“Coulda, Woulda, Shoulda” – Friedman 11/14/07

Today’s column by Friedman on energy policy should be mandatory reading for all political candidates. The basic premise of the opinion is that America has failed to act in a coherent manner with regards to energy (i.e. oil) policy. Specifically, Friedman points out the drastic increase in oil prices from September 2001 through November 2007 (350%), which can largely be attributed to the increased global demand for oil. This increased global demand is significantly related to America’s failure to reduce its’ demand and developing nations (e.g. China and India) adopting the American developmental model with respect to energy policy (see 11/9 post). The real underlying issue Friedman has with the current policy is that America has blindly relied on market forces to guide energy policy, but in a situation as complicated as energy policy the market fails to consider all the costs and benefits of a transaction. In a completely free market there is no obvious incentive to the individual driver or company to reduce oil reliance because the benefits that accrue from such decreased reliance are to the nation-state and society at-large and not the discreet economic unit. The societal costs of additional pollution is not part of the transaction, nor are the implications on geopolitical stability and sustainability calculated (directly) into the spot price of West Texas sweet crude.

The question is how do we get these costs considered in each transaction? One method would be to get individual consumers to price in these costs on their individual consumption behavior. Though laudable, the aggregate effects of this change will likely be nominal due to the overwhelming costs of an educational drive and also due to the low participation rate in such a program. The low participation rate is economically understandable, because there is no rational economic disincentive to the behavior in question. This is where a second method of regulating the market comes in: taxes. Of course using taxes to modify behavior is never very politically palatable, but this is when a truth telling politician (don't laugh) is needed. Friedman argues we need a candidate (a Democrat in his mind, and probably the only hope at all) to speak to this issue in a clear and truthful manner.

“DEMOCRATIC CANDIDATE: “Yes, my opponent is right. I do favor a gasoline tax phased in over 12 months. But let’s get one thing straight: My opponent and I are both for a tax. I just prefer that my taxes go to the U.S. Treasury, and he’s ready to see his go to the Russian, Venezuelan, Saudi and Iranian treasuries. His tax finances people who hate us. Mine would offset some of our payroll taxes, pay down our deficit, strengthen our dollar, stimulate energy efficiency and shore up Social Security. It’s called win-win-win-win-win for America. My opponent’s strategy is sit back, let the market work and watch America lose-lose-lose-lose-lose.” If you can’t win that debate, you don’t belong in politics.”

The likelihood of any serious candidate making this kind of statement is slim, but just because the current political actors aren’t willing to say it does not mean it is without value (an argument could be made that precisely for this reason it has value) Americans need to realize that continued (over) consumption of oil has a number of negative externalities coming to bear on each additional barrel of oil imported from abroad. It is my opinion that the best method to address these concerns is through a fuel tax. I understand that this tax would be inherently regressive, but this could be addressed through a phase-in and/or a temporary (I know this is hard to do) fuel tax income tax credit. Taxes have their place, and though modifying individual behavior may be the most desirable, sometimes a little government intervention can get the ball rolling.

Take this as my personal call to arms for a Geopolitical Social Cost Benefit Analysis of US Energy Policy. There has already been an outcry for including a tax on oil that would incorporate the social costs of pollution, but I argue here that we must consider the geopolitical consequences of continue reliance on foreign oil from unstable regions. An extension of the current policy, leads to America in a showdown of increasing demand with China and/or India for a stagnating world oil supply.

“No, No, No, Don’t Follow Us” - Friedman 11/4/07

What happens if India’s population starts driving at a rate close to that of America? I’m not sure of all of the consequences, but I agree with Friedman in thinking that it just isn’t likely to be a net postive. The factor driving (pun intended) this issue is the release by Tata Motors of India of a new $2,500 car, which will make a personal automobile a reality for millions of Indian families. It is hard to be the judgmental American on this issue, but developing nations need to understand that this is one area where America’s development model is very seriously flawed. In many ways the USA and China are in better form to handle this new domestic oil demand than India, because both of the former have significant reserves and domestic production. India, however, imports more than 70% of its oil and has virtually no strategic reserve. This means that as oil prices continue to increase and Indians continue to buy more $2,500 cars and thus increasing demand, India will see a larger percentage of its’ wealth shipped to the oil rich countries of the world.

This issue is awash in environmental concerns, both for India and the world as a whole. Additional issues include, India’s economic health, trade surplus, and perhaps the biggest cost, which ties all of these concepts together – the opportunity cost of Indian innovation working on a major problem of the world. Friedman is a champion of Indian innovation, and it is difficult to argue against the following thought:

“If it applied itself to green mass transit solutions for countries with exploding middle classes, it would be a gift for itself and the world... To do that it must leapfrog. If India just innovates in cheap cars alone, its future will be gridlocked and polluted. But an India that makes itself the leader in both cheap cars and clean mass mobility is an India that will be healthier and wealthier. It will also be an India that gives us cheap answers to big problems – rather than cheap copies of our worst habits.”

It would be wonderful if the world started solving the developmental problems that the American model of development has perpetrated. I am mostly concerned with this logic in the fact that if the Indians solve the issue, I’m not convinced America will take to it. We love our cars -- $100 barrel oil, despotic regimes, and declining discretionary income be damned. Until Americans are ready to make some sacrifices in giving up their single occupancy vehicles, we aren’t going to solve our transportation issues – but I guess there is hope for the rest of the world.