The Fuse

Crosspost: An Energy Policy of Dominance

by Kevin Book | June 30, 2017

Kevin Book is managing director at ClearView Energy Partners, LLC, and a nonresident senior associate with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

This article was originally published on June 28, 2017 by CSIS. The link can be found here.

Forty-odd years into American politicians’ pursuit of energy independence, the Trump administration has reoriented our national rhetoric toward energy dominance. Independence and dominance represent very different organizing principles: captives crave independence, but competitors strive to dominate. Moving our goal from independence to dominance is good news. It marks a change in our energy outlook from “getting by” to “getting ahead.”

Moving our goal from independence to dominance is good news. It marks a change in our energy outlook from “getting by” to “getting ahead.”

But what might it actually mean for the United States to become a dominant energy producer? Today’s dominant producers enjoy scale and cost advantages that, in many cases, depend more on geology than government. Higher productivity usually corresponds to lower production cost. As it turns out, higher productivity resources—not just oil, natural gas, and coal, but also wind, solar energy, hydroelectric, and geothermal—exist where they exist. Accommodative regulation has potential to reduce production costs but generally only within ranges set by nature.

Likewise, the newfound competitiveness of U.S. oil and gas production reflects private firms’ investment responses to the vicissitudes of markets. It is true that government spending decades ago contributed to unconventional oil production today. Even so, volatility, not government, honed U.S. producers for dominance. High prices inspired innovation, and low prices imposed discipline. The U.S. government, like others, continues to support innovative technologies. This seems appropriate, but such largesse can have diminishing returns. Public funds that prop up uneconomic private enterprises promote costly dependence, not dominance.

Market conditions are what they are, too. Even if the Trump administration succeeds in lifting regulatory barriers and lowering corporate taxes, neither Washington nor statehouses can swiftly engender new demand. Each year, the world’s advanced economies use less energy to generate more economic output. Two oil spikes in the space of 10 years inspired end-user innovation, efficiency gains, and some measure of behavioral change. In short, this country and most of its developed-nation peers are learning to do more with less.

Two oil spikes in the space of 10 years inspired end-user innovation, efficiency gains, and some measure of behavioral change. In short, this country and most of its developed-nation peers are learning to do more with less.

For this reason, the path to energy dominance reaches across national boundaries. Had we achieved it, energy independence might have turned our economy into an island of inefficient allocation. Instead, domestic firms optimize value chains through global trade. Private industry puts Americans to work by importing natural resources like oil and biofuels and finished goods like steel and solar panels. More to the point, trade is a two-way street. New U.S. barriers—even for nonenergy sectors—could provoke retaliation, making it harder for domestic firms to access growing overseas markets.

Conservation can contribute to dominance, too. The less energy this country uses, the more it can sell to others. Also, prices go up as well as down. When they do, producers profit, and efficiency measures can maximize economic upside by sheltering consumers from hardship. For the energy industry itself, efficient production tends to translate into cleaner production. Producers who improve environmental performance may be able to better their bottom lines at the same time that they generate future opportunities to sell into emissions-constrained, foreign markets.

Governments in the United States can position the country for dominance by rationalizing disparate policies that muddy price signals for private industry. For example, the $1/gallon federal biodiesel tax credit implies a CO2 price of ~$196 per metric ton. By contrast, the ¢24.4/gallon federal diesel tax corresponds to a CO2 price of ~$24 per metric ton. Federal wind energy tax credits of $24/megawatt hour imply ~$54 per metric ton, but the nine-state Regional Greenhouse Gas Initiative auctioned carbon allowances in June for ~$2.80 per metric ton. Paying green energy producers 10 to 20 times more to abate greenhouse gases than we charge fossil fuel consumers for emitting them is distortion, not dominance.

Policies that work at cross-purposes to one another can make dominance harder, too. Rising fuel economy shrinks the gasoline pool. At the same time, federal law mandates that refiners blend ever-increasing volumes of ethanol into that pool. Meeting both goals means that government rules require higher ethanol percentages in gasoline than most cars can use. Likewise, state and federal renewable energy incentives encourage relatively inflexible green power buildout even as efficiency standards destroy demand. The resulting squeeze doesn’t just push fossil energy off the grid, but zero-emitting nuclear plants, too.

Policymakers should try to avoid making the sorts of errors that analysts sometimes make. Analysts occasionally mistake one-time effects (like efficiency gains from light bulb substitution) for repeatable phenomena (like technology gains in solar manufacturing and oil production). Analysts also can be prone to overweighting the recent past when looking at the future. Fracking boosted the economy more when oil prices were $100/barrel and unemployment was 10 percent than it can at $50/barrel and 5 percent unemployment. Not to be overlooked, energy and politics move at different speeds. Tweets come and go at the speed of light, and Congress reconvenes every two years. By contrast, energy assets last for decades.

Aiming for dominance feels good. It’s about time. Still, unless we plan carefully—and stick with the plan—dominance could prove as elusive as independence.

 

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