclear power plants in China. China’s economic growth (which contributes to the currently high oil prices) is already straining their power supplies, so China plans to build 30 new nuclear power plants in the next 16 years, all using pebble-bed technology. Pebble-bed nuclear has been around since the 1930s. Instead of fuel rods, the uranium/carbon blend is encased in baseball-sized graphite/ceramic balls, and the reactor core is cooled with helium gas. No radioactive water, no spent fuel rods to make dirty bombs. And the scale of the plant is about one-third of the big ones that we are used to here. This is the nuclear technology of the future because it’s safer, cleaner and more secure. My hope is that this technology moves us away from our knee-jerk rejection of nuclear as an option, and that its different risk profile undermines the now-successful arguments for federal insurance subsidies (Price-Anderson).

Jeff goes on to discuss R&D and reducing world oil dependence, but I’ll stop here. Bottom line: we can do this, we are already doing this, and engaging government to satisfy our impatience is more likely to produce a worse outcome in the long run by forcing us to impose particular solutions instead of a variety of entrepreneurs all trying to find the energy approaches of the future. Tim Worstall’s comment on Jeff’s post touches precisely on that:

Please, no more new plans, no more money, no more tax breaks, research grants and definately [sic] no more bloody government interference. Just let the engineers and scientists get on with what they are doing, working to solve these problems under the rules and incentives already in place.

And let us use the information contained in price signals to evaluate our personal, subjective valuation of energy use to us, each in our own individual circumstances. The more we focus on transparency and reducing transaction costs in energy markets, the better those signals will be at capturing more of the true costs and benefits of our energy use.

Lynne Kiesling

Oil futures passed $50/barrel overnight, largely based on low US inventories and the anticipation of unrest in Nigeria, which could disrupt supply. The Wall Street Journal has a slug of articles today about oil prices, fuel efficiency, how natural gas prices are increasing the costs of exploiting Canada’s oil sands, etc. The best of the lot is this article on low US inventories and Nigerian unrest (subscription required), which notes

The decline in American inventories is roiling markets because the U.S., as the world’s largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan’s hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government’s Strategic Petroleum Reserve. The government is considering making more such loans. …

Experts say it is likely the industry can get by with inventories below the 270-million-barrel level, in part because of efficiency gains by refiners. Lawrence Eagles, an analyst at the IEA, figures that the decline in U.S. inventories to below 270 million barrels is a temporary blip, as it proved to be in 2002, and that the industry “is comfortably prepared to meet winter demand.” Yet Mr. Eagles notes that world demand for oil is running at a much higher rate at a time of capacity constraints.

But this National Post article says that Saudi Arabia is going to increase its production by 16 percent, to 11 million barrels per day. Can they really deliver on that promise? According to this AP report in Forbes, Saudi Oil Minister Ali Naimi says that the increase will come in an oil field where they’ve just started up production. Such a statement suggests that some exploration and capacity expansion have taken place. We’ll see; I’m a bit of a skeptic on that topic. Plus, as the WSJ article quoted above notes, our refining capacity for high-sulfur crude is full, so the bottleneck is in the refining part of the supply chain. That bottleneck is likely to cause high prices for refined products to persist.