Thursday, April 24, 2014
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The Energy Deficit

MILAN – I have been surprised by the recent coverage in the American press of gasoline prices and politics. Political pundits agree that presidential approval ratings are highly correlated with gas prices: when prices go up, a president’s poll ratings go down. But, in view of America’s long history of neglect of energy security and resilience, the notion that Barack Obama’s administration is responsible for rising gas prices makes little sense.

Four decades have passed since the oil-price shocks of the 1970’s. We learned a lot from that experience. The short-run impact – as always occurs when oil prices rise quickly – was to reduce growth by reducing consumption of other goods, because oil consumption does not adjust as quickly as that of other goods and services.

But, given time, people can and do respond by lowering their consumption of oil. They buy more fuel-efficient cars and appliances, insulate their homes, and sometimes even use public transportation. The longer-run impact is thus different and much less negative. The more energy-efficient one is, the lower one’s vulnerability to price volatility.

On the supply side, there is a similar difference between short-term and longer-run effects. In the short term, supply may be able to respond to the extent that there is reserve capacity (there isn’t much now). But the much larger, longer-run effect comes from increased oil exploration and extraction, owing to the incentive of higher prices.

All of this takes time, but, as it occurs, it mitigates the negative impact: the demand and supply curves shift in response to higher prices (or to anticipation of higher prices).

In terms of policy, there was a promising effort in the late 1970’s. Fuel-efficiency standards for automobiles were legislated, and car producers implemented them. In a more fragmented fashion, states established incentives for energy efficiency in residential and commercial buildings.

But then oil and gas prices (adjusted for inflation) entered a multi-decade period of decline. Policies targeting energy efficiency and security largely lapsed. Two generations came to think of declining oil prices as normal, which accounts for the current sense of entitlement, the outrage at rising prices, and the search for villains: politicians, oil-producing countries, and oil companies are all targets of scorn in public-opinion surveys.

A substantial failure of education about non-renewable natural resources lies in the background of current public sentiment. And now, having underinvested in energy efficiency and security when the costs of doing so were lower, America is poorly positioned to face the prospect of rising real prices. Energy policy has been “pro-cyclical” – the opposite of saving for a rainy day. Given the upward pressure on prices implied by rising emerging-market demand and the global economy’s rapid increase in size, that day has arrived.

Counter-cyclicality is a useful mindset for individuals and governments. Recent history, particularly the excessive accumulation of private and public debt, suggests that we have not acquired it. Energy policy or its absence seems another clear example. Rather than anticipating and preparing for change, the United States has waited for change to be forced upon it.

Energy-policy myopia has not been confined to the US. Developing countries, for example, have operated for many years with fossil-fuel subsidies, which have come to be widely recognized as a bad way for governments to spend their limited resources. Now these policies have to be reversed, which implies similar political challenges and costs.

Western Europe and Japan, both of which are almost entirely dependent on external supplies of oil and gas, have done somewhat better. For security and environmental reasons, their energy efficiency increased via a combination of taxes, higher consumer prices, and public education.

The Obama administration is now working to initiate a sensible long-term approach to energy, with new fuel-efficiency standards for motor vehicles, investments in technology, energy-efficiency programs for dwellings, and environmentally sound exploration for additional resources. Doing this in the midst of an arduous post-crisis deleveraging process, a stubbornly slow recovery, the process of building a new, more sustainable growth pattern, is harder – politically and economically – than it might otherwise have been, had the US started earlier.ampnbsp;

Still, better late than never. Obama is correctly attempting to explain that effective energy policy, by its very nature, requires long-term goals and steady progress toward achieving them.

One frequently hears the assertion that democracies’ electoral cycles are poorly suited to implementing long-term, forward-looking policies. The countervailing force is leadership that explains the benefits and costs of different options, and unites people around common goals and sensible approaches. The Obama administration’s effort to put long-term growth and security above political advantage thus deserves admiration and respect.

If criticism of democratic governance on the grounds of its “inevitable short time horizon” were correct, it would be hard to explain how India, a populous, complex, and still-poor democracy, could sustain long-term investments and policies required to support rapid growth and development. There, too, vision, leadership, and consensus-building have played a critical role.

The good news for US energy security is that in 2011, the country became a new net exporter of petroleum products. The price of fossil fuels, however, is likely to continue to trend upward.

Declining dependence on external sources, properly pursued, is an important development. But it is not a substitute for higher energy efficiency, which is essential to making the switch to a new and resilient path for economic growth and employment. A side benefit would be to unlock a huge international agenda for energy, the environment, and sustainability, where American leadership is required.

This effort requires persistence and a long official attention span, which in turn presupposes bipartisan support. Is that possible in America today?

The US political system’s persistently low approval ratings stem in part from the fact that it seems to reward obstructionism rather than constructive bipartisan action. At some point, voters will react against a system that amplifies differences and suppresses shared goals, and policy formation will revert to its more effective pragmatic mode. The question is when.

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  1. CommentedMurti Poolla

    Dr. Poolla R.K. Murti / India

    The Author observes that"Barack Obama’s administration is responsible for rising gas prices makes little sense"

    What I gather from Media Reports is that (perhaps with a guilty conscience that his adminstration is indeed responsible), President Obama throws the blame on Chaina, India and Brazil for the swift and significant rise in Gas price in the US.

    "US President Barack Obama sought to blame burgeoning growth in India, China and Brazil for the raising oil prices. Citing rising auto sales in these countries, he said as people in India and China get wealthier they will buy more cars and fill them up like Americans do, driving up oil prices. As places like China and India get wealthier, they're going to want to buy cars like we do, and they're going to want to fill them up like we do, and that's going to drive up demand,"

    It quite true that production of BIKES (and to a lesser extent Cars) has increased in India. What unfortunately, the President does not know is that a Bike carries the entire family of Five or more (though the Bike may dash against a few on the way! We are lucky to have very lax laws!). I am very proud of our Bike revolution (thanks to Bajaj Auto, Hero Honda and very recently Ratan Tata's NANO, Rs. One Lakh car). BIKES and cheap Cars like Maruti (now exported to Europe) have changed the face of Rural and Urban India by providing quick transportation and encouraging rapid-tranfer of Goods, thus lubricating the sinews of Trade and Commerce in rural India. Compare this with the American Gas-guzzling Chariots of Cars and the difference of Indian-Gas efficiency is self evident.

    It should be appreciated that in tune with the Industrial Development of India, it is quite true that the Consumtion of Oil-products, mainly for Industrial needs as also, transportation, has risen manifold. But, the Indian Railways (the great Diesel guzzlers) transport millions of Passengers and tonnes of Goods that they are most enery-efficient, counting per capita Cost per Passenger or a Ton of Goods transported (I regret I am unable to quote relevant Statistics just now)

    The whole world knows that, if only the President chooses to release a very small fraction of the Gas-reserves at US, the Oil-price would tumble down (at least for the short term). Does the President do this with Gas prices touching a whopping $ 4 a gallon?

    This comment is offered just to highlight the efficient consumption of Oil-energy in India (and perhaps in Chaina and Brazil as well). Why not the US emulate this and encourage Mass Transport insted of gloating in the glory of "A Nation on the Wheels"

  2. CommentedZsolt Hermann

    The problem is fundamental and the solution is simple: we are trying to supply energy for our increasing hunger in order to sustain the constant growth, expansive free market economy, which is based on totally false foundations: brainwashing the public to consume excessively overproduced goods people do not really need, products that are harmful for ourselves and our environment, and products which are purchased for credit as in order to purchase them we all have to extend beyond our means.
    So the energy problem is not really a problem.
    The problem is the structure that needs excessive energy, and the solution not only for the energy crisis, but all aspects of the global crisis is to change the structure.
    The present economical structure and the political governance supporting it is in a dead end, self destructing with each passing day.
    We have to return to necessity and resource based consumption and we will see a "miracle": all our global problems would disappear and we could free ourselves to deal with the basis of human life: the relationships in between people instead of chasing unnecessary and obsolete material objects and pleasures.

  3. CommentedPaulo Sérgio

    The actions of the United States since the last oil shock - in the 1970's - has been to liberalise trade, and start - or lead - a trend called globalisation. Could you say that had the effect of aiding growth in places around the world, driving up demand for oil.

    Well, the price of oil is now sufficiently high for Canada to pull the stuff out of the tar sands in Alberta, British Columbia - profitably and at great cost to the environment.

    Crude way of looking at it, but North America does now have energy independence, but at cost.

  4. CommentedJon Mitchell

    You had me until "The Obama administration is working [on] a sensible long-term approach to energy" and "Obama is correctly attempting to explain"

    Anyway, Is Bipartisan Energy Policy Possible? Sure... No Problem. But it requires the courage to step outside of your ideological cave and answer the following questions:

    1) If the solution to too much CO2 in the air is to use less fossil fuels, why is NOT the solution to too much federal debt to use less government?

    2) If the optimal amount of CO2 in the atmosphere is 350 ppm (current=389 ppm) because that is the optimal concentration of CO2 in our atmosphere that life as we know most likely can continue, why is 18% of GDP (current =25% GDP) NOT the optimal size of the federal government since that is the size that most likely yields maximum economic growth?

    Get those two questions right and you'll have Conservatives begging you for a carbon tax.

    Think about it. Progressives and Conservatives are actually making the same apocalyptic argument albeit on different issues. They both make good arguments for action. But the public is yawningly uninterested in AGW and unwilling to make the hard choices on America’s fiscal problems. Buying off the opposition is the American way.It’s time for progressives concerned about rising temperatures and conservatives concerned about rising federal debt to realize the obvious: they need to BUY each other off in order to effectively address their pet ideological concerns-there is no other way. This means trading, among other things, a carbon tax for a balanced budget amendment and a more limited government. This plan -- the LMAD PLAN -- is outlined at http://letsmakeadeal-thebook.com

    The LMAD PLAN BUYS OFF Liberals with much more than just a $600 billion carbon tax. It also adds fully-funded Healthcare for every American, a public option health insurance entity, and the implementation of tax schemes frequently advocated by Liberals such as a “sugar” tax and a value-added tax. The LMAD plan even grants overnight amnesty of 10 million illegal aliens.

    LMAD buys off Conservatives with much more than a balanced budget and limited government ; it permanently ends future illegal immigration, adds tort reform and completely replaces all taxes on production, labor, saving and investment with the new carbon tax, the value-added tax and the sugar tax.

    The LMAD plan even removes the burden of healthcare expenses from corporate balance sheets by ending our reliance on employer-provided health insurance.

    Wahla! Green tech, energy efficiency, green jobs, cleaner air WITHOUT costly government regs or Obama-instituted crony capitalism.

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