Home inFocus American Policy at a Crossroads (Fall 2012) An Energy Policy for Long-Term Economic Growth

An Energy Policy for Long-Term Economic Growth

H. Sterling Burnett Fall 2012

The American economy was built, and American lifestyles depend, upon relatively inexpensive, abundant, reliable sources of energy. Indeed, economic growth depends upon increased energy use. Economists estimate that during the next 20 years, U.S. oil consumption will grow by one-third and electricity demand could increase by more than 45 percent. Accordingly, if substantial action is not taken soon to improve and increase the nation’s energy resources, the U.S. will before long confront energy shortages that will make its current economic malaise look mild by comparison. Fossil fuels, oil, and natural gas alone are critical for transportation and increasingly for electricity, but they also serve as feedstock for plastics, pharmaceuticals, fertilizers, lubricants, and construction materials. As Rob Bradley, founder of the Institute for Energy Research, stated, “Energy is the master resource.”

High prices of energy, both in the present and historical sense, have persisted and are arguably contributing to the recent extended economic decline. Thus, converging lines of evidence suggest that access to abundant, reliable, relatively inexpensive fuels will be critical to reestablishing and maintaining long-term economic growth for the United States.

Fortunately, the steps necessary to bring forth increased energy security and independence would be good for the economy, for the general public, and for federal coffers—a win, win, win—if only Congress and the reigning administration would exercise the political will necessary to allow an energy renaissance to happen.

Do No Further Harm

The first political dictum for any policy should be “Government, do no (further) harm.” As applied to the U.S. energy situation, this means immediately halting a variety of recently enacted and proposed Environmental Protection Agency (EPA) regulations that would restrict energy choices and raise energy prices. Congress should halt the EPA’s climate regulations in their tracks.

For instance, the Utility MACT (maximum achievable control technology) Rule could require retrofits for up to 753 electricity-generating units. Up to 15 gigawatts of electricity—enough to power 15 million households—could be forced into early retirement. The rule’s standards are so stringent that even recently permitted plants employing the best available technology cannot meet them, and no new coal plants are likely to be built. The EPA estimates the annual cost of the rule at approximately $11 billion, and its estimate of annual health benefits from the reduction in mercury is only $6 million (though the benefits could be as small as $500,000). However, this is at odds with just about every independent cost estimate. For instance, researchers at Credit Suisse, an international financial services company, estimated the standard could cost $100 billion by 2017.

Under the utility MACT rule new plants will not be allowed to exceed the emissions of the least polluting power plant currently operating using the same type of fuel. By 2015, existing coal and oil-fired power plants must reduce emissions to the average level of emissions of the least polluting 12 percent of plants currently operating. The argument for these standards with regards to mercury is that exposure at sufficient doses can lead to neurological damage, among other health concerns. The factors that determine whether and, if so, how severe the health effects are from mercury exposure include: the chemical form of mercury; the dose; the age of the person exposed; the duration of exposure; the route of exposure—inhalation, ingestion, dermal contact, etc.; and the existing health of the person exposed. Among the most common routes of exposure in the U.S. comes from the consumption of fresh water fish and seafood.

These regulations are arguably unnecessary since U.S. power plants are responsible for less than 1 percent of the world’s yearly mercury emissions. In addition, it is very much in debate whether the emissions from power plants actually get into the food fresh water and sea food chains and are ultimately ingested by people. As a result, in December 2010, Jeff Holmstead, former EPA Assistant Administrator for Air and Radiation, stated that even if there were no mercury emissions in the United States at all, there would be virtually no change in the amount of mercury to which Americans are exposed. That is because more than 50 percent of the mercury people are exposed to comes from natural sources.

A second rule in need of quashing is the Cross-State Air Pollution Rule, which could threaten seven gigawatts of electricity generation capacity with early retirement—roughly enough to power seven million American households.

Perhaps even worst of all are the proposed rules to regulate greenhouse gas emissions. These rules will cost billions of dollars and millions of jobs as energy prices rise. Meanwhile, energy itself will become less reliable as inexpensive fossil fuels are forcibly replaced by so-called green energy (wind, solar, etc.) that cost more and are intermittent in delivery.

And this is just a small bit of the regulatory overreach currently in progress under the Obama administration. The current slew of regulations is so harmful that it has driven labor groups, trade organizations, and management into each other’s arms to oppose these job-killing rules. Indeed, a report by the American Legislative Exchange Council notes that a broad and diverse coalition opposes EPA overreach, including:

32 current and former governors and lieutenant governors, 27 groups of state and local officials, 16 labor unions, 17 state legislative bodies, 10 state agencies, and 57 trade associations. This coalition represents millions of workers, thousands of state officials, tens of thousands of companies, more than 3,000 counties, more than 19,000 cities, villages, and towns, and thousands of state legislators across the country.

The Myth of Green Jobs

A second step the government must make if it wants to better ensure energy security and economic growth is to end its love affair with so-called green energy and its misplaced belief in the myth of green jobs. Research shows that subsidies and grants for—and mandates to use—green energy kill more jobs than they create. For instance, a 2009 study from Madrid’s King Juan Carlos University found that for every green job the government “creates,” 2.2 jobs are lost in competing industries as factories lay off workers to cover the higher energy costs of the green technology or move their plants overseas. In addition, only 10 percent of those green jobs were permanent, with the average green job adding nearly $750,000 in costs to consumers’ bills.

In Denmark, about 28,400 people were employed in the wind industry, but only about one in 10 were new jobs—the remaining 90 percent were simply positions shifted from one industry to another. Worse, Danish gross domestic product was about $270 million less than it would have been if the wind industry work force were employed in other sectors.

The next Congress should look at these green energy subsidies anew and treat all energy sources equally by ending subsidies for them all. Recently, Republican presidential candidate Mitt Romney proposed ending the wind energy tax credit and renewable grant and loan programs, but he should go a step further. Only by ending all energy subsidies can a truly level playing field be created, while removing environmentalists’ talking point that fossil fuels get subsidies too. This would allow the market to truly function to deliver the most efficient, lowest cost energy to the public.

End Inefficient Ethanol Subsidies

Another policy to end is the insupportable Renewable Fuel Standard (or RFS, the federal ethanol mandate) which turns food into costly, inefficient fuel. This is arguably the most ill-conceived energy subsidy in existence. The only people who truly benefit from this program are the farmers, distillers, and blenders. The rest of the country and the world are harmed. The RFS contributes to higher food prices, shortages of basic food stuffs in some countries, harms the environment, increases water use—which is especially bad in drought years, decreases fuel efficiency, and in some circumstances damages vehicles themselves.

Looking just at the economics, the impact of ethanol subsidies is negative. One report by the U.S. Agriculture Department determined that every dollar spent subsidizing ethanol costs consumers more than four dollars. There are several reasons for this. First, every bushel of corn devoted to ethanol production leaves less for human consumption and animal feed—thus people pay more for corn, beef, poultry, and pork than they would absent the subsidies. In addition, prices for other goods are increasing as farmers, in pursuit of lucrative subsidies, devote more acreage to corn rather than other, unsubsidized, produce.

Adding to these costs, because ethanol absorbs water it cannot be shipped through existing pipelines used to transport unblended gasoline—the water it absorbs could separate causing pipelines and fuel lines to freeze, and perhaps burst, during cold weather. In addition, ethanol makes engines run less efficiently than gasoline meaning the more ethanol, the lower the vehicle’s fuel economy. Like so much of the pork Congress bestows upon special interests, ethanol is bad for the economy, bad for consumers, and bad for the environment.

End the Moratorium on Oil and Gas Production

Moving beyond, “Do No Harm,” improving U.S. energy independence also requires “Do Thusly,” action items for the government. One of the most costly and least sane energy policies of the past three decades has been the virtual moratorium on new oil and gas production on, and its delivery from, public lands. On the production side, billions of barrels of oil have been locked up on public lands and off shore on the U.S. outer-continental shelf for decades. Indeed, the Minerals Management Service estimates that the U.S. Outer Continental Shelf contains more than 46 billion barrels of oil and 419 trillion cubic feet of natural gas. Unfortunately, almost all of this bounty lies in areas now off limits. And a small portion, less than half of 1 percent, of the Arctic National Wildlife Refuge (ANWR) is estimated to contain between six and 16 billion barrels of oil. To put that in perspective, if only six billion barrels of oil were deliverable from ANWR, in a time of emergency the U.S. could cut all imports of foreign oil for more than two years with little or no effect on the economy. Put another way, ANWR’s six billion barrels would be sufficient to replace Iraqi oil for more than 50 years or oil from Saudi Arabia for 30 years. Understood properly, this is no longer small potatoes.

Critics of opening ANWR to exploration argue that it would take ten years to recover any oil found there (though the figure is closer to five years now). These same arguments were made during the first Gulf War in 1990 and again after the 9/11 terrorist attacks. If the U.S. had made the decision to drill in either previous periods of crisis, it would have less to fear from taking military action in the region today, if necessary. The question is: Will U.S. national security be held hostage to hostile oil exporting countries in the future? The United States is the only coastal country on earth with estimated potential offshore oil reserves that is not actively seeking to expand production.

President George W. Bush was successful in ending the moratorium on new oil and gas production, but gains made under his administration were reversed when President Obama took office. This should not be a partisan issue. Regardless of which political party holds power, for the good of the country, the government must allow oil and gas development on public lands and offshore. In order to get state buy-in, the federal government should share royalties with the states in which, or off whom’s coast, drilling will occur. Oil and gas revenues are among the largest sources of revenue for the U.S. government, and royalties, fees, and leases from expanded drilling could be used to reduce taxes further, pay down the debt, or reduce the amount of budget cuts necessary to put the country back on a sound financial footing.

Building the Delivery System

Beyond production, delivering oil and gas to the market is also critical to better securing America’s energy future. During the 1990s and early 2000s, when natural gas prices were high, demand was growing and estimated reserves were dwindling. Repeated efforts were made to allow for the building of a trans-Alaskan/Canadian natural gas pipeline that would deliver natural gas from Coastal Alaska and Central Canada to pipelines in the lower 48 states. Despite the clear benefit for the nation as a whole, this proposal was repeatedly stymied by Congress at the behest of the Alaskan delegation, which wanted a different route that would be more expensive and more environmentally challenging, but that would deliver more jobs to Alaskans. With the shale gas/fracking revolution, this pipeline has fallen off the radar screen, but if gas usage continues to expand and should prices rise, the pipeline should be allowed to go forward, with economics—not politics—choosing the route.

A more immediate delivery concern was raised when the Obama administration decided to reject plans to build the Keystone pipeline, which would have carried 700,000-1 million barrels of oil per day from Alberta, Canada to the Texas Gulf Coast for refining. This was oil the U.S. could count on, oil not held hostage to the vagaries of the political situations in the Middle East, increasingly socialist Venezuela, or the ever more anarchic African Coast. The route for the pipeline had been studied for more than three years and President Obama’s own State Department and interior department had delivered reports that endorsed the pipeline. They found that the environmental risks were minimal while the energy security benefit would be considerable. Despite his own administration’s approval, the president decided the route needed more study and rejected the plan. This was a purely political decision to satisfy the increasingly radical environmental lobby in the U.S.

This decision is already having geopolitical consequences. Currently, the U.S. is Canada’s largest export market for oil, and Canada, not a Middle Eastern country, is America’s largest single source of imported oil. But due to President Obama’s decision to “delay” the Keystone XL pipeline, Canada has decided to ship more oil to China and other fast growing Asian countries whose leaders don’t genuflect to the misanthropic environmental lobby.

As Canadian Prime Minister Harper told Jane Harman of the Wilson Centre think tank in front of a live audience of businesspeople, scholars, diplomats, and journalists: “Look, the very fact that a ‘no’ could even be said underscores to our country that we must diversify our energy export markets.” Harper also pointed out that until now the U.S. had been receiving oil at a discounted price from Canada, but that would end. In the future the U.S. will have to pay full price—no more breaks.

An Effective Energy Plan

Only by removing the market distortions inherent in government’s picking winners or losers via subsidies and mandates, as well as its restrictions on where energy development can take place, can an effective energy plan be created. A truly visionary plan for America would unleash the power of the markets and competition in all areas of energy production and delivery, allowing the Bill Gates and Steve Jobs in the energy arena to innovate America’s way to a brighter future. The United States has the energy resources for long-term economic growth, but the question remains: Do political leaders have the will and foresight to allow development?

H. Sterling Burnett, Ph.D. is a senior fellow with the National Center for Policy Analysis, a non-partisan, non-profit research institute with offices in Dallas, Texas and Washington, DC. Dr. Burnett runs the NCPA’s Energy and Environment program.