In addition to dueling over Afghanistan (the subject of my last column), Senators McCain and Obama are trying to one-up each other when it comes to energy. Most notably, the McCain campaign recently released an ad that essentially blames Obama for $4-a-gallon gasoline (although the price of gasoline has actually gone down since the ad was first aired).
According to McCain, “the rising price of oil has brought hardship to our country,” and this hardship is “because the price of oil is too high, the supply of oil is too uncertain, and we depend on oil too much.” McCain has previously admitted to not knowing a lot about economics, and his comments reflect that. While we might not like paying more for gasoline at the pump, there is no such thing as the price of oil being too high (or too low). Ultimately all things being equal the price of oil is determined by supply and demand. If the latter outpaces the former, then the price will go up. So why has the price come down in recent weeks? Largely because we’re driving less (Americans drove nearly 10 billion fewer miles in May when the price of gas broke the $4-a-gallon barrier compared to the previous year, and more than 40 billion fewer miles during the first four months of the year), which means demand is less. Less demand drives the price down. It’s amazing how that happens.
McCain’s solution to the woes of paying too much for and being too dependent on oil? Produce more oil largely by lifting the self-imposed moratorium on offshore drilling to increase supply (Obama has indicated a shift in his previous opposition to offshore drilling “if we can come up with a genuine, bipartisan compromise”). Not surprisingly, President Bush echoed this sentiment in his weekly radio address: “To reduce pressure on prices, we need to increase the supply of oil, especially oil produced here at home.” But if we want to become less dependent on oil and use alternative fuels (something both McCain and Obama advocate), increasing supply as a way to keep the price of gas low is exactly the wrong thing to do. Trying to keep supply up and price down is a surefire prescription for people to believe they can keep consuming oil as they have previously and that doing so is affordable. The only way behavior patterns will change is if the economics of oil dictate a change, which is exactly what is happening as we speak. Any attempts by government to “fix” the current “problem” will only derail the change that is currently happening.
Both McCain and Obama are chasing the chimera of energy independence. The reality is that at least with respect to oil there is no such thing. According to Massachusetts Institute of Technology economist Morris Adelman: “The world oil market, like the world ocean, is one great pool. The price is the same at every border. Who exports the oil Americans consume is irrelevant.” The practical proof of this is that in the late 1970s the United Kingdom was essentially oil self-sufficient virtually all of its oil consumption came from the North Sea. Yet when the price of oil spiked in 1979, the UK was hit just as hard as Japan, a country that was almost entirely dependent on imported oil. Why? Because oil is a commodity traded on the worldwide market and both its supply and price are indifferent as to where it comes from or where it’s going. So the notion that domestic oil would somehow assure supply or a low price is false unless you believe that domestic oil companies would forgo profit in favor of patriotism to ensure that their oil stays on the U.S. market at prices less than what the rest of the world is willing to pay. (The last time I checked, Exxon Mobil wasn’t too keen about reducing its profit to ease the burden of higher gas prices for the American consumer).
And legislating fuel efficiency (something favored by Obama, but not McCain) is not the answer either. The market is already pushing automobile companies toward more fuel efficiency. Car dealers can’t give away previously sought-after SUVs and trucks. According to the Wall Street Journal, “Auto makers are seeing a shift that was further underscored in July: American consumers long enamored with trucks and SUVs are now looking for fuel-efficient cars. Sales of Ford’s SUVs fell 54 percent, and its formerly top-selling F-series truck line dropped 20 percent.” The list of the most popular cars on Edmunds.com is filled with fuel-efficient cars, including the Honda Civic, Toyota Prius hybrid, Saturn Aura and Vue hybrids, Smart car, Chevy Cobalt, and Toyota Corolla (all in the top 10). And we’re seeing more car manufacturers introducing hybrid technology. So the market, fueled (no pun intended) by consumer demand, is moving in the “right” direction.
As an aside, I’ve not yet heard either candidate propose increased telecommuting as a way to reduce oil consumption. Imagine how much less oil we would use (and how much we would reduce automobile-related carbon emissions) if more people worked from home (although working from home would still entail using other sources of energy for heating/air conditioning and electricity for computers and other electronic equipment). It seems like a no-brainer and one that comes pretty close to being “no cost.” Moreover, it would probably be a pretty popular idea.
Of course, oil isn’t the only energy issue, but it’s the predominant one. Since the vast majority of Americans drive cars, the price of gasoline has an immediate effect on their pocketbooks and their psyches. Unfortunately, both candidates seem to want to fix a problem they really can’t fix. Because energy is what fuels (again, no pun intended) our economy, trying to fix the so-called energy crisis amounts to believing the government can somehow control the economy. Yet the lesson of the demise of the former Soviet Union is that government can’t. And we would be better off if it didn’t try.
To be fair to both candidates, there’s nothing wrong with pursuing alternative forms of energy. But a fundamental aspect of alternative energy is that it must be economically viable. That is, as long as there are other sources of energy that are cheaper, there is no incentive for consumers to spend more for energy. Moreover, paying more for energy even if that energy is cleaner and greener is hardly a prescription for revitalizing the economy. And the current reality is that alternative energy is more expensive. For example, I have a friend who is a small business owner. He chooses to buy wind power for his electrical energy needs, not because it’s cheaper (it’s not) but because he’s committed to operating a green business. I applaud his efforts. Even though it means increased costs (which he has to pass on to his customers, of which I count myself as one of the most loyal I’m at Java Shack almost every morning), his business is thriving. My friend is fortunate, but in this economic climate not all business owners can afford to take such principled stands.
Both McCain and Obama want to bring clean coal technology on line by having the government invest more in research and development, since clean coal is not currently commercially viable. McCain is proposing investing $2 billion annually, and Obama includes clean coal as part of spending $150 billion over the next 10 years. But how is government, i.e., taxpayer, investment going to bring clean coal on line any faster and make it commercially viable? The example often thrown out for getting the government to take responsibility for finding a breakthrough in alternative energy such as clean coal is the Apollo space program after all, it took the government to be able to put a man on the moon. Fair enough. But having put a man on the moon has not made space travel a viable commercial endeavor. Again, the realities of economics actually matter.
If spending vast amounts of taxpayer dollars for energy is inevitable, the one source of energy that might make a difference most immediately is nuclear power, which McCain strongly favors: “If I am elected president, I will set this nation on a course to building 45 new reactors by the year 2030. And I will set the goal of 100 new plants to power the homes and factories and cities of America.” Both France and Japan could be models for pursuing widespread nuclear power. France has 59 reactors that provide 75 percent of its electricity, and Japan has 55 reactors that account for about one-third of its electric output. The substantial costs to build a nuclear reactor aside ($4 billion for the proposed reactor in Lusby, Md.), the biggest hurdle will be overcoming the stigma of the Three Mile Island meltdown in March 1979 (a life-imitating-art experience that happened less than two weeks after the release of the movie The China Syndrome, about an accident at a nuclear power plant), as well as 1950s science fiction B-movies about the effects of atomic bomb tests and radiation exposure.