Common Tragedies

Thoughts on Environmental Economics

Race to the bottom

Posted by Daniel Hall on September 9, 2008

Foreign Policy recently roasted the 10 worst ideas proposed by Barack Obama and John McCain.  Both candidates get burned on energy policy: 4 of the 10 worst ideas from each candidate fall under energy or climate change policy.

I agree with most of what they have to say.  Obama’s support for ethanol and coal-to-liquids technologies is indefensible.  Windfall profit taxes on oil companies are a bad idea.  As for McCain, the less said about the gas tax holiday the better.  Cap-and-trade without auctioned permits = corporate pork.  And I’ve explained before why I’m skeptical about the prospects for nuclear power having a large impact in our energy and climate change policies.

I would quibble with one (energy policy) item on each list.  I think there are reasonable arguments for opening the SPR much more liberally than we do currently — as Obama proposes — in order to smooth out market volatility or reduce price spikes.  (These arguments would mirror those for suspending SPR fill when prices are very high.)  As for McCain’s desire to “drill, baby, drill!”, I’ve already noted that there may be a very strong case for more domestic drilling.  (As Matt Kotchen cunningly phrased the conundrum recently, “What would environmentalists do with ANWR?”)

But the overall feeling you get from each list is the depressing sense that as energy prices have risen to the top of the headlines this year, the candidates have raced to out-dumb each other on energy policy.

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6 Responses to “Race to the bottom”

  1. thom said

    Daniel,

    What are the “reasonable arguments” for using the SPR to reduce oil market price volatility? Off the top of my head, I would guess that a simple policy of just filling up the SPR is likely to generate smaller losses to taxpayers than a complicated policy of attempting to control the direction of oil prices.

    If you have a big and dumb trader with an essentially unlimited bankroll and a relatively transparent trading strategy, the “smart” guys in the room are going to have a field day. George Soros and the pound come to mind.

    My relatively uneducated view is that trading the SPR account to somehow reduce oil price volatility seems like a massively stupid waste of taxpayer money. Furthermore, it goes without saying that the bureaucratic processes associated with determining what are acceptable levels of oil price volatility would be ripe for corruption.

    What am I missing?

  2. [...] doesnt bode well when both candidates have raced to out-dumb each other on energy policy, at Common Tragedies. And the choice of Sarah Palin only undermines John McCains tenuous environmental credentials, [...]

  3. Rich Sweeney said

    Even more annoying has been the fact that the recent downturn in oil prices hasn’t induced any reevaluation from the candidates. Oil was down to $104 a barrel yesterday but McCain was still out there leading cheers of “Drill, baby, drill”. Its been well documented that gas prices are sticky on the way down. Apparently political positions on gas prices are too.

  4. Daniel Hall said

    Thom,

    I will try to get back with a longer reply — or maybe a post at some point — but very quickly:

    Some of your arguments touch on why we should perhaps not have an SPR at all. In fact, as it is currently managed, I would say in some ways the SPR is the worst of both worlds: the government promise to provide an emergency backstop may be crowding out private inventories and hindering markets from managing this risk, but the fact that the SPR is in fact very rarely opened up means that U.S. refined-product markets are much more volatile than they would be otherwise. We would be better off either entirely scrapping the SPR or moving to a system where it is managed to maximize taxpayer return, which would mean treating it much more like private inventories that would be drawn on (and refilled) much more regularly. Given that scrapping the SPR is probably beyond the political pale, I think we should have a discussion about changing how it is managed.

    I think a decent current analogy is Fannie Mae and Freddie Mac — the implicit government backing of the last 30 years was in some ways the worst of both worlds, and created a huge moral hazard problem that we are now paying for.

  5. Common Sense said

    The SPR isn’t the “E”SPR. It is not a backstop for temporary “economic” shocks in the system. I think it is most likely to fuel the military in the event that our oil supply is cut off.

    Why stop the drilling initiative now that oil is at $103? That is the kind of short-term thinking that will cause a huge problem 10-15 years down the road (and contributed to the recent problem). I don’t believe in “drill, drill, drill!” With that being said, I would rather see some jobs created here, drilling done under our EPA restrictions, and tax revenue generated for the nation. And I don’t believe we can drill our way to energy independence.

    I can’t wait for gas to fall to $2.50. Nobody will want a Prius (the American public will forget all about the high price of gas within a month of low prices), I will get one at invoice, and 12 months later I will look like a genius gas prices begin an upward march.

  6. Daniel Hall said

    Common Sense, we get to decide what the purpose of the SPR is. It is not like it is set in stone. At the very least, as a matter of public policy debate, we should consider what the right reason to have an SPR is. Hiding behind the claim that it was never intended to address “economic” shocks — a claim I am not convinced of anyway — is not a reasonable argument about what constitutes a good use of it now.

    And I am very confused by your claim that the SPR would likely fuel the military. The SPR is all in the U.S. — are we primarily fueling our military here, in the case of an invasion on American soil? Yes, we could fuel long-range bombers, but what about forces deployed overseas? I would think that many of the events which would prevent crude oil from reaching the U.S. would also prevent us from getting refined products to our overseas military, and many of these events would be exactly the ones where we might want to fuel our military. I think the SPR is far more likely to be used domestically.

    By the way, I completely agree (perhaps in disagreement with my co-blogger?) that drilling can still be on the table at $100 per barrel. Your claims of job-creation are bogus, but the other two reasons are very valid, particularly the tax revenue and how it is used.

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