Senator Obama: Market Manager

Yesterday, Senator Barack Obama (D - Illinois) gave a speech on fuel efficiency to the Detroit Economic Club. It was a speech full of tough talk and can do platitudes, but it was also was a prescription for government intervention in what should be free markets.

The Senator's problem statement is part true and part fantasy. For example he says that:

we fuel our energy needs by sending $800 million a day to countries that include some of the most despotic, volatile regimes in the world. We know that oil money funds everything from the madrassas that plant the seeds of terror in young minds to the Sunni insurgents that attack our troops in Iraq. It corrupts budding democracies, and gives dictators from Venezuela to Iran the power to freely defy and threaten the international community. It even presents a target for Osama bin Laden, who has told al Qaeda to, "focus your operations on oil, especially in Iraq and the Gulf area, since this will cause [the Americans] to die off on their own."

and

We know that our oil dependency is jeopardizing our planet as well - that the fossil fuels we burn are setting off a chain of dangerous weather patterns that could condemn future generations to global catastrophe. We see the effects of global climate change in our communities and around the world in record drought, famine, and forest fires. Hurricanes and typhoons are growing in intensity, and rapidly melting ice sheets in Antarctica and Greenland could raise global sea levels high enough to swallow up large portions of every coastal city and town.

and finally

We are held hostage to the spot oil market - forced to watch our fortunes rise and fall with the changing price of every barrel. Gas prices have risen to record levels, and could hit $4 a gallon in some cities this summer. Here in Detroit, three giants of American industry are hemorrhaging jobs and profits as foreign competitors answer the rising global demand for fuel-efficient cars.

The junior senator from Illinois concludes that:

America simply cannot continue on this path. The need to drastically change our energy policy is no longer a debatable proposition. It is not a question of whether, but how; not a question of if, but when. For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time.

WOW, strong words. The age of oil must end in our time? I guess he's going for that vision thing. Let's interject some reality. First estimated world proven reserves are currently in the range of 1082 bbl and 1650 bbl (bbl = billions of barrels). Since at least the 70s oil shocks "experts" have been predicting we would run out of oil. This prompted the Carter Administration to give us 55 mph speed limits and the CAFE standards. Problem is, if you look at any graph of world proved oil reserves it has been increasing, basically monotically, since the 1940s. Consumption is running at about 84 million barrels a day, meaning that current supply would last somewhere between 35 and 54 years. A couple of things to consider: 1) all known oil fields have out produced their "proved reserves", 2) there are new sources of oil in the ground but not yet explored or brought into production, 3) there is enough oil in oil sand and oil shale to last to a very long time window. Some oil experts believe that global production is capped at 85 million barrels per day. This figure can only be increased if new wells are opened. Because daily demand is close to daily supply, prices are high. Add in the uncertainty and speculation caused by war in the region and the price is even higher, and subject to wide swings.
To be fair the Senator, he didn't claim we were running out, only that we're funding terrorism and despots while ruining the environment. Ohhh, and the price is high.


Senator Obama's Prescription includes:

- "we'll need a stringent cap on all carbon emissions"
- "creation of a global market that would make the development of low-carbon technologies profitable"
- "We'll also need to find a way to use coal - America's most abundant fossil fuel - without adding harmful greenhouse gases to the environment."
- "I have already endorsed a cap-and-trade system"
- "invest substantial revenue generated by auctioning off emissions credits into the development of carbon sequestration, advanced biofuels, and energy efficiency."
- "We'll also need new ideas on energy efficiency and the ability to harness renewable sources of energy"
- "gradually raising our fuel economy standards by four percent - approximately one mile per gallon - each year. ... using existing technology and without changing a vehicle's weight or performance. And so the only way that automakers can avoid meeting this goal is if the National Highway Traffic and Safety Administration can prove that the increase is not safe, not cost-effective, or not technologically possible."
- "my proposal would provide generous tax incentives to help automakers upgrade their existing plants in order to accommodate the demands of producing more fuel-efficient vehicles."
- "We'll help to partially defray those health care costs, but only if the manufacturers are willing to invest the savings right back into the production of more fuel-efficient cars and trucks."
- "we should make it easier for the American people to buy more fuel-efficient cars by providing more tax credits to more consumers for the purchase of hybrid and ultra-efficient vehicles."
- "we should also realize that the more choices we have as consumers, the more responsibility we have to buy these cars"
- "It's time we produced, sold, and used biofuels all across America - it's time we made them as commonly available as gasoline is now."
- "provide tax credits to those who want to sell a mix of ethanol and gasoline known as E85 at their fueling stations."
- "since it only costs $100 per vehicle to install a flexible-fuel tank that can run on biofuels, I've also proposed that we help pay for this transition."
- "When I'm President, I will make sure that every vehicle purchased by the federal government {has a flexible-fuel tank)"
- "I've introduced a proposal known as a National Low-Carbon Fuel Standard,The idea behind the standard is simple. Beginning in 2010, we will require petroleum makers to reduce the carbon content of their fuel mix one percent per year by selling more clean, alternative fuels in its place."

Well this program is certainly breathtaking in its scope. It probably won't save a gallon of gas. Here's why. If you make things cheaper (through subsidies) people will use more of it, not less. Making driving cars cheaper through hybrid subsidies, E85 subsidies, flexible fuel tank subsidies, etc will lead to more driving not less. More driving means more petroleum use, not less, since none of these ideas replace it. Instituting reform to CAFE will just provide manufacturers a new game to master and play; they are already gaming the current system.

Short lesson on econ for the Senator: If you want people to use less of an item, RAISE PRICES. Ohhhh... that will not get you elected. Interested students of history should study the 1980 presidential election, particularly the positions and proposed policies of Independent Candidate John Anderson.