President George W. Bush, who told Americans there would be no sacrifices in the War on Terror, in the federal budget, and for the environment, is now saying we have a problem with imported oil, and is promoting a laundry list of measures, presumably to be encouraged by tax breaks, subsidies, favors and regulations to solve it. Funny but until a few months ago, businesses and individual Americans were suddenly working to solve our energy problems themselves — conserving, changing where and how they wanted to live, and researching and investing in alternative energy sources — all without any screwed up measures from the federal government. Why? Because the price of oil was up! Unfortunately, the minute demand for oil goes down, so does the price — by accident or design. And as soon the price goes down, as it has, Americans take the profitable and easy way of going right back to using all the cheap oil they can get. Party on! Those who invest in alternative energy sources lose their investment. Businesses close. Those who conserve, and buy teeny little Hybrids instead of macho SUVs, are looked down on as weenies, eccentrics, losers and fools. Which is what President Bush and Vice President Cheney pretty much said they were during the first five years of their administration, all while we became more locked into a lifestyle that is ever environmentally damaging and more vulnerable to economic and political blackmail.
For those of you who didn’t take Economics 101, both the supply of and demand for oil and other fossil fuels are “inelastic” in the short run. Energy production is capital intensive, so most of the cost of producing it remains even if production drops. Producers thus have an incentive to keep on producing even as prices fall, pushing prices down farther. And energy using assets, like houses, cars, and appliances are also expensive and long-lived. They cannot be replaced with more fuel efficient models overnight. People still have to heat their homes and drive to work even when the price is soaring, making it soar further. Alternative energy sources, meanwhile, take years to develop, and will either earn or lose money depending on what the price will be years from now. That’s why the Economist magazine pointed out that absent government intervention, alternative energy is a bad bet. Like any smart pusher, the Saudis and other oil interests will cut the price until the competitors are out of business and the junkies are hooked again, then jack it right back up.
What should that intervention be? Should George W. Bush decide our energy future, with no alternative and no recourse? Should Nancy Pelosi? Should Hillary, Obama, Rudy or McCain? Do we need CEO Bloomberg to make us do the right thing? NO! The world did not come to an end when oil cost $75 per barrel. So the government should use taxes and other measures to ensure that it stays at $75 per barrel, plus inflation from here on, and also raise the cost of coal and natural gas to a level that reflects not only their relative environmental damage (more for oil, less for gas) but also their greater security of supply. For coal, taxes collected from producers based on environmental damage could be rebated to consumers if they install equipment that burns it clean.
Higher fossil fuel prices would make costly domestic production competitive with the Middle East — the cost to consumers would be the same either way. It would make alternative energy investments potentially profitable. It would make conservation a smart economic move, not just a “personal virtue.” It would lead to 10,000 attempted solutions, 1,000 of which would work, and 100 of which would work enough to make a significant difference. There is no way to tell in advance which ones would work, but we don’t have to. The right solutions would emerge through trial and error in the marketplace.
I don’t expect President Something for Nothing to tell Americans they have to pay more now to save money and ensure their economic future later. No one has had the guts to do that since the Republicans made sport of Jimmy Carter’s “moral equivalent of war.” But I hope someone will. It is always possible that if Americans stuck with a massive oil bllenough times, the light will go on and a political majority will remember the virtue of working together toward a better future, rather than just partying on in the present. Having prices that reflect the totality of the effects of energy on our lives would bring along the rest.