Sparring over energy

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Aug 5th 2008 | NEW YORK
From Economist.com

The rivals for the White House have different energy plans

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JOHN MCCAIN and Barack Obama have found something they agree upon: it is time to talk about energy. Last week, Mr McCain put out television adverts criticising Mr Obama on the subject, with one even claiming that the Democrat was somehow responsible for current high oil prices. On Monday August 4th, Mr Obama responded with a speech offering a raft of proposals, and calling Mr McCain too close to Big Oil to be trusted.

Between the low blows they have made some serious policy suggestions and produced a lot of fluffy nonsense and posturing. Voters, concerned about the price of energy, have been offered a flurry of confusing proposals.

Mr McCain, for example, says that Mr Obama’s opposition to drilling for new oil off the American coast contributes to high prices. Some economists think that to promise exploration there, even though oil would not be produced for years, would bring down prices today, through the mechanism of expectations on the futures market. Mr McCain also favours expanding nuclear power. Both form part of his image as someone willing to make tough calls—and they may make good politics. According to a poll from Pew in June, 60% of respondents thought a priority should be finding new sources of energy, whereas just 34% thought that environmental protection should come first.

Mr Obama has some politics on his side, on the touchy subject of campaign contributions. The Democrat says that his Republican rival is in the pocket of oil companies and notes that contributions to Mr McCain from oil executives rose in the days after his turnaround on offshore drilling. Mr Obama used his speech on Monday, and a new television advertisement, to suggest that Mr McCain is no better than George Bush, an oilman-turned-president. According to a poll by CN* last month voters see oil companies as the biggest culprit behind high oil prices—more so than the war in Iraq, speculators or the ban on offshore drilling. Exxon Mobil’s latest quarterly earnings were $11.7 billion, the biggest of any American company ever.

Although oil prices are beginning to drop again, the squeeze has both men seeking villains. Each is also producing ill-considered proposals. Mr Obama says that he would tax oil firms for “windfall profits”, and give motorists a rebate ($1,000 for families, $500 for individuals). Such a populist gesture might go down well with voters, but imposing a windfall tax would cause uncertainty in the oil industry and divert funds from investment in production of more oil, thus contributing to higher prices. Another suggestion, to release some oil from the strategic reserve, would bring a temporary benefit at best.

Mr McCain’s villains are in government. Not only does government, in hock to tree-huggers, block drilling and the expansion of nuclear power, it also taxes petrol too much. He says that he would give a temporary break in the gasoline tax. But there is nothing to stop the oil companies from simply taking this in the form of higher prices themselves. Even if lower prices were passed on to consumers, if the consequence were then greater demand for petrol and rising prices once more, then producers rather than consumers would benefit from the tax break.

Both candidates are acting as if they do not understand the laws of supply and demand. In truth, each is playing politics. Fortunately, there are some more thoughtful proposals in the mix. Both Mr McCain and Mr Obama support a form of cap-and-trade to limit carbon emissions using market mechanisms (this would probably put up prices, though it should reduce pollution). Both want new investments in alternative sources and improved efficiency. Mr McCain has promised a $300m prize for a breakthrough battery-powered car. Mr Obama has more ambitious goals: $150 billion in investment in clean energy over 10 years, 10% of electricity generation from renewable sources by 2012, and increasing cars’ fuel efficiency substantially. He believes that by 2015 there could be 1m cars on the road getting 150 miles to a gallon of gasoline.