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Brooks Wilson's Economics Blog: Past Policy and Today’s Oil Price

Saturday, April 30, 2011

Past Policy and Today’s Oil Price

President Obama has correctly stated that there is little that the federal government can do to lower the oil prices in the short run but that is where the story begins, not where it ends.  Recognizing that oil production results in pollution, environmentalists have engaged in a decades long battle to enact policies that restrict the production of oil while subsidizing renewable energy sources like wind, solar and biofuels.  These policies have been consequential; supply has contracted and equilibrium price increased.  Subsidies of wind, solar and ethanol have been expensive to taxpayers and resulted in little if any commercially viable production.  Not satisfied with subsidies alone, the government has often mandated the use of these alternative energies forcing consumers to bear the higher cost.

President Obama supports a continuation of past environmentalist policies.  David Harsanyi provides a couple of quotes that support high oil prices (“Why Isn't Obama Celebrating High Oil Prices?”).
In 2008, candidate Barack Obama was asked by CNBC's John Harwood, "So could the (high) oil prices help us?" Obama: "I think that I would have preferred a gradual adjustment."…That same year, current U.S. "Energy" Secretary…Steven Chu clarified that "somehow we have to figure out how to boost the price of gasoline to the levels in Europe."
In response to rising oil prices, President “Obama reissues call to end oil company tax breaks.”  When you tax something, you get less of it.  Taxing oil would not encourage production.  While calling for more drilling, EPA has denied Shell a permit that would allow it to drill in the Arctic Ocean in Alaska.  Shell is preparing to scrap its five year, $4 billion investment.  Dan Springer writes (“Energy in America: EPA Rules Force Shell to Abandon Oil Drilling Plans”).  The Obama administration dramatically slowed the issuance of permits for deep-water drilling after the BP blowout (“First deep-water drilling permit issued for gulf since BP oil spill”).  These policies will result in higher oil prices in the future just as past policies have resulted in higher prices today. 

There is nothing morally wrong or logically inconsistent with environmentalists’ beliefs.  Oil production, like the production of any form of energy, results in pollution.  A cleaner environment is a worthwhile objective.  Everyone wants it but everybody wants cheap energy as well.  This is where my disagreement with traditional policies supported by President Obama ends. 

Government policies to find a cheap alternative to fossil fuels have failed and there is no reason to believe that future efforts will be more productive.  Traditional environmental policy seems to underestimate the pollution caused by “green” energy sources.  Windmills are ugly and blight areas where they are located.  Ethanol production pollutes air and water and drives up food prices.  I believe the tradeoff between wealth and a clean environment is steeper than traditionalist admit and as wealth falls, pollution increases.  For example, people drive older cars and spend less on maintenance.

With no real evidence to support my opinion, I believe that support for traditional environmental policy comes largely from people earning more than the median income.  This may cause a fissure in the Democrat’s voting coalition.  Highly educated high income Democrats will continue to support these policies but the poor and many union members may not.

1 comment:

  1. Most oil leases are not being used and if they were being used, oil would not necessarily be used in the US. US oil companies exported 844 billion barrels of oil. With globalization and the international bias of oil companies, it will gravitate toward price. The short term answer to high gas prices is not more production…nor is the long term answer.

    You inference that Obama wants prices to go up is interesting and maybe possible at one time…when he was not running the show but it is not supported by the information you posted. He may well want it to happen but I doubt it. I think what he wants even more than kicking the smoking habit is to be reelected. High gas prices just might prevent that. I’m sure he knows that. However, wanting gas prices to rise is neither mean or illogical. Even more dangerous to our health than the pollution of fossil fuel is where we have to go and what we have to do to get it. The people who have it don’t like us. And in the long run, as much as people want to ignore the fact, we will run run out of oil sooner than later.

    In the original stimulus bill that Obama offered, there was a provision requiring that all newly constructed homes, where possible, provide solar panels sufficient for supplying it’s need for electricity. It was removed with pressure from the oil industry on both parties but mostly Republicans. Enough survived, however, that has produced an active solar system. I just purchased one. It will cost me $19,000 after rebates and it will save me $156 a month in power bills. That is about 9% profit on my investment compared to the 1.9% I am getting now in corporate bonds.

    Getting back to pump prices, many claim Wall Street speculation is the culprit not supply and demand. The fact that oil company profits and the untapped oil lying rotting in the ground, as it were, along with the recent wild speculation in the mortgage market, could lead a reasonable person to believe this.

    What this all mean, to me at least, is that the long term answer is renewable energy. I don’t find wind wind mill farms particularly esthetically polluting and ethanol may be dirty but it is our dirt and we don’t have to buy it from people who don’t like us so much.

    Nice blog! Timely subject rationally argued. Like your name too! Where did you get it?

    My links didn't work!