The Costanza Energy Policy: 25 Ways to Drive Oil to $150
On last night's Kudlow & Co., I discussed how absurd US energy policy is.
The United States is heavily dependent on fossil fuels (>80%), most of which come from places we would rather not send our money to. We consume 26% of the world's energy, with only 3% of the world’s known oil reserves.
It turns out that for the past 3 decades, we've had a George Costanza Energy policy -- every decision we have made as a country has worked to drive energy prices higher. Had we made the opposite decisions, Crude Oil prices would be much lower than they are today ($130.17 as I type this).
What follows is a list of energy-related policies of the United States. On many of these, I have no opinion -- but I wanted to list as many as I could to demonstrate why Oil is where it is
US Policies with an impact on Energy:
1. Limited areas available for offshore drilling;
2. Stopped the rise of CAFE standards for automobiles;
3. Restricted nuclear power generation of Electrical;
4. Federal Reserve policies since 2001 led to a very weak US dollar (raising Oil prices);
5. Energy conservation policies? None
6. Iraq and Afghanistan wars contributing to Middle East tensions
7. No major United States funding for R&D on energy;
8. Kept CAFE standards for light trucks/SUVs much lower than autos;
9. Failed to raise efficiency standards for appliances for decades;
10. Provided no tax incentives for consumer purchases of hybrid automobiles for decades (in 2005, provided a modest, now expired tax credit);
11. Suburban Sprawl: Americans, on average, live further from where they work than Europeans do;
12. Mass transit system not a high priority;
13. Allowed tax credits for residential solar power to expire;
14. No special capital gains treatment for VC alt.energy investment
15. Ridiculous corn ethanol policy helped drive food prices higher also;
16. Amongst the lowest gasoline taxes in the developed world;
17. No special capital gains tax treatment for clean energy technology development;
18. Created a tax incentive (ADCS) that encouraged purchases of large inefficient vehicles;
19. Game changing breakthroughs over the past decades in solar, battery, or energy generation technologies? None
20. Exempted light trucks, SUVs, and pickups from gas-guzzler tax;
21. Discouraged clean coal, including gas liquification from coal;
22. Limited (or non-existent) state tax incentives for building energy efficient homes;
23. Failed to aggressively promote compact fluorescent light bulb;
24. Limited hydro-electric power generation;
25. Aggressive tax incentives for battery technology development? None
26. Failed to aggressively promote efficiency improvements for residential energy use, transmission of power, or consumption;
27. No new oil refineries built in the USA over the past 25 years.
And that's just off the top of my head.
Some of the above is being responded to by the private sector. With Oil at $130+, there are significant price incentives for these technologies.
However, markets develop solutions only AFTER the economics of it are feasible. This means we are starting R&D with Oil at previously unthinkable levels. Imagine if we had some form of energy leadership 10 or 20 years ago when Oil was $8.
As I mentioned on the show last night, whoever is elected President in November should put together a blue ribbon panel, and develop a real energy policy. Otherwise, we will revisit this post in a few years with Oil at $200 . . .
~~~
What other policies does the US have that has led to higher Oil prices? Use comments to add to the list . . .
Crude Oil, Cash Contract, 1986-2008 (Log)
click for larger chart
Non-Log Chart
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Thursday, May 29, 2008 | 07:10 AM | Permalink
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and there is Joe Kiernan this AM on CNBS still selling that oil is in a bubble...that global warming is not real...that any attempt to control global consumption should be left to the "free market"...talk about being in a bubble....CNBS is just a joke....
Posted by: grumpyoldvet | May 29, 2008 7:24:28 AM
Add one of the most egregious which will never be fixed barring $6+ / gallon gasoline in US....
horrendous land-use/development policy at local and state level which encourages suburban sprawl and encourages the production of negative externalities (pollution and traffic).
hmmm, democracy in action....special interests have managed to protect their agendas while harming the collective good. *sigh* And sadly consumers are the last to blame themselves for the problem. Classic behaviour of an addict.
Posted by: i'm just sayin' | May 29, 2008 7:43:53 AM
What i'm just sayin' said.
The lack of any sort of sustainable urban planning/design, is THE problem. The horrid thing about this, is that this mistake is very difficult and painful to try and fix. It's a very embedded issue. People have their homes, and presumably they'd like to keep living in their homes. Telling them that we're not going to subsidize that lifestyle isn't going to go over very well politically.
Posted by: Karmakin | May 29, 2008 8:06:55 AM
How about fighting a couple of major wars? The amount of oil used to transport all the troops and equipment, not to mention all of the jet fighter flights, is huge.
Posted by: BuddhaBoy | May 29, 2008 8:07:49 AM
I love that we get all excited because a hybrid gets 30 MPG.....
in the early-mid 90's there were cars getting 50mpg... and they were just regular old cars...
Posted by: Eric Davis | May 29, 2008 8:15:13 AM
Barry, you missed Bush adding 150M barrels to the SPR in just 4 years, creating an almost 1M barrel a week draw in fuel and adding 5% to US "demand".
Also, did you know our military is using over 450,000 barrels a day to fight the war, that's over 2% added to US "demand" as well.
Posted by: Phil | May 29, 2008 8:15:47 AM
I recently had the need and opportunity to read some of Jimmy Carter's Energy policy speeches, including his The President's Proposed Energy Policy speech delivered 31 years ago last month.
Its both sad and interesting to speculate what the US would be like now if Reagan had done a 180 and trashed those ideas (while removing the solar panels from the roof of the White House).
Posted by: JD | May 29, 2008 8:20:11 AM
How about margin requirements for oil at 7% vs. margin requirements for stocks at 50%.
Posted by: Andrew | May 29, 2008 8:26:02 AM
Perhaps we should be hoping for more failure in energy policy. Higher fuel prices create the kind of emotional response from consumers that inspires innovation and political response.
I believe $4/gallon gas will bring about more psychological and emotional angst so I am hoping for $5/gallon gas as soon as possible...
Americans need to be stretched to the point of breaking before we get the kind of energy policies that will bring long-term benefit...
Posted by: The Financial Philosopher | May 29, 2008 8:48:05 AM
i am a future urban planner and it seems there is some hope. The trend has been for smart growth to end urban sprawl and more enivormental friendly sustainable planning
Posted by: pikertrader | May 29, 2008 8:49:32 AM
Energy. Let's look at the spin, and the facts.
1. There's no new drilling in America.
Complete nonsense. More GOP talking points distributed to right wing radio. To name two examples:
http://en.wikipedia.org/wiki/Bakken_Formation
http://money.cnn.com/2008/06/06/news/economy/birger_shale.fortune/?postversion=2008060617
2. Iraq had nothing to do with today's oil prices.
Price is supply and demand. We have demand of 85-86M blls/day and supply of 87Mblls/day
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8Roxzn8p.bI
But Iraq's production prior to Bush's fumbled occupation is equal to that difference,
http://www.eia.doe.gov/emeu/international/oiltrade.html
Even the guys with the numbers on their site say spinning that Iraq "isn't the problem." Bull. Where are their y-o-y numbers. Why are they so hard to find?
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2176rank.html
3. No new refineries have been built in thirty 30 years.
There are no new TV manufacturing plants either. Now, why's that? Because refining is a bad business, so no NEW ones have been built but the CURRENT refiners have EXPANDED tremendously. Ask one of those FOX news spinners about the volume of refined products "as measured in daily processing capacity."
http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/refining_text.htm#U.S.%20Refining%20Capacity
Lee Raymond Head of Exxon says refining is a bad business, there is very little profit in it. Yet they invested three and a half billion. Where? They expand current refineries.
http://www.foxnews.com/story/0,2933,172527,00.html
4. Restrictions on nuclear power cause oil prices to rise.
The US electricity grid is NOT powered by oil, but by nuclear, coal and natural gas so, anyone who says this on FOX news is spinning. Lunacy.
5. We must drill in ANWR and the environmentalists have stopped that, blame them
The "drill in ANWR" guys had total control of the White House and Congress. Why didn't they pass the law? The same reason they never passed a gay marriage ban, any abortion bans, any flag burning bans… so that they can have some emotive boogey man to point to when their policies fail.
The GOP needs to have those same disclaimers about side effects that are reeled off at the end of a TV pharmaceutical ad.
Posted by: John | May 29, 2008 8:51:16 AM
I like a good faith-based energy policy. We know god wants us to have plenty of oil, or he wouldn't have made all of these cars.
Posted by: Marcus Aurelius | May 29, 2008 8:59:27 AM
Except for tax credits / penalties, what you suggest is obvious. Since government is likely to screw up the tax incentives that give money to producers, I would be cautious with those. Sin taxes for oil products are asinine, in spite of the textbook-like intellectual appeal.
Having said that, I am happy to be sitting out the market at this time. I'll jump in briefly only if the market has a good dip and will hopefully profit from the eventual rise. I made good money last year (more than BR proffered on CNBC as his return on 2007) and am up this year a few percent.
While I am only a fringe player, it seems obvious to me that the oil and energy markets are a gamed system, aided by a lack of transparency that does not appear to apply to other commodities. If Congress close the Enron Loophole and the other black holes that apply to these markets AND prices remain high then I will reconsider. If the system looks honest, I will put my savings back into it.
One of the most valuable things I learned in years past was something my barber taught me after I lost a sucker bet he conned me into ... 'Never Play Someone Else's Game'. High energy prices are clouding the entire system. If they really are justified then realistic investment plans are possible. Right now, it looks like a crooked system that smart people have blown into a bubble.
Whether I am right or wrong will only become known when transparency eventually enters the energy markets. Anything else is a sucker bet if you are an investor and not one of the people who are probably gaming the system.
(BTW, here's the sucker bet my barber turned into a life learning experience ... Pick a baseball team and MULTIPLY all the final game scores they have. The other side ADDS scores. The ADDER will always win. Why ... anything multiplied by zero is always zero. It only takes one shut out to lose. It cost me double the price of a haircut. God knows how much this lesson has saved me over the years. It is an incalculably large amount. This doesn't even include the amounts I 'won' by dangling a 'sure thing' towards people who were too smart by half.)
Posted by: cinefoz | May 29, 2008 9:07:55 AM
Had we made the opposite decisions, Crude Oil prices would be much lower than they are today ($130.17 as I type this).
-----------------------
A couple of years ago that thought crossed my mind but today I'm not so sure it holds up.
Energy is key to world growth so the more you can get or use, the better. This means that if one country uses less, other countries get to use more. And that could have only accelerated the US empire's decline vs. other growing countries unless, of course, the US had minimized its use of energy while at the same time increasing its ownership of world oil reserves.
It's hard to believe such a strategy could have worked because it implies too much dissonance! I don't think a country can decrease its use of energy unless it is forced to. And obviously the US was not forced to because it did not do it... Too many players, lobbyists to convince or hold back.
There are inefficiencies everywhere, it's too easy to say what if...
Posted by: D. | May 29, 2008 9:10:23 AM
What's the H.P. count on your car ? 200+ ? The Red Ball Express saved the 3rd Army moving stuff in 6X6's with 175h.p. Who owns an SUV ? A large SUV ? The point of all this is that we collectively chose to be hear (go watch Syrianna who's underlying theme is that the spice must flow at any cost). We went thru this in the '70s (and I was there as a resource economist in a think tank). NO single thing going on now wasn't anticipated then. Including the huge surge in prices bringing both substitutions away from energy in technology AND counter-vailing surges in new supplies. In actual point of fact there's still plenty of inexpensive oil for the next 30-50 years. It's just in places that are hard to get too and politically unstable.
IF we're serious about this then we need a concerted national effort not another quick fix. Done right we re-position the economy, create new industries and ween ourselves away from our blood-spattered addictions.
Who's willing to sign up ? The politicians do what they think will get them elected and kept there. In other words these are our choices.
Posted by: dblwyo | May 29, 2008 9:11:32 AM
What about incentives for better energy efficiency in the industry? Kyoto would have given a good reason to invest in new machines and processes. If I remember well, the US didn't sign the Kyoto protocol because it would hurt the economy. Not signing hurts as well and you will feel the pain much longer :-)
Posted by: Gregor | May 29, 2008 9:17:34 AM
Th red thin line between liberalism and national security.
Surely it is -easiest/fairest/or simply they get money- for us politicians to sometimes do the game for foreign companies or countries, liberalism.
when this liberalism results in a breach for national security evryone starts shouting, not before.
Posted by: j | May 29, 2008 9:20:50 AM
Our entire zoning process is wrong. It encourages large energy consuming houses a long distance from work. I live in Nice France and have not owned a car for 9 years. I walk, ride my bicycle, ride trains and buses and rent a car on rare occasions.
I am an Austrian economist at heart and beleive in choices. We do not have the choice of bicycles as transportation in America. At best bike amenities are treated like entertainmet and the paths are full of baby strollers and joggers. They are not treated as an alternative transportation choice.
Zoning is wrong from beginning to end. Get it right and 30 years from now energy use would be improved.
Posted by: Alexandra Lux | May 29, 2008 9:29:28 AM
In California, the supposed (Hummer-driving) Green Governator is cutting mass-transit funding to help address a Hummer-sized budget deficit.
One of the big holes in the budget is due to the Governor's refusal to reverse a 67% cut in automobile registration fees - a cut made when California was flush with internet-bubble tax revenues.
Posted by: ottnott | May 29, 2008 9:36:22 AM
spending money for roads that support sprawl--no impact fees on developers
subsidizing oil companies via huge military in middle east
refusing to add bike paths to roads.
Posted by: steveeboy | May 29, 2008 9:39:34 AM
A few puzzlers in the list.
* Mass transit system is not a priority;
* Americans, on average, live further from where they work than Europeans do;
* various sprawl comments...
While I find the European transit and old town planning charming, I think you're missing some key factors in play with the way they live:
27 States in the EU, 4,422,773 square km with 500 million people.
50 Stats in the US. 9,629,091 square km of land and 300 million people.
More than twice the land with 60% of the people.
Simply put, there is no reason for folks to cluster into soviet style high rise barracks just to support bus and bike lines. No reason and no turning back. People here don't yearn for high density or communal living and we have no shortage of land.
* Amongst the lowest Gasoline Taxes in the developed world;
Adding additional cost to gasoline would help the economy and average person how? Again, you've missed the fact that most of the goods we use are delivered via truck, in many cases over long distances (see my previous point about being a very large country in land area.
*Failed to aggressively promote compact fluorescent light bulb;
A technology that isn't quite up to the task of providing a quality product that *also* saves energy. Paying $6 for a dim and flickering light bulb vs. 60 cents for one that delivers warm and steady light is the problem, not a failure to promote.
Besides, local utilities have massive amounts of fixed cost in the form of infrastructure and facilities. Reduce the usage of electricity and the rates go up to make the difference. The utilities will make their money; it's just a question of margin vs. volume.
Posted by: Aaron | May 29, 2008 9:40:25 AM
Nice list, by the way, Barry. Could only have been made by somebody who has been paying attention for a long time.
You can add housing developments with covenants that prohibit rooftop solar systems (either thermal or electric) and don't allow anyone to dry clothes outside.
Posted by: ottnott | May 29, 2008 9:41:12 AM
I'd remove 'limited hydropower generation" from the list. Nearly all of the favorable sites for hydropower in the U.S. have already been developed -- and often with disastrous side effects. For example, the enormous Columbia and Snake River commercial salmon fisheries are pretty much destroyed now because of the Columbia and lower Snake River dams. These were the largest commercial salmon fisheries on Earth. But hey, being a crack addict requires trade-offs.
Posted by: Douglas Watts | May 29, 2008 9:56:18 AM
I believe it should read "Federal Reserve policies since 1913..."
There are a lot more failings in Mideast policy than just Iraq and Afghanistan. Iran would be an obvious addition along with the rest of the covert destabilization of moderate governments in the region. I don't recall any of them refusing to sell the US oil. The problem is the US wants to steal it, not pay for it.
Posted by: just dug | May 29, 2008 10:11:40 AM
Since its inception the DOE has prolly spent over $500 billion. Proving that government is efficient at one thing - pissing away money with no results. WE DON'T NEED A GOVERNMENT ENERGY POLICY. WE'VE HAD ONE IN THE FORM OF THE DOE FOR OVER THIRTY YEARS AND IT IS A MISERABLE FAILURE.
If we had simply used taxpayer dollars to build nuclear power plants as opposed to creating the DOE to hire bureaucrats, we'd be like France where 80% of our power came from nuclear. (Guess the French system doesn't look so stupid today.) Or funding basic research into advances in other energy sources which is a role government can constructively play. As long as research dollars aren't used to play favorites and the market decides who gets the research grants.
The best thing government can do with energy is fund research, regulate games in the commodities markets and produce policy that encourages capital investment. Then get the out of the way.
~~~
BR: There are so many wrong statements in this I don't know where to begin:
Not building Nukes is an energy policy
The DOE is not an energy policy
Choices matter
Tax incentives work
Certain things are only fundable by govt's (Manhattan Project, Moon Landing, Interstate Highway Program, Internet, etc.)
Stop buying into the nonsense that government cannot accomplish ANYTHING. For most things, the private sector is the preferred option. For certain situations -- long term, national defense, etc., there is no other option -- other than $135 oil . . .
Posted by: bdg123 | May 29, 2008 10:26:01 AM
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