Congress Encounters the Energy Tar Baby

By David L. Brown

Our nation, and indeed all the nations of the entire world, are facing a serious energy crisis. Because of the danger of climate change we cannot continue to burn increasing amounts of fossil fuels. Clean alternatives must be found. Even more threatening to our economy is the fact that the Earth may be nearing or even have passed the so-called Hubbert Peak for petroleum recovery, after which oil production cannot be sustained except through heroic and increasingly expensive efforts.

Naturally our representatives in Washington are eager to “solve” these energy problems, and the only way they know how to approach anything is by passing new laws. Lots of new laws. (Why do they so seldom address problems by repealing existing laws that may have created the problems in the first place?)

Unfortunately, there is apparently no clear vision in the halls of Congress about what to do about energy — at least no vision that extends as far as from one end of the Capitol Building to the other. Perhaps it is because there are too many special interests involved (Big Oil, Big Ag, Big Auto to name just three). Remembering the situation in which B’rer Fox found himself when engaging in fisticuffs with the Tar Baby, perhaps we should have some sympathy for our befuddled legislators as they struggle to “solve” our nation’s looming energy crisis.

To their credit, both houses have now passed versions of a new energy bill, the Senate in June and the House just last week. But there is one very big problem: The two bills have about as much in common as Bart and Lisa Simpson. The conference committee charged with attempting to lash up a compromise between these disparate bills will face a daunting and perhaps impossible task.

Here, thanks to information included in a report posted on the Energy Legal Blog, are some examples of just how different the two bills are:

  • The House bill passed August 4 by a 241 to 172 vote requires that by 2020 public utilities produce at least 15 percent of their power from renewable sources such as wind and solar. The Senate version has no such provision.
  • The House bill would cut $16 billion from tax breaks for oil and gas companies and would apply the savings to incentives for energy efficiency. The Senate version does not address this.
  • The Senate bill calls for an increase to 35 mpg in Corporate Average Fuel Economy (CAFE) automobile efficiency standards by 2020 for a range of vehicles, including cars, SUVs and light trucks. The House bill includes no provisions concerning CAFE standards.
  • The Senate bill (quite unwisely in my opinion) would mandate an increase in the use of ethanol to seven times the present level by 2022, and require that 85 percent of cars manufactured by 2015 be capable of running on E-85, a blend of 85 percent ethanol and 15 percent gasoline. The House, perhaps in its great wisdom although more likely due to mere oversight, sets no such targets.
  • The Senate version provides financial support for programs to produce liquid fuels from coal, another issue the House bill does not address.
  • The Senate bill also includes a provision making it unlawful to charge an “unconscionably excessive price” for oil products, including gasoline. The House bill does not plan to criminalize inflation.

One of two things can happen if the conference committee succeeds in crafting a compromise bill: Either the best features of both bills can be included in the final draft, or those features can be bargained away to yield a watered-down version. In the worst case the entire process could get bogged down and have to be started all over again in the next session of Congress. Based on recent experience, the gloomier alternatives are probably the most likely.

Some of the features mentioned above seem to have merit and others appear to be political posturing, lame attempts to rewrite the laws of economics, and no doubt accompanied by a large helping of oily pork. Here are some comments:

Mandating utilities to produce more power from renewable sources is probably a pointless gesture. As oil and natural gas prices rise, and in light of carbon emissions and other problems associated with coal-fired plants, most utilities are already moving toward greater use of renewable energy. Legislative pressure is probably not needed. The House bill does, however, deserve credit for proposing billions of dollars in support for research into alternative energy processes and carbon sequestration.

Taking away tax incentives from oil companies might be a good thing for the environment, but in the short term at least it will probably just add to the cost of gasoline and diesel fuel. (Not that that is necessarily a bad thing, since sustained higher fuel prices will encourage greater conservation, investment in more fuel efficient vehicles, and other consumer actions that will reduce the use of petroleum fuels.) It is always popular to punish Big Oil, but in the end they will merely pass on the added costs to the consumer. Oil companies make enormous profits, but when viewed as a percentage of their large gross sales those profits are in line with most other successful business segments. In the end, however, it makes no sense to provide subsidies for these companies unless for the purpose of encouraging investment in sustainable energy, something to which some companies such as BP are at least giving lip service.

On a related note, unless the bill’s wording is more sophisticated than indicated in the summary I read, I must disagree with the Senate proposal to legislate against charging high prices for gas. Petroleum is a fungible commodity, meaning that its price is set by the world markets based on supply and demand. Should oil prices rise to much higher levels in the near future, as many expect they will, what would oil companies be expected to do if it were made unlawful to charge what might be deemed an “unconscionably excessive price” for their products? They are not going to sell at a loss, so perhaps the nation’s gas stations would simply close up shop when oil hits $100, $150, or even $200 a barrel. That would bring our economy to a screeching halt. Little loved though they are, we must allow Big Oil to continue to provide us with a reliable fuel supply for as long as possible, and at whatever cost the world markets demand. Punishing Big Oil might make us feel good, but it would not serve us very well.

The move by the House to raise CAFE standards should be applauded, except that it is too little, too late. Since early in 2004 the minimum average fuel economy for cars has been mandated at 27.5 mpg, so the increase to 35 mpg by 2020 is by no means a bold enough step. The expected steady rise in gasoline costs alone can be expected to push auto makers to design and make more fuel efficient vehicles, and if we are truly passing Peak Oil those changes better take place a lot sooner than 12 years in the future. In Europe clean diesel powered cars are now being sold that get up to 90 mpg. We need to be thinking in terms of economy targets in that range, and soon.

Finally, the Senate provision to mandate a sevenfold increase in the use of ethanol fuel is economically insane unless it includes a strong incentive to produce the alcohol other than by hijacking our nation’s corn crop. We have written frequently about this issue. Ethanol production from corn actually uses more fossil fuel than the energy contained in the alcohol, and is profitable only with relatively low grain prices plus government subsidies (which are intended to help farmers and secure their votes, not to address the energy problem). Unfortunately, with dozens of ethanol plants springing up across the nation, the price of corn is already soaring out of control. That means that not only will ethanol be even less economically sound as time goes on, but the price of food will rise as well.

These trends are already plain to see — but there is an even worse “unintended consequence” of the ethanol mania, and that is that many third world nations already teetering on the brink of widespread famine rely on U.S. corn and other export grains to feed their masses. As a side note to that, foreign aid programs for those countries all-too-often are merely covers for subsidies to American farmers. How are we going to explain to our foreign customers that we can no longer sell them the food they need to maintain their standards of living or even to avert famine?

So like Br’er Rabbit we will watch with interest as our Senators and Representatives continue their heroic struggle with the Tar Baby of energy policy. It is a grand entertainment that will surely keep them occupied for many years to come.

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