Why U.S. Energy Policy is Poised for a Fundamental Shift

As I wrote yesterday, I believe that the U.S. is moving fundamentally towards a point where it will be a major net exporter of energy, especially of refined oil products.

Everything we’re hearing now in the political sphere and in the press is about how bad the spike in gas prices is for the American economy. But – if we are to become a major energy producer – that cannot be true. It is no longer the case that high oil prices are unrelentingly bad for our economy: they’re only bad for oil consumers. Here in DC, we’re pounded by API’s ad campaign that three are over 9 million people directly employed by the oil and natural gas industry. In a total national workforce of 154 million, that means that almost 6% of the workforce is employed by the industry.

Certainly, we’ve seen the low unemployment rate in North Dakota as proof that an energy boom can create jobs. Last fall, the Wall Street Journal ran a very widely read article, “The Non-Green Jobs Boom” saying how clean energy was failing to produce jobs, but there were lots in traditional energy sources.
The Implications of Being an Energy Producer Economy

If the U.S. was to shift its emphasis away from consumers, and instead become a real energy producer, that would imply some significant policy shifts. First, low prices cannot be the sole policy goal, as we hear from politicians on both sides. Instead, the industry doesn’t demand high energy prices, but stable energy prices. Only when prices are predictable over the long-term can the real investments be made that promote an industry.

Second, even though a producer economy implies helping out the oil business, a close look at the members of OPEC shows that they all take large government stakes in production. Here in the heart of capitalism, we’re not going to nationalize the industry and create a national oil company akin to Saudi Aramco. But, increased taxes or increased royalties on oil production, would give the government and politicians more of a  stake — not in how individual businesses are doing, but in how the industry is doing overall. Maybe it would end up that our politicians would allow more drilling, but the price they exact is higher taxes and higher royalties.

Becoming a net exporter of refined petroleum products is already helping our trade and current account deficits. We remain very dependent upon imported crude, but that percentage is going down. Further efforts to help energy exports could reduce our trade deficit even further, and begin to strengthen the dollar again.

How to Protect Consumers in an Energy Producer Economy

Even if we accept that America should embrace its return to being an energy superpower, our consumers are still fatally dependent on the price of oil. So – what actions can be taken to help reduce the impact of high energy prices on consumers?

First, and most important, is efficiency. The U.S. is just about the least efficient developed country in the world.

Second, is providing price-competitive alternative fuels to gasoline. The recent op-ed in the New York Times by Tom Ridge and Mary Peters, “The Methanol Alternative to Gasoline” said that methanol is already price competitive with gasoline, but it cannot be used in our cars (for more on methanol as a fuel, see: Methanol versus Ethanol: Technical Merits and Political Favoritism). However, new cars can be outfitted as flex fuel cars for only $100 each – allowing drivers to choose between gasoline or other alternatives, whether ethanol, methanol, or other sorts of mixed alcohols and biofuels.

Finally, a strong dollar is good for consumers because it reduces the price of imported goods and services, especially energy. One of the underlying reasons why the oil shocks of recent years have been particularly bad for the US, while not as harmful around the world, is the weakness of the dollar. The best way to increase the value of the dollar is to promote exports. That would mean expanding exports of refined fuels, as our refiners are doing, and permitting new LNG export terminals. Shale gas technology has been a boon for natural gas consumers, but the low prices do not help producers.