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“Our Energy Policy Has Not Been Very Wise” March 17, 2008

Posted by davidzweig in economics, Energy, environment, financial crisis, Freedom From Mid-East Oil, Oil.
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President Bush has never spoken more truthfully than he did on March 14 at the New York Economic Club.

The president restated his belief that the absence of new refineries (true) and the prohibitions against drilling in Alaska (false) are the major causes behind the record oil prices Americans are paying today.

To his credit, he got around to the issue of renewables: “And, look, I’m very — I’m an alternatives (sic) fuel guy, I believe that’s important. As a matter of fact, we’ve expanded — mightily expanded the use of ethanol; a slight consequence if you rely upon corn to grow your hogs, but nevertheless it’s a — it is a policy that basically says that we got to diversify.”

That’s a curious imperative, coming from an executive who has threatened to destroy the tax exemptions for the fledgling renewables industry to preserve one corner of the favorable tax treatment for the senescent fossil fuel industry.

Either way, the president says the nation has one addiction to oil and another to drugs. In the former case, he would deal with the addiction by increasing supply. In the latter, he continues the 50-year “war” to eliminate it.

As oil futures have now hit seven record-highs in seven market sessions, the government’s policies seem to be ineffectual, disjointed, and counter-productive. The ethanol fiasco combines the worst of government planning with the worst in free market economics, blending a zero-proof energy cocktail that is suppressing the nation’s economic recovery while stoking political unrest and inflation around the world.

That same day, Federal Reserve Director Bernanke took a break from the dismal economic picture to talk about the energy picture. He suggested that the U.S. might want to roll back the 54-cent per gallon ethanol tariff.

As anyone who recently has bought 15 ounces of Kellogg’s corn flakes for $4.19 knows, the corn ethanol subsidy has affected more than hog farmers. And the disjointed manner in which the free market has handled the ethanol boondoggle (50 closed ethanol distilleries this year) has compounded the problem.

Here is where it becomes very interesting: again, on the same day that Pres. Bush proclaimed himself an alternatives guy and the director of the Fed suggested we repeal the tariff, an officer of Petrobras, the state oil company of Brazil, said he could not raise gasoline prices because Brazilians would substitute sugar cane ethanol for gasoline.

Oh, happy day! Would that we could forfend but one daily gasoline price increase to put a little sugar in our tank. That would have to be a samba occasion.

Twenty percent of Brazilians drive flex-fuel cars instead of Yukons and Denalis, Torrents and Avalanches, Explorers and Trailblazers, Escalades and Armadas. Nine out of 10 new car sales in Brazil are flex-fuel.

Reuters reports: “Petrobras downstream director, Paulo Roberto Costa, said consumers in Latin America’s largest country would stop buying gasoline and switch to cheaper ethanol if the price of the fossil fuel was raised to match world levels after being frozen since late 2005.

“It doesn’t make sense hiking the price of gasoline abruptly if it will cause me a bigger loss of the market than what is already happening today,” he told reporters. “It’s possible that this year we’ll sell more ethanol than gasoline in Brazil.”

This issue of economic fungibility also was addressed by the President in New York: “You know, when I was overseas in the Middle East, people said, did you talk to the King of Saudi (sic) about oil prices? Of course I did. I reminded him… you better be careful about affecting markets — reminding him that oil is fungible; even though we get most of our oil, by the way, from Canada and Mexico, oil is fungible.”

It is indeed. Three days before, the Energy Department and the Energy Information Administration said that foreign demand would soak up declining U.S. consumption. Let’s hope the King of Saudi wasn’t paying attention.

Where will this end? At some point, both political parties in the American government must stop pandering to Iowans and Michiganders and do the Right Thing for the other 48 states and indeed, the world. Meanwhile, it’s delicious to see an oil executive acknowledge a different law of economics: the law of substitution.

More important, when and why will this end? January 2009 is a good guess, because after the election, no one will particularly “need” Iowa or Michigan for another four years. The policy of indulging (That’s a euphemism.) these two states finally will accurately be seen for what it long has been: an insupportable luxury. After a year of floundering with $5-a-bushel corn, $110-a-barrel oil, and $1.53-a-dollar Euros, when the pain experienced by the other 48 exceeds the value of Congressman Conyers’s vote and the endorsement of the 2012 caucuses, then and only then will our government move.

There is yet reason to believe in those two now regrettably hackneyed qualities: hope and change.

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