As predictable as the change of seasons is the call every few years for a “comprehensive U.S. energy policy” whenever the price of gas approaches $4 a gallon.
Just as predictable is the defensive posture taken by whichever administration happens to occupy the White House at that moment.
This is all playing out like clockwork right now in Washington, D.C., as assuredly as the blooming of the cherry blossoms come April.
Comprehensive is generally defined as a policy that seeks to increase domestic production, reduce domestic consumption and expand the use of alternative energy sources, all in an effort to wean the U.S. from its dependency on foreign oil.
There’s just one problem.
“A comprehensive energy policy would require us to do things we don’t want to do,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.
Instead, the powers-that-be tend to adapt on the fly, adhering to the actual U.S. energy policy, which O’Grady described as “suffering through the vagaries of the oil market.” That is to say, there's virtually no long-range policy at all.
“A comprehensive energy policy would require us to do things we don’t want to do.”
- Bill O’Grady, Confluence Investment Management
The Obama Administration said Friday it isn’t ruling out tapping the nation’s strategic oil reserve if the threat of distribution disruptions by Iran pushes the price of oil much higher. The fear is that surging oil prices worldwide could place another significant drag on an already-struggling global economy.
The price of crude oil has risen in recent weeks, to almost $110 a barrel on Friday. The parallel increase at the pump has meant U.S. gas prices have jumped 9 cents this week alone to an average of $3.61 cents a gallon. And with peak warm weather driving season on its way, the price isn’t expected to level off any time soon.
The Obama Administration is aware that gas headed toward $4 a gallon not only hurts the U.S. economy it also hurts the president’s chances of being re-elected.
To be sure, the administration has painted itself into a corner on this issue. The Solyndra fiasco has done nothing to help the case in favor of the government providing financial incentives to companies pursuing alternative energy sources. Administration officials are accused of ignoring financial red flags at Solyndra, a now bankrupt solar panel maker, for political reasons while showering it with $535 million in guaranteed government loans.
It’s safe to say with the issue now entirely politicized, politicians won’t be lining up to find another Solyndra in which to invest taxpayer dollars.
Politics has also inundated the debate over the proposed Keystone XL oil sands pipeline. The Obama administration, bowing to pressure from environmentalists, has put on hold construction of the pipeline until after the November elections despite strong popular support for the project. (With the price of gas soaring, that’s a political decision for which the president would surely like a mulligan.)
Unfortunately, politicians rarely take the long-view on issues. If they did they would not only enact measures that encouraged less domestic consumption of oil, they would explain why those measures are beneficial in the long run.
O’Grady likened the U.S. dependency on oil to the nation’s struggle with obesity. The solution is simple, but carrying out that solution isn’t. “It’s no secret how to lose weight: you eat less and move more,” he said. Most people are disinclined to accept that reality.
Similarly, Americans are practically insatiable in their thirst for oil, and politicians act as their enablers, to borrow a phrase from the 12-step world.
“You have to keep domestic consumption down. You have to attack the demand side and that's what’s politically hard," said O'Grady. "The political class knows the people like low gas prices and they want to drive big cars at high speeds for long periods of time. But the world won’t let us do that."
Obama Administration officials have been touting in their defense of a long-term strategy a fuel efficiency standards agreement reached last summer that will require the auto industry to build cars that run an average of 54.5 miles per gallon by 2025, efficiencies the administration claims will save 12 billion barrels of oil.
That’s a start, but not nearly enough.
To lessen the U.S. dependency on foreign oil, production has to expand in geo-politically safe areas such as the Gulf of Mexico and North Dakota, and exports increased from Canada. That's happening, but not enough to consistently lift supplies such that it eases foreign influences on oil prices. And not nearly enough to silence critics of the Obama Administration.
O’Grady offered a solution: Raise energy taxes such that a gallon of gas in the U.S. is fixed at $5 regardless of the wholesale price of oil. If the wholesale price falls and gasoline slips to $1 a gallon, the extra $4 could be used by the government to research alternative energy sources, or reduce taxes, or whatever.
Such a proposal would undoubtedly "elicit howls" from both sides of the political spectrum, O'Grady conceded. Conservatives would be aghast at the thought of all that money heading into the black hole of government, while liberals would argue such a tax would disproportionately hurt the poor.
In the end, it’s the unpredictability and volatility of energy prices that usually kills any momentum in favor of a long-term policy. Long before such a policy can be formulated, let alone enacted, the price of oil has fallen, pushing gasoline back down to more tolerable levels. And by the time that happens the politicians and the public have moved on to some other crisis.