Friday, June 18, 2010

Daily Show makes a point on Energy Independence

The Daily Show With Jon StewartMon - Thurs 11p / 10c
An Energy-Independent Future
Daily Show Full EpisodesPolitical HumorTea Party

Jon Daily has a remarkable ability to poke fun at politicians but this segment is especially biting.  He goes through eight presidents' rhetoric about "energy independence."   The segment raises a question that we should think about more carefully.   The American economy has benefitted increasing integration into the global economy.  No one but some labor activists actually believe that we need to have steel or cherry independence.   It is about what Ricardo called comparative advantage.   A lot of products we once produced are done somewhere else now because they can be produced more easily somewhere else.  We ultimately benefit from being able to consume raspberries in the winter which come from Chile.

One argument that is raised about oil - with presidents like Bush 43 - is the security issue.  But what is the difference between the argument in favor of domestic steel production (we need it in case of a war) and oil?  Free flowing trade will ultimately trump the security issues.  Unless we let the nativists and the mercantilists determine our policies.   From my perspective, and the Daily piece points this out, part of the hangup is balancing environmental policy with energy policy.   

A second argument used, mostly by democrats, is the finite nature of oil.  Here basic economics comes into play.  When the price of energy goes up people change their behavior.   That is called elasticity of demand and oil is a pretty elastic product.  In 1973, in my last stint in the federal government, we had a heated debate about whether Americans would change their consuming habits as the price of oil went from 25¢ to about a $1.50 in a short few months.   We found very quickly that Americans began demanding smaller more fuel efficient cars.   In a relatively short period of time the auto makers adjusted and they were being produced.  Oil is finite, but as was found in the first oil crisis (Whale Oil) in the middle of the 19th Century when the price of a commodity goes up sufficiently ingenuity takes over and something else (in this case petroleum) replaces the higher priced product.   There is no reason why as supplies of oil become less available we won't develop new fuels.   But we won't develop them until price dictates.

One final note, when the first president in the string began to talk about energy independence our figure was about a third of our oil - it is now about seventy percent.  So much for successful policy.

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