Energy Policy Canards

by Will on February 24, 2012

The president gave a speech about gas prices, in which he said the following about the “drill, baby, drill” school of energy policy:

You know that’s not a plan — especially since we’re already drilling. That’s a bumper sticker

This is true, but in the same speech he paid lip service to “energy independence”, which is an equally empty bumper sticker. More or less the entire political spectrum is associated with misguided ideas about energy policy.

First, “drill, baby, drill”: this argument rests upon a deeply mistaken view of how gas prices are set. The gasoline industry is not competitive: the price of gas is simply whatever the oil cartel thinks it can get. This means that it is influenced by the level of demand much more than by the level of physical supply. The specific demand that sets the price is not the demand of this or that region, but worldwide demand: if people in one region will not pay a given price for gas, the oil cartel does not lower the price in that region, they just sell elsewhere instead. They would be idiots to do otherwise. The amount of oil produced in the United States rather than in Canada or Russia is totally irrelevant to the setting of this worldwide price. The only situation in which it might be relevant would be if we had a nationalized oil company selling domestically-produced gasoline at below market rate, as Mexico does now, and as many middle-eastern countries have done. I suspect most adherents of the “drill, baby, drill” school do not envision such a set-up.

Second, “energy independence” is a misguided expression of nationalism. Look at the example of our supposedly pernicious “dependence” on Iran, one of the major oil producers. It would be hard to find a country more hostile to the United States than Iran. And yet, it is not the case that Iran refuses to sell oil to us, thus exercising its power to cripple our industry. The present reality is just the opposite: we refuse to buy oil from them.* They would be happy to have the money from our gasoline purchases. We are not hostages to the hated oil-producing countries, they are hostages to worldwide demand for oil. If you can’t find a buyer for it, an oil surplus is not a boon: you can’t eat the stuff.**

I think part of the motivation behind calls for energy independence may be a perception that desire to control foreign oil has had undue, harmful influence on the United States’ foreign policy. This is probably true. But, if true, it just shows that our political elites have failed to grasp what I said above, that where oil is produced, and who owns it, is irrelevant. These political elites–notably, both Bush administrations–have thus underestimated the relentless power of the market, and overestimated the state’s power to interfere with it.

More broadly speaking, this focus on where the oil we burn is produced misses the real point, which is that oil is a dirty fuel that inflicts ample harm on parties not involved in its use. The problem with it is not that it is too expensive, but that it is deceptively cheap.

*This is called “collective punishment.” It is widely recognized as brutal and counter-productive, in the abstract, or when it’s happening to you.

**I owe this insight to an editorial in the Wall Street Journal, published at some time in 2001 or 2002. It is one of the few true things I have ever read in that editorial page.

{ 2 comments… read them below or add one }

Marsha March 25, 2012 at 4:51 am

Will, This is great information to share with the general public. You should send it into the letters to the editor in your Oakland and the Plumas County newspapers. Wouldn’t it be a real money saver to put more effort into making sure our houses, businesses and appliances are highly energy efficient? The Greenville water company figured out that if they put in a generator type water wheel at the top of the dam at round valley lake that they could produce energy for the company and save about $5,000. a year. They actually sell energy back to PG&E. I still think that we should put renewable energy devices on all new homes and businesses and retrofit on older homes if workable. I know that you have to wait to get your money back out of it but I like the future thinking aspect of it. I haven’t looked at your blog for a while since you hadn’t written anything for awhile. I’m so glad you’re writing again. Lv, Me

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Will March 26, 2012 at 1:38 am

One has to be careful when thinking about “saving” money, since one person’s expenditure is necessarily someone else’s income. But yeah, retrofitting old houses, putting in modern double-pane windows and insulation, would be the easiest way to reduce the level of energy used per person. And I continue to think that fixing the price of gas at some arbitrary price, say, $5 + CPI, and collecting the difference between that and the market price as taxes, would be helpful both to encourage the viability of alternate transportation, and to eliminate the uncertainty associated with fluctuating gas prices. File that under “things that will never happen.”

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