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An oil platform in the Norwegian Sea. (MARCEL MOCHET/AFP/Getty Images)

Fossil Fuels Are the Future

Irwin M. Stelzer

On September 23 in New York, the president will have an opportunity to score a political victory and advance an important part of his agenda. No, not at some Park Avenue fundraiser, although he might squeeze one in, but at Climate Summit 2014, a meeting of heads of state convened by U.N. secretary general Ban Ki-moon “to galvanize momentum toward a new global agreement on climate change,” to be finalized at a 2015 summit meeting in Paris. This is an opportunity for President Obama to lead from the front, and in the process lay out a program that might, just might, break the partisan deadlock in Washington.

The president likes to refer to the arc of history, to criticize those who are on the wrong side of history. Well, when it comes to energy and environmental policy it is the president who is on the wrong side of history, in two respects: He wants to end the use of fossil fuels, and use command-and-control regulatory techniques to do so. All of this just when fossil fuels are becoming cheaper and more abundant domestically, their use less threatening to the environment, the need for their contribution to economic growth more compelling, and when evidence is mounting that central direction produces unnecessary costs in lost growth and higher levels of unemployment.

Start with fossil fuels. It was once considered good policy to reduce the consumption of oil, for three reasons. First, it was believed we are running out of oil. Along came fracking and with it the ability to tap reserves that had been economically unreachable. Domestic oil production has risen by 65 percent in the past six years. Second, we feared excessive dependence on unstable and unfriendly foreign suppliers. No longer. We are now the world’s largest oil producer, and if policy permits will become a major exporter of petroleum products. Not that we are “energy independent,” as promised by Richard Nixon and every president since. We are not and probably never can be independent of developments in a key, globally traded commodity market. But any need to curtail oil use merely to insure against cutoffs of foreign supplies is not one that should any longer dominate energy policy.

Nor is the third reason we once had for seeking to wean ourselves off oil any longer sufficiently worrisome to drive policy: the fear of price spikes induced by some upset in the flow of oil from volatile regions. In recent months we have seen interruptions in the smooth flow of crude to market in Iraq, Libya, Nigeria, and threats from Venezuela. Yet the price of crude has not spiked; indeed, at this writing the price of benchmark Brent crude is lower than it was at the beginning of the year.

Compare that with pre-fracking 2008, when disturbances in Nigeria and Venezuela drove prices up to almost $150 per barrel, and gasoline prices in some markets above $5 per gallon. Because supplies are more ample, Americans saved $700 million per week this past August compared with last year, estimates oil analyst Tom Kloza at – despite upheavals in major oil producing regions around the world.

It is not only domestic oil that is more readily at hand. No longer is there a reason to ration natural gas, as was the case years ago when regulators tried to force an end to its use for decorative outdoor lighting and boiler fuel. Natural gas is available in such abundance that the important policy question has become how to ease restrictions on its export without damaging domestic industries that consume it in great quantities. Its abundance results in prices so low that natural gas is displacing coal in power generation. And if the EPA is right that clean coal technology is economically attractive, at least for any new coal-burning plants that might be built (and would be built if the fear of draconian restrictions were replaced by an energy market dominated by price), the usable supply of coal has increased.

In sum, we are sitting on one of the world’s largest supplies of fossil fuel, and need only figure out how to use it without causing some of the nasty climate effects that so worry environmentalists – environmentalists to whose views partial deference should be paid even by climate-change skeptics, if for no other reason than the weight given their views in policy-making circles. Meanwhile, environmentalists would be well advised to tackle the difficult question of how to balance environmental considerations and the need for growth, in the knowledge that the age of fossil fuels is not coming to an end, and that it is highly unlikely that the political facts of life will allow them to set targets that involve leaving three-fourths of existing world reserves of fossil fuels in the ground, untapped.

The president is not only engaged in a futile exercise when he tries to bend the arc of history to produce a world free of fossil fuels. He is on the wrong side of history, too, when he tries to use command-and-control regulations to achieve his goal of reducing carbon emissions. Not that regulations do not have their uses. But history tells that although regulations can help in some circumstances to reduce certain pollutants, especially those produced locally and with local effects, those regulations generally need market-oriented implementation to make them passably efficient, an exception being the effectiveness of CAFE standards for autos in cleaning the air. But that set of regulations did not entail a massive reorganization of the energy sector, as would be required by the Obama plan for reducing carbon emissions, a plan of the sort recently inflicted on the health care industries, and one that is not within the reach of ordinary mortals. Doubt that and look no further than Germany, once the growth locomotive of Europe, now struggling to keep its economy chugging along after deciding to recast its energy sector with no attention to cost, in pursuit of forestalling climate change.

Germany’s planners had reason for, shall we call it, self-assurance. Their economy has been the strongman of Europe. But that was before the Energiewende, or energy revolution, described by the Wall Street Journal as “a mammoth, trillion-euro plan to wean the country off nuclear and fossil fuels by midcentury and top domestic priority of Chancellor Angela Merkel.” One data point does not a trend make, but there is foreboding in Germany’s boardrooms after the economy contracted by an annualized 0.6 percent in the second quarter of this year. German businessmen believe that implementation of the planners’ goal to get at least 80 percent of the energy they need to run their factories from renewables by 2050 – a more ambitious goal than that of the EU’s central planners – will shrivel the industrial base, hitting small and medium-size firms the hardest. The projected cost of $1.4 trillion is about what the country spent on the reunification of western and eastern Germany, reckon the Wall Street Journal’s economists. Noted energy economist Daniel Yergin, who rarely permits himself apocalyptic statements, says, “Germany’s current path of increasingly high-cost energy will make the country less competitive…, penalize Germany in terms of jobs and industrial investment, and impose a significant cost on the overall economy and household incomes.” And benefit America, as German firms take their next rounds of expansion here in order to benefit from low-cost fossil fuels, the ones Obama wants
to eliminate.

Fast-forward from the grumpy boardrooms of Berlin to the summit meeting of world leaders in New York City later this month. President Obama wants to set the stage for an agreement next year that would compel other nations to pass legislation that would set limits on their carbon emissions, and require the wealthier among them to cough up enough money to induce poorer nations to set their own emissions limits. But he has a problem – two, in fact. To accomplish his goals within the bounds of the Constitution he will need Senate ratification of a treaty, and to pass money from American taxpayers to developing countries he will need House appropriation of such funds. Neither the Senate, no matter which party controls it next year, nor the House will give him what he needs. So the White House is trying to figure out a way around the inconvenient Constitution and is planning to disguise the agreement as a mere updating of earlier treaties.

If the president succeeds, environmental activists will be delighted – and will lose. For one thing, if leaders of other countries agree to pass legislation placing binding limits on their industries’ carbon emissions, while the American president and leading advocate of such legislation does not and cannot, they will have a lot of explaining to do to their own parliaments or governing institutions, especially since Obama will be pursuing a new career while they will be left with legislation and commitments that he could not persuade America to adopt. For another, experience in Britain, Germany, Spain, and other countries suggests that there is a point at which rising energy costs sap support for environmental protection measures. By going too far, driving household energy bills up, encouraging industries to relocate to lower-cost nations such as ours, environmentalists are causing subsidies for renewables to be brought into question, and green goals to be subordinated to job-creating growth.

That is a pity, because even those who are skeptical of the claims made about the causes and effects of climate change should prepare for the contingency that they (we) just might be wrong. Here is where the president has an opportunity to lead, if he is willing to lead down a different path: that of tax reform and a carbon tax, both of which measures he supported before dropping them in the face of congressional opposition.

Obama would have to be willing to concede that such a tax would be revenue-neutral, rather than revenue-enhancing if it is to have any chance of succeeding. But politics is, after all, the art of the possible, and if he really believes that climate change is the burning issue of our time he should give up a few bucks to prevent its worst effects. Besides, if the taxes to be offset are inhibiting growth, he would have a nice bonus.

Instead of trying to get other nations to go along with emissions restrictions that he cannot sell to either party in Congress, the president can use the podium in New York to announce that legislation establishing a carbon tax will be introduced. Rather than rely on his powers of persuasion to get his fellow leaders to go along, he can announce that the legislation will include border tax adjustments that impose an equivalent burden on goods imported from countries that choose not to follow his leadership in fighting global warming. Finally, to make certain that the applause is accompanied by a standing ovation from economists of all persuasions and, I am told, from many environmentalists, he can announce the repeal of government-inflating, costly regulations made unnecessary by a market-based carbon tax.

That, Mr. President, is a strategy. Not one assured of success, but having a better chance than one built on subverting the Constitution and relying on government planning of a complicated energy sector rather than on price signals from millions of consumers of energy.

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