There Is No Silver Bullet for Energy Security
In 1979, President Carter made his famous “crisis of confidence” speech, in which he implored Americans to hold fast against high gasoline prices and promised that renewable energy and alternative fuels would give relief. Then President Reagan came into office and lifted the price controls on oil. Finally allowed to yield a profit, domestic producers were incentivized to increase production and the energy crisis ended.In 2022, Americans are facing record high prices at the pump, and we are seeing echoes of the “crisis of confidence” as Vice President Kamala Harris and Transportation Secretary Pete Buttigieg are pushing for electric vehicles (EVs) and green energy. The administration, and other politicians, are making a classic error of failing to understand that there is no panacea to the nuts and bolts of energy security, and sometimes the simplest solutions are the best. What’s more, recent moves by the administration to plea for increased foreign fossil fuel production is at odds with America’s environmental policy objectives.
Energy prices are high right now, quite simply, because demand exceeds supply. There are numerous contributing factors, not the least of which is that the Organization of the Petroleum Exporting Countries (OPEC) and its cooperating partners (including Russia) are artificially constraining their production to keep prices high. Another major reason is that Russia’s invasion of Ukraine creates a supply risk, as Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. Importantly, just as lockdowns depressed energy demand (and prices) in the early days of COVID, energy demand has risen as the world has grown accustomed to managing work and life during the pandemic.
Bringing prices down and offering relief to Americans must come from reducing the demand or increasing the supply. The simple answer of increasing domestic oil production, though, has not been the first priority of the administration.As Nikos Tsafos of the Center for Strategic International Studies put it, “I don’t understand why it’s so difficult for the White House to say, we need more U.S. oil produced right now.” Instead, on the demand side, the administration has focused on EVs. And on the supply side, the Biden administration is asking adversarial regimes such as Saudi Arabia, Venezuela and Iran to increase their oil production. These strategies are unlikely to bring relief.
While EVs and alternative fuels may be the way of the future and may eventually bring down petroleum demand, they are unlikely to do anything about pump prices in the near term. The typical car in the United States remains on the road for about 12 years, which means that in any given year only about eight percent of vehicle stock will turn over. Currently, EVs are about four percent of car sales in the United States, but even if every new vehicle sold today was an EV, it would be over a year before gasoline demand would fall by even 10 percent. Thus, EVs are not a practical near-term solution to gasoline prices or energy security.
The president’s efforts to get OPEC and its partners to increase production are also unlikely to be fruitful, or at least not without cost. Back in 2014, the United States “broke OPEC” through its massive increases in oil production. Since then, OPEC has expanded its cooperation to include Russia, and these countries purposefully constrain their production to keep prices high. Why, then, would they increase their production to lower prices today? OPEC functions as a delicate balancing act: even though each member has an individual incentive to increase production as much as possible, they act in concert to keep prices high enough that they get more money by manipulating the market. These countries are therefore only going to increase production if they think it will get them more money or grant them some concession from the United States (both Venezuela and Iran are also under sanction).
The obvious solutions seem to be the ones that the administration is most reluctant to pursue. U.S. oil production is still below pre-pandemic levels, and returning to these levels would go a long way toward offering relief to the American people. Why, then, have American oil producers not been drilling to take advantage of high energy prices? The likely answer is that investors may not have confidence that such investments will remain profitable.Some of the early moves by the administration were to rescind approval for the Keystone XL pipeline, put a moratorium on new leases for oil and gas extraction from federal lands and order agencies to impose new regulations on the oil and gas sector. While there are certainly pros and cons to each of these issues, they have the effect of signaling to investors that the industry can expect to face higher costs, and undoubtedly this has had a negative effect on industry investment.
The concern is, of course, the environment, and especially the priority of climate change. But it is peak hypocrisy for the administration to do all it can to curtail domestic production while asking foreign producers to increase production, as greenhouse gases are a global pollutant, and climate change does not care where fossil fuels are produced.While the president’s recent requests that foreign countries increase oil output have been newsworthy, it is not the first time Biden has done this. This past November, President Biden requested that OPEC and its partners—which includes Russia—increase their oil production. Some Democrats are also requesting that the administration limit exports of natural gas in an effort to constrain domestic prices. This is bad environmental policy because U.S.-produced oil and gas can be cleaner than competitors. U.S.-produced oil has lower-than-average life-cycle emissions, and U.S. liquefied natural gas (LNG) exported to Europe has 30 percent lower lifecycle emissions than Russian pipeline gas to Europe. There is no situation in which it would be better environmental policy to buy from dirtier producers.
Environmentalists may defend the administration’s moves by arguing that a global clean energy transition is just around the bend, and, as such, it doesn’t make sense to build pipelines, LNG export terminals or other oil and gas infrastructure in the United States. But the energy models don’t show that a global transition is likely in the near term. Even though renewable energy is booming and expected to more than double by 2050, becoming about a quarter of total global energy supply, fossil fuels are still expected to account for 70 percent of global energy by 2050.Not only that, but because global energy demand is rising faster than renewable energy production, demand for all fossil fuels is expected to increase over today’s levels, with a nine percent increase for coal by 2050, a 29 percent increase for liquid fuels (essentially oil products) and a 30 percent increase for natural gas. It would not make sense either economically or environmentally to position Saudi Arabia, Russia, Iran and Venezuela as the dominant suppliers of these fuels instead of the United States.
At the end of the day, we are seeing what happens when energy policy is focused on an ideal world instead of the real world. The United States is the world’s largest oil and gas producer, and the global demand for these resources is high and expected to remain so. Instead of leveraging and expanding on this strength to improve both energy security and the environment, policy efforts are thus far aimed at increasing barriers to domestic production, trying to get Congress to pass massive energy subsidies and asking foreign regimes that are in some cases openly hostile to the United States to increase their oil output. Ultimately, there is no silver bullet for getting energy security right, but a return to the basics of economics and a retreat from wishful thinking would probably serve the administration better.
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