weekly response

Subsidies and the End of Oil
By Leo Brown
[President Obama's Weekly Address]

If only because I read (the print edition of) Ranger Rick as a little boy, I have long taken for granted that oil companies are greedy, heartless, and dangerous for the health of our planet. Glossy spreads of charismatic megafauna and a bright future powered by sun and wind inspired my young convictions.

I'd like to think that my views are a bit more sophisticated today; I understand that we need oil in the near-term. But my distrust of fossil fuels and the lords of the extraction industry remains, and I can't help but expect that some day, maybe in my own lifetime, we will no longer depend on their opiate.

Environmentalists, scientists, and some politicians have been saying for decades that we need to invest in alternative forms of energy. This drumbeat reached a fever pitch in the summer of 2010 as the events of BP's Deepwater Horizon explosion unfolded. 24-hour submarine video feeds dominated the airwaves. Members of Congress lambasted BP CEO Tony Hayward and delivered impassioned soliloquies in defense of the spill victims. In the wake of the worst environmental catastrophe of our nation's history, the case against Big Oil was laden with populist fury and disgust over the industry's latest disaster.

To speak in defense of the oil industry was not a political option (as Rep. Joe Barton quickly discovered). It seemed that, perhaps, we had reached a tipping point that would require lawmakers to clear the path for alternative energy's emergence as a big business in its own right.

Today, President Obama rides what remains of this sentiment and invests his political capital in the inevitability of a green energy revolution. Oil companies don't deserve taxpayer money, he contends. They are wealthy enough already, and we need to look towards a green, sustainable future.

In his argument, the President does not announce outright that he hopes to see the oil industry recede and, ideally, transform into a producer of alternative energy. (Such a transformation would probably be necessary in order to avoid massive loss of employment.) His omission of this position leaves him vulnerable to the legitimate criticism that he is unfairly singling subsidies to the oil industry. Their tax relief is like that of any other big business, and as a result, his argument that oil companies don't need our money, while true, isn't particularly compelling. A more salient point would be that, in the interest of national security, economic viability, and concern for the environment, the oil industry needs to end.

In other words, the government should not pay for what it does not need and does not want. Even if government would, in the end, lose revenue - a very possible outcome - President Obama needs to make the case that this would be a worthy sacrifice.

Oil subsidies are not unique or especially heinous aside from the industry they maintain. If President Obama wants to get rid of them, he needs to move beyond the populist argument that oil CEOs are filthy-rich scoundrels and focus on the fact that the oil industry is what tethers our economy and our environment to the dirty 20th century.

Our Ball and Chain
By Leo Brown
[President Obama's Weekly Address]

It is astonishing that President Obama needs to convince us that energy efficiency is an important priority. His argument is clear and basic, and he presses on.

Of course, funding (and fear of the unknown, but that's another story) is a big part of why the nation isn't rallying around this cause. President Obama is correct that investment in clean energy would pay manifold dividends in the near future. But we must also, for example, mend our archaic system of education, riddled as it is with perverse incentives and slack. As we lag behind other developed nations in science and math, can we afford to ignore this expensive problem? Must we choose, or do we have enough cash on hand to address both challenges?

I might not be asking these silly questions had the United States not invaded Iraq in 2003. Because hundreds of billions of dollars have been spent to that end, we are left bickering over whether to invest in energy, education, or nothing at all.

However, we must consider that if the United States had not invaded Iraq, we probably would have found another way to spend those few hundred billion dollars. Pressing issues - education and energy efficiency - that pertain directly to the economy and national security would most likely have been neglected anyway. So what is it about our government culture that makes such a dim fate seemingly inevitable?

In an op-ed that President-elect Vladimir Putin wrote prior to the March 4 elections, he accused the United States of  being "obsessed with the idea of securing absolute invulnerability," and announced that this is "the root of the problem." In fact, this is quite an accurate assessment. Americans are obsessed with "securing absolute invulnerability"; one might argue that this is necessarily the aim of a government, even if it is a distant dream. But because our sphere of influence is so immense and our military so vast, remaining invulnerable gets to be quite expensive and, from President-elect Putin's perspective, intolerably invasive. This would be so even if the United States were to refrain from launching wars of choice based on emotional fervor and pitifully faulty intelligence briefings.

Just as Russia is saddled with more land than any single country could possibly manage well, we have consolidated power to an extent that requires most of our economic might to maintain it. This is why we are in debt, and this is why we don't provide for our citizens at the standards of other developed nations. This is why a commitment to clean energy remains a distant dream.

The President-elect's Choices
By Leo Brown
[President Obama's Weekly Address]

In the last decade, the Russian government has expanded their web of gas and oil pipelines to such a degree that domestic production will soon be unable to maintain full export capacity. This problem will worsen as western Siberian oil fields, the wellspring of Russian oil since the 1970s, run dry. But instead of investing in new technology to extract oil from other regions, the government will continue to funnel resources into the state-owned pipeline operator, Transneft, and ambitious expansion projects. Though new pipelines will be born, they might well sit underutilized and decrepit.

The muddy economic rationale for these projects caves under the realities of Russia's rising energy needs and finite production capacity. These pipelines are built primarily to allow Russia greater geopolitical leverage and flexibility. The idea is that when a 'transit nation' hosts a Russian pipeline, that nation profits as Russian energy flows. But if Transneft and the government have options of simply doing business elsewhere and rerouting through a different pipeline, the transit nations have much less political leverage. They have a choice of either not dealing with Russia at all, or doing so according to Russia's political, economic, and military conditions.

For these strategic reasons, Russia has, and will continue to have, more pipelines than are economically viable. However, it is still possible for Russia, the world's leading oil producer, to have it both ways.

The Russian economy is quite energy intensive compared to other European nations, and its rapidly expanding auto market is a major contributing factor. Regulation of Russian auto industry standards are lax and, as a result, the potential to fill the new pipelines with oil exports is lost to domestic consumers driving inefficient vehicles. If President-elect Putin sees to fruition President Medvedev's modernization program, the Russian market might be able to function on significantly less oil and gas, thereby freeing up Russian reserves to be strategically exported.

President Obama notes that American fuel efficiency standards are tighter than ever, and the Big Three auto makers are building vehicles that produce many more miles to the gallon. This may bode well for American efforts to develop energy independence while investing in alternatives to fossil fuels. But if President-elect Putin is serious about growing the Russian economy while maintaining a sophisticated network of energy security, he will make a case to his people that the push for energy efficiency is not a Western plot connected with a global warming hoax, but rather a vital component of national security and geopolitical influence.

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For a full analysis of Russia's energy choices, refer to Adnan Vatansever's Russia's Oil Exports (or the abstract), published in 2010 by the Energy and Climate Program of the Carnegie Endowment for International Peace.

Four Billion Dollars in Context
By Leo Brown
[President Obama's Weekly Address]

In the interest of developing an "all-of-the-above" approach to American energy, President Obama has reissued his call to end oil subsidies. Without such generous tax breaks, more money could be invested in the development of alternative energy sources or used to pay off the deficit.

But by reducing the oil company's profits, we will, in the short term, reduce domestic production and increasingly rely on foreign oil. Gas prices will rise due to transit costs and tariffs. Without the ability to produce our own energy, our influence in negotiations with foreign governments will dwindle.

Furthermore, the money that oil companies lose will not be taken from monstrous corporate salaries and bonuses. Big oil will simply save the difference by investing in oil production abroad, thereby dodging the matter. The rich will remain rich, and many American refineries will go the way of mid-century mills and plants.

Alternatively, if these companies were incentivized to drill in America, they would be subject to the rules and regulations of the Environmental Protection Agency, the US Internal Revenue Code, and US labor laws. But unless there is some impetus to produce domestic oil, profit-driven transnational corporations will inevitably opt for the lax environmental regulations and labor laws of production of Russia, the OPEC nations, and international waters.

"Drill, baby, drill," crooned the GOP, at least until the Deepwater Horizon BP Gulf oil spill of 2010. This call to drilling has been mocked, rightly, as economically backwards, Islamophobic, and ignorant of environmental risks. However, an anti-oil backlash, too, would yield economic and environmental devastation, so long as Americans continue to use oil. We often hear about the quest for energy independence, but an equally important priority is the collection of tax revenues from oil companies - revenues that can be invested in the development of alternative energy sources and used to pay off the deficit.

American oil production, along with the extraction of natural gas (fracking) from Marcellus Shale, can ease our reliance on foreign oil. If the government seriously considers the warnings of scientists and environmental activists, these endeavors can be less environmentally dangerous than foreign extraction, cut down on wasteful transit, and support the American economy.

So, with any luck, President Obama will not spend the entire election season playing word games about saving "four billion dollars of your money" by eliminating tax breaks for oil companies. Surely, he realizes that we could save a great deal more by investing in stringent regulations, incentivizing oil companies to stay in America with tax breaks, and using the revenue to ease the tax burden and invest in alternative energy. Unfortunately, this is not a logical opportunity for the 99% to take their revenge against wealthy CEOs, who will simply take their business abroad if we give them no reason not to.

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For a more detailed analysis of the economic consequences of these options, you might like to read Scott McNally's guest post on Scientific American's PluggedIn blog.