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Commentary: Energizing Energy


Gasoline prices have climbed above $2 per gallon, crude is hitting record highs -- reaching $56 a barrel on Mar. 16 -- and OPEC is pumping more to keep America's oil pain from increasing even more. So it's small wonder that in Washington, panicky pols are suddenly talking the talk on energy policy.

Forget red-state and blue-state America. Now many lawmakers see the energy crunch in shades of green. Indeed, who could possibly be against less-polluting school buses, a more reliable electricity grid, and incentives for solar and wind power -- all packaged alongside traditional GOP ideas for increasing oil and gas output? All these items and more are in a massive energy bill that the House of Representatives is expected to take up again in April. Even the White House, which once dismissed conservation as little more than "a sign of personal virtue," is now getting in on the act. In a mid-March speech, President George W. Bush said that America needed a strategy that "must promote conservation" as well as diversifying and updating the country's energy sources. Of course, that too remains high on the Administration's agenda: On Mar. 16 the Senate voted to open up the Arctic National Wildlife Refuge (ANWR) to drilling, though the battle is far from over.

Does this mean Washington is getting serious about a bold plan? Not really. First, the chances Congress will pass a broader energy bill this year are uncertain. Despite efforts by Senate Energy and Natural Resources Committee Chairman Pete V. Domenici (R-N.M.) to avoid last year's rancor by reaching out to Democrats, the measure could founder on a host of issues: liability protection for makers of the fuel additive MTBE, for instance, or lack of money now that the White House has admonished Congress to spend just a fraction of what advocates say is needed.

Even if a measure does pass, it won't do much to impose a rational energy regime on a fuel-guzzling nation. "I don't want to say there's nothing in it, but there's not a lot that really makes a difference," says Obie O'Brien, director of government affairs at Apache Corp. (APA), a Houston oil and gas producer. Sure, it's a great idea to provide incentives for everything from renewable fuels to natural gas supplies, but "the bill does not make an honest attempt to solve the long-term issues everyone is concerned about: energy security, climate change, and creating new technologies," says one key Hill staffer.

Indeed, in many ways, America is better off without current Washington's meddling, because rising prices are both a problem and a path to a solution. "The U.S. has not had an integrated energy policy -- and that's probably a good thing," says David G. Victor, director of Stanford University's Program on Energy & Sustainable Development. The market works pretty darn well in bringing supply and demand in line. The U.S. economy is largely shrugging off today's $50-plus-a-barrel oil, thanks to big efficiency gains prompted by past shocks. High prices are stimulating not just traditional oil and gas but newer sources, such as Canadian tar sands. "The industry can expand supply much more dramatically than people think through price," says Howard H. Newman, vice-chairman of private equity investor Warburg Pincus, which has made big development bets everywhere from Rocky Mountain gas to West African oil. That's why few experts expect prices to go much higher.

But don't expect the market to solve every problem. In electricity, the invisible hand is hampered by a welter of confusing regulations. Meanwhile, the price of oil would be far higher if it reflected the military and national security tab for ensuring the flow of oil. "It's sheer lunacy" that America is paying billions of dollars for "imported oil from those who wish to do us harm," says Frank J. Gaffney Jr., president of the Center for Security Policy, a conservative think tank. Plus, oil, gas, and coal prices don't include the future costs of climate change. Today, the main driving force for a national energy policy is the high price of oil, says Joseph Romm, a former Energy Dept. official. "But in the long term, it will be global warming."

That's why the U.S. needs an energy plan -- one that goes beyond the compromises and pork-trading that Congress will resort to in Energy Bill, Act III. Here's what the nation should do:

Improve the Grid

Remember the August, 2003, blackout? The transmission grid has been improved since then, reducing chances of another outage. But procedures that make the system more reliable are still voluntary. At the least, Congress must make standards mandatory.

Beyond that, the U.S. needs to invest far more in infrastructure. A roadmap from the Electric Power Research Institute describes the path to a "smart," digitally controlled grid that would boost reliability and efficiency. It would save tens of billions of dollars a year and eliminate the need for dozens of power plants. It would also make it far easier to hook the grid up to small-scale solar, wind, and other alternative sources of power. The government needs to help fund such a network or offer utilities the incentives to make the investments.

Diversify Supplies

The U.S. urgently needs to increase the number of suppliers of oil and gas -- as well as the availability of alternative sources of energy -- to lessen the chances that any given war, coup, or other disruption will cause a spike in prices. Already, exploration and drilling are moving to new regions around the world, from the Caspian Sea to West Africa. Considering new technology and a good safety record for drilling in the U.S., Washington should open up more of the continental shelf and other areas to drilling, as well as exploring the ANWR to find out what's there.

We'd get a higher payoff, however, by nurturing nonfossil fuel alternatives, including nuclear power. Congress passed tax credits for wind, solar, biomass, and other sources last year, but the breaks expire at the end of 2005. They need to be renewed for 5 to 10 years to provide the certainty that business needs. Moreover, 19 states have moved far ahead of Uncle Sam by requiring that a certain percentage of electricity be generated from renewable sources. The Feds -- even the regulation-phobic Bush White House -- would be wise to follow suit.

Boost Energy Efficiency

As the President says: "If you want to become less dependent on foreign sources of energy, we've got to be better conservers of energy." If the industrial world curbed its thirst, it would gain leverage over OPEC and other producers, who need dollars as much as we need their oil. Increased efficiency also cuts pollution, saves money, and slows climate change.

Bush hasn't backed up his words with real action, however. Neither the White House nor Congress is seriously trying to tackle the 800-pound gorilla of oil consumption -- cars and trucks. The transportation sector burns more than 60% of the nearly 21 million barrels of oil per day used in the U.S. At 20 miles per gallon, "our national fuel economy is worse than it was 15 years ago. That ought to be unacceptable," says Representative Sherwood L. Boehlert (R-N.Y.). And in contrast to the situation during the 1970s' energy crisis, "we know what the solutions are," says Amy Myers Jaffe, a Rice University energy expert. "We don't have to make a better car. We already have a better car." By boosting average consumption to 40 mpg -- which is doable -- America would eventually use 6 million fewer barrels of oil every day.

Again, the states are ahead of the feds. California has proposed 30% cuts in auto carbon dioxide by 2015. A market-based approach would combine higher fuel-economy standards with stiffer taxes for purchasing cars with lower gas consumption, and tax credits for vehicles that consume less. If Congress had the political moxie, higher gas taxes would also help steer people to more frugal cars. One example: the takeoff of high-mileage diesel cars in Europe.

Take Global Warming Seriously

If climates change, potentially bringing flooding and agricultural disruptions, then today's concern over oil prices or imports will seem trivial. The next generation will blame us for arguing instead of making big cuts in fossil fuel use to minimize the chances of a global catastrophe. William K. Reilly, Environmental Protection Agency administrator under Bush's father, recently co-chaired the bipartisan National Commission on Energy Policy, which called for mandatory curbs on carbon. "What I learned from the experience is that it's a mistake to put our chips just on clean coal or on renewables, or nuclear power, or other sources," he says. To make a meaningful difference, "it will require every one of them."

Much of the industrialized world has come to the same conclusion by ratifying the Kyoto Protocol and setting ambitious goals for slashing emissions. As a result, the U.S. is falling behind in efficiency gains. Japan, for instance, is the world leader in solar and hybrid cars, while Europe leads in wind. As a start, the U.S. needs to pass the modest mandatory limits on carbon pushed by Senators John McCain (R-Ariz.) and Joseph I. Lieberman (D-Conn.) or those embraced by Reilly's commission.

There's no guarantee these measures will work. Energy policy is notoriously complex and tends to have unintended consequences. Dramatically increase energy efficiency, for instance, and the resulting drop in demand will send prices plunging, taking away incentives for conservation. Indeed, companies have held back from investing in oil or gas exploration, or in efficiency measures, because prices have been so soft until recently -- and execs wouldn't be surprised by another dip. "Oil is a commodity," says Exxon Mobil Corp. CEO Lee R. Raymond, adding that commodity prices rarely stay high for long.

What's most important for successful energy policy is certainty: a Goldilocks price of energy -- not too high, not too low. If prices stayed relatively high, though not enough to sap the economy, and slowly climbed, they would offer a powerful incentive to invest continually in both efficiency gains and new sources. How could we provide that certainty? If Washington had courage, it could simply slap a slowly rising tax on emissions of carbon. In one bold move, that would make fossil fuels gradually more expensive, smoothing out price swings and spurring the development and adoption of everything from efficient cars to green power. It could even be good for the economy, if the revenues were returned to companies in the form of reduced payroll taxes or research and development funds for new technologies. Of course, that idea is politically untenable in today's Washington. So instead, expect Congress and the White House to fight endlessly over sideshow issues like farmer-friendly ethanol or drilling in the ANWR while another opportunity to make a real difference is lost. We can do better.

By John Carey with Chris Palmeri in Los Angeles and Wendy Zellner in Dallas


Silicon Valley State of Mind
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