Scale of the Global Oil Market
The RAND corporation recently released a report “Promoting International Energy Security” for the U.S. Air Force that, for the most part, contained the conventional wisdom about oil prices and energy security: in a global marketplace, there is little that one buyer can do to affect prices. The report then went on to state the importance of the US military in maintaining international trade routes and supporting energy infrastructure security around the world. On the whole, it was an anodyne report from a government contractor to its client that generally would have quietly been filed away.
However, the report did have one section that dove directly into a simmering area of contention: the Department of Defense’s investment in a domestic biofuels industry. Both the House and Senate Armed Services Committees have rejected the Department of Defense’s plans to purchase biofuels and to directly invest in domestic biofuels producers. The Senate will likely consider an amendment on the floor to attempt to reinstate the program in July. The specialist media quickly reported the controversial provisions, saying “Renewables no fix for U.S. military fuel woes” (Reuters) and “Alt fuels won’t solve military energy problems” (Greenwire).
An ongoing discussion among some of us analysts at Consumer Energy Report has been about whether having natural resources like oil or coal is actually beneficial to a country (see Are Countries With Vast Oil Resources Blessed or Cursed?, Oil Dependence — Tom Friedman’s False Narrative, and Oil — Easy to Produce, But Not Easy to Buy).
The argument which I’ve made is that a boom in natural resources production can cover up some short-sighted economic policies; in effect, the earnings from producing oil mean that countries do not have to invest in their education or produce their own manufactured goods. The other side of the argument is that it can only be a good thing for new resources to be found.
Leaving aside the question of whether natural resource wealth undermines institutions or causes corruption (and there is good evidence of a resource curse among developing countries) there is one thing that increased production of oil does, once it gets to be a big enough sector of the economy: it pushes up the value of that country’s currency.
All else equal (as economists always have to say), new production of natural resources strengthens the domestic currency. That’s because those resources are either exported or are used to replace imports.
A Complex Issue
A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the U.S., and the U.K. as examples of countries that have thrived even with resources.
The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and it is difficult to separate out individual causes.
As I have been researching and writing about Arctic energy development recently, there’s one important – and easy – policy prescription that often comes up: joining the UN Convention on the Law of the Sea (UNCLOS). As I mentioned in my article, “Energy Development in the Arctic: Threats and Opportunities” the USGS estimates that the Arctic region has 22% of the world’s undiscovered energy resources – and 84% of those resources are expected to occur offshore (so 18.5% of the undiscovered resources are on or under the Arctic seabed).
A Moderate Willing to Work With Both Sides
I just wanted to take a quick moment to lament the loss of Senator Lugar to the Senate. He lost his Republican Primary election for the Indiana Senate seat last night by an astonishing 21 points. The issues of energy and environmental security, especially in how they affect America’s foreign policy, were central to his 36 years in the Senate. There were many other factors that helped bring him down — his age, the fact that he no longer lived in Indiana, and his votes on TARP and President Obama’s Supreme Court nominees.
Senator Lugar played a unique role in American energy and environmental policy because his position has really marked the center of American politics on these issues. That means that he’s been willing to work with both sides to get things done, and it also means that his views have shifted as the country’s views have shifted.
When I worked in the Senate, I had the opportunity to work with his staff on the Foreign Relations Committee, and there were few people anywhere on the Hill who were more professional. They simply were interested in seeking the best solutions on important issues, regardless of whether that solution came from the right of the left. One of my proudest moments was working to introduce and pass legislation for a clean-energy bank — now operated through the World Bank — that helps to fund clean energy development around the world. This truly was bipartisan, introduced by Senators Lugar, Biden, Menendez, and Hagel (my boss at the time). I am afraid, however, that this election marks the end of such solution-oriented legislating for a long time.
Earlier this week, the Washington Times wrote a particularly angry and irrational editorial arguing against the military planning for climate change. The proximate reason for their editorial was Secretary Panetta’s speech on May 2 at the Environmental Defense Fund in which he said “Climate Change has a Dramatic Impact on Our National Security.” ASP blogged about the speech last week.
Normally, I would not take the time to respond to the Washington Times editorial, as they are notorious for being at the far edge of the spectrum on this issue, and far away from any scientific mainstream, but some of the assertions are so scurrilous that they require a response. They simply cannot stand without being challenged.
They write that the national-security threat of climate change “is a fight America can’t afford.” However, as I have discussed before, a changing climate does pose real threats to America’s national security. Rising sea levels, changing precipitation patterns, increasingly dangerous weather disasters, and melting polar ice caps could destabilize countries, and the U.S. military must be prepared to react to the conflicts that could result from these changes. There is a robust academic argument about the precise linkages between climate and conflict, but that is not where this editorial goes.
Instead, there are some serious assertions in the editorial that must be responded to because they are so far from reality. I will precisely go through them.
One of the most contentious domestic political issues in the debate between energy development and environmental policy for over 20 years has been how to develop America’s energy resources in the Arctic. As Shell makes preparations to send offshore drilling rigs into the Beaufort and Chukchi Seas north of Alaska, I thought it would be important to walk through the history of energy exploration in Alaska.
Two weeks ago, I spoke as a part of a lecture series by the Massachusetts-based Manomet Center about energy development and ecosystems in the Arctic. Manomet is a conservation sciences organization that was founded to study migratory shorebirds; I was paired in the lecture with Stephen Brown, one of Manomet’s foremost experts on Alaskan shorebirds. The event was very interesting because it allowed a frank and open discussion of the threats and opportunities in the Arctic. The discussion below is adapted from my presentation.
Red Herrings: Speculation & Regulation
As I noted last week, I have been working on a short paper for ASP on gas prices. It was published earlier today with a title of “Cause & Effect: U.S. Gasoline Prices.” I also published an Op-Ed in The Hill “Running on empty: Failing to address high gas prices“ and was quoted in Reuters saying “The truth is, neither party is offering policies that will effectively address high gas prices.”
The report seeks to get beyond both party’s preferred narratives on gas prices and looks more deeply at the root causes of today’s high gasoline prices. Hopefully, it will puncture some of the assertions and rhetoric that both political parties use about gas prices, whether it’s shouting “speculation!” by those on the left or “too much regulation!” by those on the right.
Last week, in my post about the new Better Place electric vehicle company, I wrote that I was concerned that the electric vehicle “economic model cannot work in places like the U.S. where prices are lower, spaces are bigger, and there is not as much [government] support.”
I really do think that there’s not yet a good reason to buy an electric vehicle here in the U.S. yet. Though gas prices are approaching a nationwide average of $4.00 (it was $3.94 this week), I still don’t think that’s high enough to justify the extra cost. For instance, a Chevrolet Volt costs $40,000 (plus a $7,500 tax credit), while the Cruze, which is basically the same car with a 138 hp gasoline powered engine, costs only $17,000. Even at $4 per gallon, it’s hard to make those numbers match up. Across the Atlantic, though, where gas prices are higher and there are higher sales taxes on traditional cars, it can make more sense.
Who is to Blame?
I’ve been working for the past week on a fact-sheet for ASP on gas prices; what is causing this spike, and why they’re going so high. I will post a link to it when we publish it, but suffice it to say that we’re not going to come down and say that President Obama is responsible for high gas prices. Although I believe that there are some good reasons to be exploring for oil and gas here at home (e.g. balance of trade, new construction jobs), we should not delude ourselves into thinking that’s going to actually lower prices. More to come when we release the report next week, so keep an eye on this space.
I want to take a minute, though, to write about a few conclusions I’ve drawn after diving into the sometimes heated and nasty rhetoric around gas prices. One big conclusion that I’ve come to about gasoline in the U.S. is that we simply use too much of it; much more than is necessary. I think that’s mostly a factor of the low pump prices that we had grown accustomed to over generations. Though prices have been high and very unstable since 2005 when Katrina shut down refining in the Gulf, we have really only begun to change our economy to the new world of high prices. I wrote before about how the U.S. energy market is poised for a “Fundamental Shift” as we produce more oil and use less. However, I am somewhat surprised that it continues to take this long.