by Peter Z. Grossman
14-03-06
The big policy idea going around Washington these days is how to achieve
energy (really, oil) independence.
But today's proposals are neither practical nor sensible and reflect utter
confusion about American energy policy.
No one embodies this confusion more than President Bush. Last August, with
great fanfare, he signed the Energy Policy Act, a bill that he claimed would
"strengthen our economy... improve our environment and... make this country more
secure." The bill called for a host of initiatives, including incentives to
encourage more oil drilling.
In his State of the Union address on Jan. 31, he called us a nation of oil
addicts who needed to get over our habit. The Energy Policy Act notwithstanding,
he now proclaimed that we needed to do something different.
To that end, he pledged a 22 % hike in funding for alternative fuels and
promised that in 20 years we were going to end our addiction and become more
energy independent by cutting 75 % of 20 % of our oil imports, the amount of our
oil that comes from the volatile Middle East.
A couple of days later, administration officials declared that he didn't really
mean it and the proposed cutback was "purely an example" (whatever that meant).
Officials apparently didn't want to offend Middle East oil exporters.
To me, the president's State of the Union pronouncement was a sign that he
has no clue about why he has an energy policy or what it might accomplish. Of
course, there are real problems, primarily political, that arise from our
oil-based economy because so much of the world's oil is located in unstable
parts of the world.
Iran, for example, is funding an apparent nuclear weapons program with the money
it makes from oil. Saudi Arabia underwrites fundamentalist schools around the
world that turn out radical Islamists. How we deal with these regimes is an
urgent political matter.
But oil independence is just not possible and trying to achieve it would be a
colossal waste of money. True, we could significantly reduce consumption by
raising the price of gas through taxes to, say, $ 8 per gallon, but that is
clearly politically infeasible and economically unwise.
Some politicians and commentators have argued we need instead a program to
convert all car engines to run on an 85 % blend of ethanol. But this is even
less sensible than high gas taxes.
True, we can make ethanol from corn that can substitute for oil. But right
now we use 14 % of our corn crop to produce enough ethanol for 3 % of our
transportation fuel. To make 85 %, we'd have to quadruple the acreage planted in
corn and use all of it for ethanol. That would, in fact, cause the prices not
only of ethanol but also of most food to soar.
But even such a crash ethanol program wouldn't free us from the oil market. We'd
still pay the world price for oil unless we forbade any imports or exports since
that price is set in world markets according to supply and demand.
Moreover, cuts in our consumption would lower the price of oil, which would
mean that an even greater percentage of world oil would come from the Middle
East where production costs are cheapest. In other words, however little oil we
import, the odds are we'll still be pumping Middle East gas into our hybrids.
Some people would argue that lower prices would end the political problems we
have with rogue oil states like Iran. But the political problems won't disappear
with cheap oil. The Saudis funded schools and the Iranians worked on their nukes
even when the price of gas here was $ 1.
Bush suggested in his speech that the key for us is to develop a different
way of making ethanol, notably from low-cost plant materials such as wood chips
and switch grass. But we've been trying to develop such "cellulosic" ethanol for
years. And like every other federal effort to develop alternative energy
sources, this one has failed so far, and more funding will not magically spur a
technological breakthrough.
I have no doubt that alternatives will one day become commercially viable and we
will fuel up with ethanol or hydrogen or some other non-petroleum product. But
that's not going to happen because of more government spending. But then, I
expect that President Bush will have something else in mind six months from now.
Peter Grossman is the Clarence Efroymson Professor of Economics at Butler
University.
Source: IndyStar.com