Politics & Policy

Obama’s Muddled Energy Policy

High prices are good! No, wait, they’re bad!

If the Obama administration’s energy policy were the script for an old Keystone Kops silent movie, it would be comical. But since energy policy is, in fact, a crucial component of righting this nation’s economic ship, it is anything but funny.

Consider: President Obama entered office with a plan for an “economy-wide” cap-and-trade system that was expressly intended to make conventional fossil fuels more expensive, in order to encourage greater use of less efficient alternative sources of energy. By encouraging alternative sources of energy, the administration reckoned, America would gain energy independence. The outcome would be a new, robust “clean-energy economy.” Cap-and-trade was his cornerstone policy initiative.

That was two years ago. Cap-and-trade, however, proved to be politically unpopular. Moreover, inflationary monetary policy, a devalued U.S. dollar, and global economic growth outside the U.S. have pushed up the prices of energy. So the president is now campaigning against high energy prices. High energy prices “hobble our economy,” he’s argued, and he recently averred that the administration “is in conversations with the major oil producers like Saudi Arabia” to encourage them to produce more oil. Moreover, in early April he traveled to Brazil to congratulate that nation on its expanded offshore oil drilling and pledged that the U.S. would import more Brazilian oil.

In sum, in the first half of Obama’s term, we were told that high energy prices would be good, and thus America ought to adopt a policy to push up the costs of using oil and gas to lessen our reliance on imports. Now, in the second half of his term, we’re being told that high energy prices are bad, so we need to encourage more foreign oil production for the U.S. to import.

Recently, however, things have gotten even more confusing. President Obama has renewed his call to end tax incentives for U.S. oil exploration and production. He wants to end the oil depletion allowance, which lets U.S. oil producers cover the cost of capital expenditures. It is a standard deduction for the cost of doing business, like allowing depreciation for machinery in a manufacturing company. What is most mind-boggling, however, is that this proposal comes on the heels of his Brazil trip, which was tied in to the approval of a subsidized loan from the U.S. Export-Import Bank to help Petrobras, the Brazilian national oil company, expand its oil production. In short, he’s proposing to increase the cost of oil production in the U.S. while approving subsidies for foreign oil production.

The one constant in Obama’s energy policy, though, is his commitment to renewable energy. That hasn’t changed since his cap-and-trade proposal. In fact, the $4 billion saved from the proposed end to the depletion allowance on U.S.-production oil would go to fund even more subsidies for renewable energy.

To put such a swap in context, consider that the U.S. produces more than 2 billion barrels of oil a year. The depletion allowance equates to about five cents per gallon of crude (there are 42 gallons in a barrel). Ethanol, by comparison, receives a subsidy of 45 cents per gallon in the form of a credit on excise taxes that are levied on motor fuel. In short, gasoline is taxed, ethanol is not. Additionally, so-called cellulosic ethanol (made from things like wood, grasses, and plant waste) receives what the Congressional Budget Office calculates as a $3.00-per-gallon subsidy. These subsidies are on top of a federal mandate that ethanol must be used in the fuel supply.

Subsidies aside, President Obama’s plans to revolutionize the economy and gain American energy independence through renewable sources are mislaid. First, ethanol is less efficient than gasoline: Cars get lower mileage on ethanol. Second, supplies are limited. Despite the subsidies and the mandate, there is still not a commercial supply of cellulosic ethanol. Federal law requires the use of 250 million gallons of cellulosic ethanol in 2011, yet according to the Environmental Protection Agency, which administers the mandate, only 6 million gallons will be produced this year in the U.S. This is the second year in a row in which cellulosic production has not met the mandated federal minimum.

The case of corn ethanol has farther-reaching implications. This year ethanol will account for approximately 40 percent of the U.S. corn supply. This has added to food-price inflation, not only domestically but globally. The U.S. is the largest supplier of corn in the world — approximately 70 percent of the world’s tradable corn supply is from the U.S. — so American ethanol policy has serious repercussions for global food stability. Consider this in the context of President Obama’s admonitions to Saudi Arabia about their oil output — they’re a country that is food-deficient and relies on food imports, and our energy policy is helping to destabilize the world food trade.

Moreover, recent history shows that there are reliability issues in using crops as feedstocks for energy. Drought in the U.S. heartland last summer caused corn yields to fall short, leading to the critical supply-and-demand situation we now face. Corn prices in April 2010, before the drought, averaged $3.54 per bushel. Corn prices this April are near $7.50 per bushel. And a wet spring has significantly delayed plantings so far in 2011, raising the possibility of further low yields and even higher prices to come.

Finally, because of the Rube Goldberg nature of our renewable-energy policies, with their subsidies, regulations, and mandates, taxpayer-subsidized U.S. corn ethanol is being exported, while mandates to use non-corn ethanol are — because of the shortfall of cellulosic — being filled by imported sugar ethanol from Brazil, to which a 54-cent-per-gallon tariff is applied. Ironically, with its expanded oil production, Brazil has announced that it will lower its ethanol mandate in order to lower fuel prices domestically. Currently, there is a 25 percent ethanol requirement in Brazil; it will be dropped to 18–20 percent this spring, according to government officials there.

U.S. energy policy needs to encourage domestic oil production, find a realistic and viable role for renewable and alternative sources of energy, and recognize natural-resource and economic realities, domestically and globally. A comprehensive approach based on these principles would be the most productive path toward U.S. energy security and economic stability in the energy sector.

— Dave Juday is an adjunct fellow of the Center for Global Food Issues.

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