Energy policy, wherefore art thou?

In case you missed it, oil and wholesale gas prices hit all—time highs recently, with unleaded gas futures closing at roughly $1.58/gallon. As one can typically double this number to approximate what it might translate into at the retail level, this figure suggests that, some time soon we are going to be paying $3.00 at the pump.

Clearly, this news didn't elude the President, who took the opportunity in a speech in Columbus, Ohio to propose some policy initiatives to address the looming crisis.  The problem is that Bush could be coming to this party late, and needs to quickly refocus some of the Administration's efforts to affect a truly historic energy program that radically changes the way our nation uses fossil fuels and alternative energy sources.

This apparent handicap is caused by the lack of prominence given to energy policy at the president's State of the Union address this year.  The cornerstone of this speech —— as well as the presumed top priority of Bush's second term —— was Social Security, a crisis that the nation at this point isn't sure is either real or imminent.

By contrast, with most commodity valuations at their highest levels since 1981 —— led in  part by the charge of exploding energy prices to dizzying heights —— the threat to the current economic expansion posed by a renewed inflationary spiral might represent a more clear and present danger than Social Security running a deficit in the year 2018. 

To be sure, there are many economists who feel that current energy prices are not based in economic fundamentals.  This is espoused in a recent column by Lawrence Kudlow, wherein he suggests that oil is appreciating in a bubble pattern, but market forces will eventually act to correct these aberrations leading to lower prices in the near future.

Unquestionably, I agree with Mr. Kudlow's assertions in the short term.  However, America and the world continue to experience shots across the bow concerning the increasing demand for this finite (in the short run) commodity, and each time such a warning is issued, our response mysteriously and inexplicably becomes more muted.

For example, when the first energy crisis hit in 1973, for the next seven years, rather forward thinking pieces of legislation were enacted at the federal level to address what we all logically perceived as being a serious problem.  Such initiatives included lowering federal speed limits, implementing Corporate Average Fuel Efficiency standards, and issuing tax incentives for the creation and purchase of alternative fuel sources.

Unfortunately, once the crisis waned, and oil prices slipped back into the teens by the mid—1980's, America took its eye off the ball, and basically stuck its head back in the sand.  For instance, most tax incentives for alternative energy sources were eliminated as part of the Tax Reform Act of 1986.  In 1996, federal speed limits were raised back to their pre—energy crisis levels.  And, the CAFE standards first enacted in 1975 haven't been increased since their final implementation twenty years ago. Legitimate controversy exists over the efficacy of these measures, but little debate exists over intelligent alternative energy policy measures to reduce our dependence on oil, with all its geopolitical  and national security hazards.

However, potentially even more appalling is that it is 26 years since the accident at the Three Mile Island nuclear facility in Middletown, Pennsylvania, and there haven't been any further incidents at an American power plant since —— except in movies and on television, of course.  Yet, we continue to ignore expanding this energy source, even though many countries around the world, notably including France, rely heavily on nuclear power technology to light their homes and office buildings.

Consequently, when one considers the state of computer technology in 1979 —— as well as what existed in telecommunications, biotechnologies, and pharmaceuticals —— and imagines where nuclear and other alternative fuel sources would be in our nation today if modern technologies had been consistently applied to these areas, it is almost mind—boggling to ponder how oil—independent we could be, and what energy would now cost. 

That said, international energy usage continuing to increase is an incontrovertible trend.  Demand from China and India, the world's most populous countries, will do nothing but explode as their economies grow.  Beyond this, a democratic Iraq will also begin to see greater demand, as will other nations across the globe that are abandoning totalitarian and authoritarian economic policies.  With limited additional areas of exploration available, the energy equation appears to be spiraling toward demand pushing supply constraints, and consequent price rises. Prices can and do fluctuate in the short run. The long run trend, however, is unmistakable.

Which brings us to President Bush, a man who has shown himself to be a leader who doesn't wait for crises to be imminent before engaging the American people with his vision.  Clearly, he wasn't willing to wait for Saddam Hussein to develop nuclear weapons that he could attack us with or sell to terrorists to do the same.  And, Bush is doing his best to not permit Congress to ignore reforming Social Security until 2018.

As such, the President must use this same prescience to recognize that the supply—demand ratios relating to energy continue to conspire against America's economic sovereignty in much the same way as terrorism and the looming insolvency of Social Security do.  As he is universally depicted as a strong ally to Big Oil, he is in a unique position both historically and politically to lead America and the world on this key international issue.

Noel Sheppard is an economist and writer residing in Northern California.  He welcomes your comments at slep@danvillebusinesscenter.com. 

In case you missed it, oil and wholesale gas prices hit all—time highs recently, with unleaded gas futures closing at roughly $1.58/gallon. As one can typically double this number to approximate what it might translate into at the retail level, this figure suggests that, some time soon we are going to be paying $3.00 at the pump.

Clearly, this news didn't elude the President, who took the opportunity in a speech in Columbus, Ohio to propose some policy initiatives to address the looming crisis.  The problem is that Bush could be coming to this party late, and needs to quickly refocus some of the Administration's efforts to affect a truly historic energy program that radically changes the way our nation uses fossil fuels and alternative energy sources.

This apparent handicap is caused by the lack of prominence given to energy policy at the president's State of the Union address this year.  The cornerstone of this speech —— as well as the presumed top priority of Bush's second term —— was Social Security, a crisis that the nation at this point isn't sure is either real or imminent.

By contrast, with most commodity valuations at their highest levels since 1981 —— led in  part by the charge of exploding energy prices to dizzying heights —— the threat to the current economic expansion posed by a renewed inflationary spiral might represent a more clear and present danger than Social Security running a deficit in the year 2018. 

To be sure, there are many economists who feel that current energy prices are not based in economic fundamentals.  This is espoused in a recent column by Lawrence Kudlow, wherein he suggests that oil is appreciating in a bubble pattern, but market forces will eventually act to correct these aberrations leading to lower prices in the near future.

Unquestionably, I agree with Mr. Kudlow's assertions in the short term.  However, America and the world continue to experience shots across the bow concerning the increasing demand for this finite (in the short run) commodity, and each time such a warning is issued, our response mysteriously and inexplicably becomes more muted.

For example, when the first energy crisis hit in 1973, for the next seven years, rather forward thinking pieces of legislation were enacted at the federal level to address what we all logically perceived as being a serious problem.  Such initiatives included lowering federal speed limits, implementing Corporate Average Fuel Efficiency standards, and issuing tax incentives for the creation and purchase of alternative fuel sources.

Unfortunately, once the crisis waned, and oil prices slipped back into the teens by the mid—1980's, America took its eye off the ball, and basically stuck its head back in the sand.  For instance, most tax incentives for alternative energy sources were eliminated as part of the Tax Reform Act of 1986.  In 1996, federal speed limits were raised back to their pre—energy crisis levels.  And, the CAFE standards first enacted in 1975 haven't been increased since their final implementation twenty years ago. Legitimate controversy exists over the efficacy of these measures, but little debate exists over intelligent alternative energy policy measures to reduce our dependence on oil, with all its geopolitical  and national security hazards.

However, potentially even more appalling is that it is 26 years since the accident at the Three Mile Island nuclear facility in Middletown, Pennsylvania, and there haven't been any further incidents at an American power plant since —— except in movies and on television, of course.  Yet, we continue to ignore expanding this energy source, even though many countries around the world, notably including France, rely heavily on nuclear power technology to light their homes and office buildings.

Consequently, when one considers the state of computer technology in 1979 —— as well as what existed in telecommunications, biotechnologies, and pharmaceuticals —— and imagines where nuclear and other alternative fuel sources would be in our nation today if modern technologies had been consistently applied to these areas, it is almost mind—boggling to ponder how oil—independent we could be, and what energy would now cost. 

That said, international energy usage continuing to increase is an incontrovertible trend.  Demand from China and India, the world's most populous countries, will do nothing but explode as their economies grow.  Beyond this, a democratic Iraq will also begin to see greater demand, as will other nations across the globe that are abandoning totalitarian and authoritarian economic policies.  With limited additional areas of exploration available, the energy equation appears to be spiraling toward demand pushing supply constraints, and consequent price rises. Prices can and do fluctuate in the short run. The long run trend, however, is unmistakable.

Which brings us to President Bush, a man who has shown himself to be a leader who doesn't wait for crises to be imminent before engaging the American people with his vision.  Clearly, he wasn't willing to wait for Saddam Hussein to develop nuclear weapons that he could attack us with or sell to terrorists to do the same.  And, Bush is doing his best to not permit Congress to ignore reforming Social Security until 2018.

As such, the President must use this same prescience to recognize that the supply—demand ratios relating to energy continue to conspire against America's economic sovereignty in much the same way as terrorism and the looming insolvency of Social Security do.  As he is universally depicted as a strong ally to Big Oil, he is in a unique position both historically and politically to lead America and the world on this key international issue.

Noel Sheppard is an economist and writer residing in Northern California.  He welcomes your comments at slep@danvillebusinesscenter.com.