Energy Policy Needs to Look at Both Supply and Demand
Dealing With the Total Picture
Last week, Governor Romney released his plan for “Energy Independence” that promises to “increase domestic energy production and increase partnership with Mexico and Canada to gain energy independence by 2020.” Briefly, the plan proposes to increase domestic fossil fuel production by opening new areas to exploration and by reducing regulatory barriers to the building of new power plants.
My concern is that this is simply a one-sided energy policy – it focuses solely on increasing the supply of energy (and almost exclusively on fossil fuels, especially oil). A true energy plan would realize that no matter how much oil your country produces, it can never escape the world market price. In a world with a globalized market for oil, OPEC will always be the most important price-setter, and the price of oil will not be set at home. The price will track with demand from economic growth in India and China and will follow supply shocks from the most recent unrest in oil-producing regions, whether Iran, Sudan, or the South China Sea.
A real energy policy would address the complete picture: The supply side, by growing supply and by pursuing alternatives, as well as the demand side, by reducing use.
The Romney proposal does not touch on how to reduce dependence on oil — only seeking access to more. The US currently devotes about 70% of its petroleum use to transportation, and most of that in gasoline to power our cars – so addressing transportation is key to oil energy policy. This week we saw that the Department of Transportation and the EPA finalized a rule that would increase average fuel economy of the U.S. fleet to 54.5 MPG by 2025. This is very important – it is estimated to reduce American oil use by about 2 million barrels per day once it is fully implemented. Although Romney does not address it in his energy plan, he has stated that he opposes these new fuel economy standards.
Another example of demand-side energy policy has to do with natural gas. I have been waiting for either campaign to release a plan for what to do with the bonanza of natural gas that the U.S. has been blessed with. As you should know, new technologies of fracking and horizontal drilling have given the U.S. access to over a century of natural gas reserves. Whereas only 6 years ago, the government was planning for new LNG import terminals, now we are looking to build new export terminals. This glut has driven prices below $3 per million btu, down from over $13 in 2008. Most market analysts expect it to stay low on the strength of continued production.
Conclusion: We Need a Cohesive Energy Policy
A prudent, demand-side energy plan would address how to use this glut of gas, but neither campaign has weighed in with a plan, though there is no shortage of ideas. Some say that the U.S. should set up LNG export terminals to sell the gas abroad (mostly to East Asia), where it’s selling for about ten times the price that it fetches here in the U.S. Others say that we should keep it here to fuel a manufacturing renaissance. This could incentivize production of products that use gas as a feedstock, like fertilizer or other chemicals. It could also be more widely used in electricity generation, where it could drive down wholesale electricity prices to a level that would give manufacturers of electricity-intensive products, like aluminum, an advantage over international competition. Or, finally, the country could use it in transportation, where it could compete with crude oil as a way to drive our cars and trucks. All of these are possible. Without government policy, we are likely to see a mixture of them all – but in a haphazard way. Neither campaign has given their preference. This would require actual planning and policymaking instead of heated rhetoric.
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