On Energy: Same-Old, Same-Old

By Steven Pearlstein
Friday, June 20, 2008

Listening to the back and forth this week about oil drilling and energy prices, you have to wonder whether there's anyone in Washington who understands what leadership is about.

This is about more than our immediate discomfort with $4 gasoline. Embedded in the energy debate are questions about global warming, the competitiveness of the U.S. economy and the apparent decline in middle-class living standards.

So far, the responses have been colossally disappointing, with the president, the presidential candidates and party leaders in Congress all retreating back to the same hardened and hackneyed positions that have created a stalemate in energy policy for the past 20 years.

The frustrating thing about this standoff is that both sides have it half-right. Republicans are right that we need more oil and gas drilling, more refineries and a revival of nuclear power. And Democrats are right in demanding that we finally get serious about conservation, crack down on speculation and market manipulation, and recycle windfall profits into alternative energy sources.

Unfortunately, they're both so thoroughly captured by their interest groups, and so determined to defeat the other's policies, that they haven't noticed we're now so deep in the hole that we have no choice but to do it all: Gas drilling off the coast of Florida and wind farms off the coast of New England. Curbs on speculation and curbs on CO2 emissions. Tax hikes for oil companies and tax breaks for solar.

The challenge here is to finally get real about the politics as well as the policy.

By now it should be obvious that neither side in this battle can achieve total victory, even if one party or the other pulls off a sweep in November. The competing interests are just too powerful for either side to prevail. The only choice is between compromise or stalemate.

In terms of policy, there can be no hope for compromise if both sides continue with their false claims and exaggerated doomsday scenarios. These include:

· We can't drill our way to energy independence.

Energy independence is a political slogan masquerading as energy policy. It's not achievable with existing technology, nor is it any more fundamental to our economic security than independence from food or steel imports. We live in a globalized economy -- get over it.

Equally silly is the environmentalist argument that developing this oil field or that gas reserve isn't worth the environmental risk because the output would be only a small fraction of what we consume. If that were the standard, no field would ever have been developed. The U.S. market is too large and the size of even big fields too small to dramatically increase supply.

That doesn't mean, however, that a bit of additional supply can't have a beneficial impact on prices. In energy, as with all commodity markets, prices are set at the margin -- based on the last transaction -- and short-run demand doesn't change much in response to price fluctuations. In such markets, even small changes in supply can have a big impact on price.

· Raising taxes on oil companies will reduce supply and raise prices.

This is true, in theory, holding all other factors constant. But in real life, all other factors are not constant

Take Exxon Mobil as an example. A doubling of oil prices over the past year had the effect of increasing its U.S. upstream earnings by 38 percent in the first quarter of 2008. If the government had captured just half of that increase through a windfall profits tax, its after-tax profits would still have risen by 19 percent. That's surely enough to stimulate investment, increase supply and drive prices lower than they were the year before. And the government would have collected an extra $800 million a year from Exxon Mobil to use for conservation or other energy-related incentives.

· Drilling offshore or in wilderness areas would be a disaster for the environment.

The environmentalists' hysteria on these issues has always been way out of proportion to the actual risks involved, suggesting that it may have more to do with symbolism and fundraising. Missing from the environmentalists' logic is any recognition of the tradeoffs involved, not only between the environment and the economy but among environmental goals.

Alaska and the continental shelf, for example, hold the potential to produce huge amounts of natural gas, the cleanest fuel now available for large industrial users and electric utilities. By providing additional crude oil to the U.S. market through pipelines, we could reduce the volume of oil brought in on cargo ships, which have much greater risk of disastrous spills.

Perhaps the more interesting question, however, is what could be gained in a political horse trade involving these drilling issues. And if the answer is industry support for a plan to reduce carbon emissions to stem global warming, then accepting a bit of well-regulated drilling in Alaska or off the Florida coast could turn out to be very good for the environment.

Here's a guess: The presidential candidate who wins in November won't be the one who's best at activating his base or pandering to the views and concerns of the voters. It will be the one who shows he can lead by speaking the truth, setting a limited number of priorities and demonstrating the knack for making the compromises necessary to accomplish them. And by that criteria, the race is still very much up for grabs.

Steven Pearlstein can be reached atpearlsteins@washpost.com.

View all comments that have been posted about this article.

© 2008 The Washington Post Company