The Trump administration recently announced a proposal to freeze planned increases to fuel economy and fuel emissions standards in new vehicles. Under the current regulations, issued by the Obama administration, car and truck makers are expected to produce vehicles with an average fuel economy of 51.4 mpg by 2025. The Trump administration wants to keep the 2020 standard of 36.9 mpg in effect until at least 2025.
It would be simple to see this move as a blow to Democrats’ environmental agenda or as part of a pro-big-business Republican agenda. But it is actually a response to a new energy situation in the United States in which oil and gas are abundant and cheap once again.
The regulations were conceived when oil and gasoline prices were significantly higher, with the assumption that, in the future, consumers would desire significantly more fuel-efficient and even electric vehicles. Since then, however, new technologies and more investment in oil exploration and production unlocked billions of barrels of oil and equally impressive amounts of natural gas beneath the United States’ own soil. By 2014, oil prices were trending downward, and by 2016, the price of oil bottomed out at $27 per barrel. Now, with gasoline prices steadily remaining less than $3 per gallon across most of the United States, consumers are just not as willing to pay extra for cars that get outstanding gas mileage.
Although not unprecedented, adjusting policy to reflect the new energy reality is actually rare. Policymakers have historically been bad at forecasting the future when it comes to oil prices and energy technology. Repeatedly, even as the energy situation inevitably changed, energy policy remained static. Political interests, ideological beliefs and a lack of will to undo policies that were no longer effective all explained why certain energy policies remained in place long after they made sense.
Clinging to these policies exacerbated certain economic trends and created political situations that could have been avoided had the government adjusted policies and regulations to fit new developments in energy. By doing so now, the Trump administration is avoiding a repeat of this persistent mistake.
In the early 1970s, inflation was a pressing policy issue. The Nixon administration decided to implement price controls on oil, among other things, to keep prices low for consumers.
Policymakers were reacting to the immediate economic situation without considering how this might affect energy use and availability. Just a year later, however, domestic oil production hit a wall while demand continued to grow. As a result, the United States became a net importer of oil for the first time in 1972.
That became an even bigger problem in 1973, when the Organization of Petroleum Exporting Countries (OPEC) unilaterally increased oil prices and the Arab members of OPEC initiated an oil embargo against the United States. Americans were suddenly hit with soaring energy prices and gasoline shortages that they were completely unprepared for. The fact that prices had been kept artificially low because of the 1971 decision exacerbated the economic shock in 1973 and 1974.
Low oil prices also stifled the development of new oil resources in the United States. Oil companies would not commit financial resources toward developing oil reserves, such as those in Alaska, because the return on investment for these projects was considered too low. Oil companies were interested in investing only in cheap resources, which were mostly found in the Middle East. The Nixon-era price controls, therefore, actually exacerbated the United States’ dependency on foreign oil.
Oil prices fluctuated over the next 30 years, but at the turn of the millennium, they again reached extreme heights.
Many analysts and industry experts came to believe that the world might soon run out of oil. These fears prompted a comprehensive energy policy overhaul by the George W. Bush administration designed to cut the use of oil and prepare to shift the U.S. economy away from oil entirely. New policies included, among another things, a mandate to mix ever-increasing amounts of ethanol, a substance made from corn or sugar, into U.S. gasoline — producing a boon for corn farmers.
But this policy was based on the flawed assumption that the total amount of gasoline used in the United States would continue to increase at essentially constant rates and that petroleum would become increasingly scarce and expensive in the future. This turned out to be false.
Gasoline use fell during the recession, and gasoline producers could not use all of the ethanol mandated by regulation. There simply was not enough gasoline being sold to mix in all of the ethanol the government was demanding the industry use. To comply with the law, refineries were forced to purchase “credits” for the ethanol they could not use.
In short, the Bush administration policies quickly stopped matching the reality of gas consumption. And so, such regulations became inefficient and ineffective. Compounding the problem, the ethanol mandate created a powerful ethanol lobby funded by farming interests that has successfully blocked legislation that would modify the standards to reflect the ever-changing gasoline market.
Most vehicles on the road today cannot run efficiently on gasoline that is more than 10 percent ethanol. But the ethanol lobby continues to agitate for the current ethanol mandate and support politicians who resist changes, even though this policy poses economic challenges for refineries and environmental threats as well.
Although historically U.S. energy policy has proven difficult to adjust, we do sometimes get it right — illuminating the advantages of a deft, flexible energy policy. During the Carter administration, the United States banned the export of almost all domestically produced oil. In the wake of the oil shocks and the 1973 oil embargo, policymakers wanted to keep American oil in the United States and prevent future gasoline shortages.
At the time, it seemed that the United States would never again become a major oil producer. Forty years later, however, the fracking revolution brought American oil production up to almost 9.5 million barrels per day. U.S. oil storage facilities were overflowing with crude oil that U.S. refineries could not process.
President Barack Obama and Congress wisely adjusted course, ending the crude oil export ban in 2015. In 2016, the United States started exporting its crude oil around the world. Last month, the United States exported an average of 1.87 million barrels per day of oil — more than double what U.S. producers exported in 2016. U.S. crude oil exports are a growth industry and are already helping to reduce America’s trade imbalance, create jobs and generate investment in new ports and shipping facilities.
Policies, especially with regards to energy, need to be adjusted to fit changing circumstances. It turns out that no one, especially not the government, can predict the future of the energy industry.
The real problem lies with government’s proclivity toward crafting comprehensive schemes that set policy for the future based on the economic conditions of today. As interest groups that benefit from such policies mobilize, change becomes difficult. Even without legislation, adjusting rules and regulations requires a time-consuming process of public comment that can drag on for many months or even years. Most politicians lack the will or the desire to go through the process of adjusting rules and regulations, preferring comprehensive legislation or ignoring what appear to be minor issues.
When it comes to fuel economy standards, the Trump administration isn’t even trying to reverse or undo the current policy but is simply seeking to delay the implementation of higher standards for several years. This flexibility can better serve consumers and the broader economy and shows the dexterity that all administrations need to have in this policy realm.