This is the last in a series on the major policy ideas — from Left and Right — that should guide the next presidential administration's agenda. (For the opposing view, see Fred Krupp, "The Moment for Urgent Climate Action.")
Imagine it’s after Inauguration Day. The next president asks the staff of, say, the White House Science Office to come up with a strategy for a bipartisan energy policy for the post-campaign-promise period. In that implausible, though perhaps not impossible, scenario, the resulting staff memo to the science advisor might go something like this.
“The U.S. shale industry accounted for over two-thirds of all new global oil supply over the past half-dozen years.”
This memo responds to your request that we develop a conceptual strategy for bipartisan energy policy that could also have big economic and political impacts.
The issue of climate change is, of course, at the center of any energy debate today. While we weren’t tasked to produce an opinion on climate science per se, we must observe for the record (this is, after all, the Science Office) that while there is no such thing as “settled science,” there is such a thing as settled public opinion (at least in the relevant time-frames we’re dealing with). While no public poll shows climate is a top issue for the electorate, surveys do show a majority evince concern about climate change, especially millennials. Equally important: polls and behaviors make it clear there is no political support for significantly increasing energy costs.
We’ll come back to the climate issue. First we should focus on today’s key reality: Oil and, increasingly, natural gas are critical to global economies and trade. We cannot escape petroleum’s role in the geopolitical tensions that pivot around the Middle East, the Eastern Bloc, and Africa. Global demand for oil has nothing to do with “Big Oil” and everything to do with “big economies.” It would be devastating, politically and economically, if anything vaguely echoing the 1973 Arab oil embargo were to happen again. Oil prices increased 400 percent following that embargo. All of the political capital devoted to talking about and funding alternatives to oil (and natural gas and coal) have obscured the fact that conditions today are more fragile than in 1973. We must address that.
In 1973, trade accounted for one-third of the world’s GDP; now it accounts for over 60 percent. Today, as then, oil fuels 95 percent of the machines that transport the world’s goods and people. Since 1973, maritime shipping has increased over 300 percent; global air travel has risen 700 percent; and automobile use has increased by 300 percent. And 70 percent of world oil tradedtoday still comes from OPEC and Russia.
The only significant disruption in this tenuous state of affairs over the past four decades has been the emergence of shale technology. The U.S. shale industry accounted for over two-thirds of all new global oil supply over the past half-dozen years. Such a rapid increase in output is unprecedented in the post-war history of the energy and oil industries. It is an astonishing fact that shale oil and gas technology has added 40 times more energy supply to the United States in the past decade than has the combined expansion of (massively subsidized) solar and wind technologies. No federal program has had an impact comparable to the shale revolution. A side note regarding electric cars, about which we are bullish: The most optimistic forecasts don’t foresee displacement of even 10 percent of world oil demand by 2040.
Simply put: Shale technology has rocked world markets. The major oil-exporting nations have been deprived of trillions of dollars and have scrambled to adjust budgets and drain sovereign wealth funds. Given that American producers are the primary reason for the price collapse, we are witnessing a massive wealth transfer away from those exporting nations (much of it flowed to the U.S.) and the biggest transfer in geopolitical power since the fall of the Berlin Wall. As a consequence, we believe that, specifically regarding the geopolitics of energy policy, we have a once-in-a-generation opportunity.
Until recently, the go-to sources to meet rising global oil demand were the monarchies and oligarchies dominated by the OPEC nations and Russia. The administration should form a high-profile multi-nation trade mission, in cooperation with relevant private entities, to facilitate long-term frameworks to supply other nations with oil and natural gas from U.S. sources. The sales pitch is obvious: While the U.S. may not offer the lowest prices for oil and gas, we are one of the most reliable suppliers, and importing nations — that includes most of the world’s economies — have a compelling need to diversify for energy and geopolitical security.
For the U.S., an export-centric oil-and-gas strategy would yield multiple benefits by accelerating a shale resurgence. It would continue downward pressure on prices to the benefit of consumers everywhere. It would also open up new markets for U.S. firms and, collaterally, create millions of U.S. jobs and billions of dollars in export revenues. Finally, such a policy would not only lower trade deficits but also increase both domestic tax receipts and attract more foreign direct investment. In short, the combined economic benefits would constitute a massive economic stimulus without cost to the Treasury.
A pro-export trade policy for oil and natural gas — along with the creation of a new Office of Energy Export Assistance within the Department of Commerce — would not only ensure the permanence of a global wealth transfer, it would also restore America’s “soft power” in the geopolitical arena, a critical alternative to the “hard” power of military deployment or threats (real or implied). Soft power will be increasingly important as disruptive and potentially dangerous events continue, or heat up, in the Middle East, Africa, and Russia.
As for climate-oriented energy policy, we should embrace the framework that Bill Gates has been pushing. Gates, who has made it clear he is concerned about climate change, has said: “We need innovation that gives us energy that’s cheaper than today’s hydrocarbon energy, that has zero CO2 emissions, and that’s as reliable as today’s overall energy system. And when you put all those requirements together, we need an energy miracle.” Google reached a similar conclusion about alternative energy sources when their lead energy engineers stated: “Incremental improvements to existing [energy] technologies aren’t enough; we need something truly disruptive…Those technologies haven’t been invented yet.”
By invoking “miracles” Gates was not referring to fantasy but, rather, the distinction between technology (building things using today’s science) and the need for profoundly better ideas coming from basic science, where “miracles are happening all the time.” This points to the need for a fundamental policy shift towards basic research. Gates himself has proposed that federal funding for basic energy research be increased to $18 billion annually — roughly triple today’s budget.
The administration should take the Gates challenge and raise the stakes by targeting a $30 billion a year budget for basic research. However, the critical issues here are: where the money comes from; who distributes it; and where the money is spent.
Funding expanded science programs can come from re-allocating budgets away from those now directed at projects. Basic research accounts for less than one-third of the current $70 billion total federal (non-defense) research and development budget. But the biggest trove of money is to be found in the private sector which spends six times more on research and development than the entire federal (non-military) budget; only 5 percent, however, is directed to basic science. Encouraging a modest re-direction of private-sector spending towards basic science could meet the rest of the new target. (Straightforward tax incentives would work.)
We can maximize political support for all this by using a block-grant structure to delegate to the states the authority to distribute the increased funds to research universities and entities within each of the states. This approach will not only maximize the diversity of talents, but also be politically crucial in gaining broad Congressional backing.
Finally — and critically — this expanded program must be focused clearly on basic research, not industrial-class projects or grants for building newer versions of yesterday’s technologies. Our mantra: Fund more scientists, not more Solyndras.
We’re not naïve about likely opposition to these proposals. So permit us to outline briefly some talking points relating to the two positions we know are in circulation in Congress.
At one pole, there is the proposition that we should eliminate all alternative energy subsidies. That’s a non-starter. There is widespread public and bipartisan political interest in the idea of federal support for alternative energy technologies. Immediate negative regional economic and job consequences would follow a wholesale elimination of support for such companies. Arguments have been made, many valid, that subsidies can, on the one hand, distort markets and, on the other hand, stimulate new industries. But the fact is total federal support for alternative energy is ‘small ball’ — well below 1 percent of the federal budget. Clearly, there are ways to improve subsidy-based policies, but we don’t see subsidies as moving the meter one way or another.
At the other pole, there’s the keep-it-in-the-ground position, the idea that all extraction and fossil-fuel use must stop. This (and its variants) is also a non-starter, not least for the geopolitical realities outlined earlier. In any case, every forecast, including from our own Energy Information Administration and the International Energy Agency, sees more fossil fuels needed in the foreseeable future. The core problem with the United States supporting any version of a “keep it in the ground” approach is that other nations won’t follow. If we produce less, the consequences include rising U.S. imports and rising prices, both with multi-hundred-billion-dollar impacts. And this could happen quickly, with disastrous economic and political fallout.
Our political headwinds are visible in recent surveys that found Americans believe 20 percent of our energy already comes from solar and wind. The real number of course is just 3 percent, despite hundreds of billions of dollars in subsidies and preferences so far. But our mission here is to deal with reality, since there is no amount of spending that can enable a wholesale reduction in fossil fuels any time in the politically foreseeable future. The only path that would be technically sound and impactful — with some prospects for politically viability — is to seize both the geopolitical and economic opportunity offered by shale, and to use some of that wealth to become a global leader in long-term basic research to bring about energy “miracles.” And the latter will doubtless yield many other unanticipated benefits.
This piece originally appeared at RealClearPolicy
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Mark P. Mills is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in RealClearPolicy