Energy Prices

Last night, House Leadership came together on a package that dramatically expands both offshore drilling and renewable energy. The bill is designed, as NDN Green Project Director Michael Moynihan writes, to be palatable to Republicans, as it gives them almost all of what they want on drilling.

The comprehensive package, as described by the E&E Daily (subscription required):

The drilling provisions are part of a broad package that includes a repeal of oil industry tax breaks for major companies, new renewable energy mandates and investments, a new fund to speed deployment of carbon control technology, and many other measures.

Have no doubts, this is a moment of truth for Republicans in the House. (Next week, Republicans in the Senate will likely get a similar opportunity.) If Republicans truly are for an "all of the above" energy solution, this package is their chance to vote for one.

If Republicans continue their obstructionism on actually achieving anything on energy by nitpicking at this legislation, they, and not the Democratic Congress, will be responsible for failing to lower energy prices, failing to break America’s dependence on foreign energy, failing to confront climate change, and failing to harness the clean energy economic opportunity.

New York City--As used in Washington, the term "silly season" means what happens to government in an election year.  Legislation becomes almost impossible to pass, politicians grow more disingenuous than usual.  And no one does anything without assessing how it plays politically.  When one party controls Congress, the other may decide to prevent any action to create the appearance of a "Do Nothing" Congress.  As both the House and Senate now prepare to debate energy legislation once again--perhaps as soon as tomorrow or on Monday--the question is are we stuck in the silly season or is there a real chance for legislation to move forward.  

While exacerbated by it being an election year, in a sense, the failure of the government to take any meaningful action on energy this year despite a full fledged energy crisis is a textbook example in how markets move faster than government.  Since January, the price of oil climbed from about 100 up to 150 and then dropped back down to just over 100 where it closed last night.  During the interim, America experienced a mini oil shock--not as severe as those in the 1970s because prices have come down--but severe enough.  $4 dollar and up a gallon gas this summer shocked the economy, driving real changes in behavior that so far are sticking.  Americans are driving lass, taking mass transit more and are no longer buying gas guzzling cars.  Some of the changes can't be reversed.  The car companies shuttered plants making SUVS and are retooling to make hybrids or high efficiency cars.  Airlines cut routes, hiked fares and are only now staunching the flow of red ink that began this summer.  And what did government do during all this drama?  Nothing.  Nada.

In one sense, this all might be an argument for laissez faire economics.  The price signal of $4/gallon gas worked.  Demand dropped leading to a price correction.  It is hard to see how legislation if any had passed would have made things better in the short term.  And, indeed, legislation is a clumsy tool for short term objectives.

For the long term, however, one would think that Congress might have interpreted a 50% spike in prices at the pump as a signal to do something to avoid or at least mitigate the type of shock we encountered.  For example, one would think at a minimum Congress would have extended renewable tax credits to develop alternative energy sources to oil.  But Congress did not.  Majority Leader Harry Reid brought up the Investment Tax Credit eight times and Republicans blocked cloture on as many occasions. 

Lest anyone think we can leave it all up to the market, Opec's decision yesterday to cut production to make sure oil does not drop below 100 per barrel, shows that this is not all about the market.  There is such a think as a huge government controlled, anti-American cartel plunk in the middle of the oil market, controlling supply if not demand.  Thus while legislation is not the answer for short term problems, a renewed energy policy is vital to America's long term economic and strategic objectives.

The legislation likely to move to the floor tomorrow in the House and next week in the Senate has been crafted specifically to attract Republican votes.  It contains generous provisions for off shore drilling.  In addition, it has impoortant initiatives to reduce dependence on oil over the long term such as the critical extension of existing renewable tax credits, green building standards, a tax credit for weatherization, commodities market reform and incentives for oil companies to accelerate drilling on federal lands.  However, if those who want to make Congress appear to be doing nothing win out over those who want it to do something, this effort will suffer the same fate as the previous energy initiatives this year.

There is, however, a potential way to break the log jam.

This election season is unusual in featuring two Members of the Senate at the head of their respective tickets.  Both presumably want action on energy.  And as the leaders of their party, both should be able to unite their parties to break the logjam.  The legislation now has the drilling that Senator McCain wants and the support for alternatives he says he wants as well.  It also contains support for renewable energy at the heart of Senator Obama's energy plan.

Accordingly, I am calling on Senator McCain to bring his party together to support comprehensive legislation and on Senator Obama to do the same.  If the party leaders marshall their troops there is no reason we cannot see real action on energy even during the silly season.

The price of what are called “credit default swaps” for U.S. Treasury debt is rising sharply. Credit default swaps are financial instruments by which one investor holding debt pays another investor to guarantee that if that debt defaults, he will make the first investor whole. 

This week, the Treasury assumed responsibility for $5.2 trillion in outstanding debts held by Fannie Mae and Freddie Mac. A modest but significant share of that is headed for default, and the Treasury will have to absorb the losses. And the result is a rising price for credit default swaps on the U.S. Government: It now costs $18,000 to insure $10 million of U.S. Treasury debt. The market sees a very small - but not negligible - prospect that the U.S. Government would actually default on its debt, which would be, well, the end of the American and global economies as we know them. That’s how bad it is.

Credit default swaps for subprime mortgage based securities, of course, have played a significant role in the current unraveling in the financial markets. But conservative/Republican disdain for normal regulation of those markets has played the larger, underlying role.  Such regulation isn’t intended to “manage” those markets, but to ensure that the rest of us are protected from serious repercussions when problematic choices by financial market players (for example, to double down on subprime mortgages or their derivatives) collide with adverse conditions that make those problematic choices very reckless.

That’s the essential meaning of the Fannie Mae and Freddie Mac regulatory bailouts. Setting aside the many years of astonishingly reckless and self-interested management at Fannie Mae and Freddie Mac, the mortgage market would freeze up if these two institutions suddenly couldn’t operate. Here’s a brief course in why that’s so: there’s always plenty of credit for new mortgages, because those creating the mortgages promptly sell them, in bundles, to investors, so that the credit can cycle back to finance more mortgages. 

Fannie Mae and Freddie Mac both create and buy trillions of dollars in these mortgage-backed securities, and there’s no financial institution that could step in if they were taken out of the picture. That’s why we need to keep them operating, even if it requires a bailout. By the way, the other major holders of these securities include U.S. banks – expect a line of them to go belly-up in the next six months – and foreign central banks. 

The potential unpleasant fallout for our relations with other countries if their holdings went bust is the other reason that the Bush Administration has taken the largest interventionist step in U.S. financial markets since the Great Depression. Once again, the Bush Administration is moved to act not by what’s happening to Americans, but by the implications for our relations with other countries

New York City - The issue of energy was hardly absent from the Republican convention this week or from the McCain campaign this summer.  If anything, it has been a centerpiece, from the chants of Drill Baby Drill during Rudy Giuliani's keynote speech to images of windmills fluttering in and out of slides and television commercials to the mantra of energy independence to renewed calls for nuclear power.  What has been missing, however, is consistency or internal logic to this message.  In fact, a fundamental complication has bedeviled almost all the discussion of energy this year, namely the conflation of the issue of high energy prices with those of energy independence and climate change.  They are not the same issues nor are their policy implications the same.

Consider the following question which in many ways is a Rorschach test of one's true policy priorities.  Is the collapse of gas prices, now down by almost a third in the last month, good or bad?

Since lower prices mean more money for families, and support for a shaky economy, from an economic standpoint, lower prices ought to be good. On the other hand, since lower prices also mean more gas consumption and therefore more consumption of foreign oil as well as more carbon in the atmosphere, one must conclude that from an energy independence and environmental standpoint, lower prices are bad.

Most people--including the Republicans in Minneapolis--would like to have it both ways: lower energy prices as well as energy independence and a better environment.  But to hope to achieve that, it is first necessary to be intellectually honest about what policy choices are likely to have what consequences.

From a purely economic point of view, more energy is better. Drilling offshore and in Alaska, investing in solar energy and building nuclear plants all have the potential to reduce the cost of energy by increasing supply. 

On the other hand, from an energy indpendence and environmental point of view, the source of energy is what matters. Drilling offshore and in Alaska might marginally reduce dependence on foreign oil but it will also clearly increase carbon emissions.  And to the extent it lowers prices, it might actually hook America even more on foreign oil!  More nuclear plants will reduce emissions and increase energy independence but only by creating huge environmental risks.  Only renewable energy such as wind, solar and biofuel technologies has the ability to lower prices, help the environment and create energy independence.  Unfortunately, while the Republicans have been showing windmills in their ads, they made clear in Minneapolis that renewables come third behind drilling and nuclear power.

The fact is that lower energy prices combined with energy independence and help for our ailing planet can only come about through a conversion of our entire energy infrastructure from one based on dirty fuel sources such as oil to one based on clean, renewable technologies.  Building out what Thomas Friedman is calling the ET or Environmental Technology infrastructure is a massive economic opportunity that can accomplish the three goals of lowering prices, achieiving energy independence and fighting climate change.  But subsidizing oil exploration through friendly government leasing and tax credits will only slow down this conversion while subsidizing nuclear energy would divert scarce investment capital.

It should not be surprising that there are many who still cling nostalgically to oil and gasoline, the fuels that powered America through the 20th Century.  After all, America has had a long love affair with gas.  Our entire self identity is bound up in images of fast cars, filling stations and the roar of gasoline engines.  We began by pumping it ourselves.  Then we pumped it in other countries when America was the dominant industrial power and the people inhabiting the desert sands where we drilled rode on camels and horses.  Those days are over.  The overseas wells have been nationalized by governments less and less friendly to ours.  And the oil that remains in America and off our shores is increasingly hard and expensive to find.  No matter how much we may harken back to the past, we have to wake up and smell the coffee. 

Nuclear energy is no panacaea either.  Besides the obvious safety risks, the lack of an acceptable place to store spent fuel rods and the lack of trained engineers that will take ten years to remedy, the cost of building a nuclear plant has soared so that nuclear is no longer financible as a private venture.  Only huge government loan guarantees and subsidies could revive nuclear power.  And if we are going to spend billions on a technology fraught with so many environmental issues, why wouldn't we spend a fraction of that to renew the solar Investment Tax Credit and wind Production Tax Credits to drive renewable prices below that of fossil fuels.  

In short, the Republicans did the causes of lower gas prices, energy independence and a healthier planet few favors at the convention.  However, the good news is that while renewables are not at the top of their list, they are at least, on the list. 

That means there is the potential for common action.  In the weeks ahead, both parties should reach across the aisle to pass bi-partisan legislation to extend the renewable tax credits, pass a national renewable electricity standard and accelerate the rollout of the environmental technologies that in contrast to either oil or nuclear power, can power American prosperity in the 21st Century if only we have the sense to pursue them.

Electric car pioneer Shai Agassi is on the cover of this month's Wired, with a story on "The Future of the Electric Car." Shai's innovative and impressive solution is already underway in Israel, and the story is worth a read. Click on the picture for more.

For the last month, the McCain campaign has drilled away at energy as the decisive "separate from Bush and make Obama look bad in the process issue" in the election. McCain’s ads first trumpeted his commitment to cap and trade and later whacked Obama on drilling. His ads pointed to a mythical "electricity tax," and, despite obvious errors, hypocrisies, contradictions, and outright lies, conventional wisdom decided that McCain had won the debate on drilling.

With McCain’s four word key position of "drill here, drill now" exhausted, Obama, as the New York Times covered today, pivoted his message to the economic well being of everyday people. His second Olympic ad focused completely on his economic plan (the first focused on building an energy economy).

In case you haven’t caught Olympic fever and seen it, "Three Bedroom Ranch:"

Then today, John McCain had a moment that played right into Obama’s hands. McCain forgot – in the midst of a housing crisis – how many houses he owned. As I briefly mentioned earlier today, the Obama campaign quickly turned an ad around, noting how out of touch McCain was with everyday people.

McCain will have two, already begun, responses: he will continue to go negative on Obama, moving from a celebrity attack to a politics of association line of attack, and he will try to move the debate back to the issues he feels good about: national security and energy. This strategy has two small problems and one big problem for McCain. First, king oilman Dick Cheney is speaking at the Republican National Convention a week and a half from now – not exactly the backdrop McCain wants on energy. Second, timetable is now an agreed upon word for the end of America’s engagement in Iraq, the proposed Democratic solution.

The really big problem for McCain is that, while some think offshore drilling is nice, and others may care about foreign policy, Americans, in large part, see the economy as the overwhelmingly dominant issue. The McCain responses to his housing uber-gaffe – all personal attacks – do not get away from the fact that their candidate, a man who has spent 26 years in Washington, thinks the level of being rich is having five million dollars, and is extraordinarily wealthy, is no doubt out of touch with the lives of everyday Americans.

If this narrative sticks, if Obama can convince everyday Americans that he is focused on them, and if Obama can close on this message, it is hard to see Obama losing, because, despite all this supposedly bad polling and this supposedly bad month, Obama is still ahead.

If you're headed to Denver, don't do anything you don't want to read on a blog or see on YouTube.

According to a recent article by the Wall Street Journal's Amy Schatz, a super sharp member of the Fourth Estate, the Netroots -- bloggers, citizens armed with camcorders, people on Facebook -- are going to be a big presence at this year's party conventions. 

The Big Tent, a two-story, 8,000 square-foot structure is being erected in Denver to house bloggers, new media, progressive leaders and others coming from just about everywhere. Google is a sponsor of the Tent and will offer massages, smoothies and a candy buffet. YouTube will have a kiosk for convention-goers to upload their videos. What does all this mean? Amy talked to Simon for her report:

"There's no such thing as off the record anymore. There's no such thing as private moments anymore," says Simon Rosenberg, president and founder of NDN, formerly the New Democrat Network, and the New Politics Institute.

"We saw that with 'macaca,'" Mr. Rosenberg said, referring to an incident in 2006 when a videographer recorded then-Sen. George Allen using a term often considered derogatory to some ethnic groups. "This is the condition of life now in the new media age."

AFP also wrote about the Netroots at the conventions in a story that moved across the wire today. In it, Technology Correspondent Glenn Chapmann quoted Simon's foreword to "Crashing the Gate," a must-read by Markos Moulitsas and Jerome Armstrong for anyone who wants to understand why the Netroots took hold so quickly, deeply and strongly:

"This new politics is disruptive, upsetting old arrangements and displacing people invested in the old ways," Simon Rosenberg, president of progressive think tank NDN wrote in a forward to the book "Crashing The Gate."

"It is literally crashing the gate of the old system ... and to that I say, 'Amen.'"

The New Yorker's Hendrick Hertzberg took a fascinating look at Robert Kuttner's upcoming new book on whether U.S. Sen. Barack Obama has the right stuff to be a "transformative" president if elected.

The book’s premise is not only that Obama will be elected President but also, and mainly, that his character and talents—in combination with the manifest failures of conservative rule and the manifold crises it has created, exacerbated, or ignored—give him a fighting chance to lead the country into a deep and lasting era of positive change. (As it happens, there are signs that Obama understands this and is preparing to seize the moment.) Kuttner, in concise chapters written with great vigor and clarity, shows what the change could look like if Obama is bold enough to go for it and the gods continue to smile on him.

Thanks to Hertzberg for citing Simon's recent blog post (click on "signs" in Hertzberg's piece).

NDN Green Project Director Michael Moynihan recently talked to the St. Louis Post-Dispatch about energy issues.

Michael Moynihan, an energy expert at NDN, a think tank in Washington aligned with Democrats, said the candidates needed a far more robust plan for solar power.

"On this issue, I think that Americans are ahead of the candidates of both parties," he said.

To read more about the potential of solar, check out Michael's recent paper here.

Finally, Simon talked to the Washington Times' all-star, Christina Bellantoni, about whether Obama's vacation hurt him. The short answer is, "doubtful."

In today's New York Times Week in Review, Bill Keller has a thoughtful look at recent events in China and Russia, and what might be called the end of the end of history. I thought Fareed Zakaria captured this sentiment best in his recent book when he described this new era of geopolitics with a simple powerful phrase - Americans are witnessing what he calls "the rise of the rest."

Perhaps after eight years of talk of Basra, Kabul and tax cuts, we will look back at this month as the month that Rip Van Winkle-like Americans woke from their conservative-induced slumber and began to see the 21st century as it is, not as portrayed by the Rovian/Chenesian fantasy of the last eight years.

Perhaps in no area is this new pragmatism more important than on what it means for our people here at home. The next President faces one domestic challenge more important than all the others - how to get wages and incomes rising again.

For most of the Bush era, the American economy performed well by traditional metrics. GDP, productivity, corporate profits and the stock market were strong. But despite this period of growth and strong productivity gains, the typical American family saw its annual income drop by about a $1,000 a year and the rate at which new jobs were created has been slower than any other recovery since the Depression. According to the laws of economics, it was not supposed to be possible to see robust growth in GDP and productivity and see incomes drop. In fact. it has never happened before in the modern economic history of the United States.

Every day Americans figured all this out long before coastal elites did. Our 2007 analysis of public opinion and the 2006 exit polls shows that it was the economy that drove the GOP from office much more than the war. As has been reported in many places, the American people are more unhappy with the state of the nation than anytime since the 1930s. The American people have understood for years that the people running their government has not turned their attention to the most important challenge they face in their own lives - making ends meet in a much more competitive globalized world. And small-bore solutions to this enormous challenge - off shore drilling, children's health insurance, raising the minimum wage, middle class tax cuts - will be treated as they have been treated by the American people these last few years - "that's nice, but where is the long-term, sustained, comprehensive plan big enough to actually improve our lives and the lives of our families?"

Led by Dr. Rob Shapiro, figuring all this out has been the primary focus of NDN's Globalization Initiative these last four years. I won't repeat the major recommendations from our project now, but offer three general observations:

1) It is critical that our political leaders explain to the American people that if we want to maintain our place in the world, and our standard of living, that we will have to "try harder." The rest of the world is rising, catching up, learning our game - as was the goal of foreign policy these last 60 years - and no longer can be seen as characters from an Indiana Jones movie. To compete in this world, this emerging world of the 21st century, we will have do more; invest more; modernize our infrastructure; lessen our dependence on expensive and dirty energy sources; make pensions and health care more portable and accessible; do more to equip our workers and kids with the modern skills they need to compete; accelerate innovation and the formation of "new businesses;" make our global economic liberalization strategies smarter and more modern...this new era must be seen as one of "investment" in a better future, and calls for an anachronistic politics of austerity must be rejected....

2) This economic and public opinion dynamic developed before the recent slowdown, credit crunch, housing crisis and energy/commodity price surge, and thus will not be solved by focusing on these recent developments in the economy. Because incomes went down during a period of sustained growth, the solutions offered by our leaders in the next few years must recognize that the traditional way we help Americans get ahead - by creating macroeconomic growth - is no longer guarenteed to improve the lives of every day people BECAUSE IT DID NOT WORK SO FAR IN THIS DECADE.

3) Given the enormity of this challenge, we here at NDN hope that helping Americans get ahead in this much more competitive world becomes the central focus of the elections this year. In several recent interviews, Senator Obama has said that his three priorities are Iraq, health care and climate change. Not so sure this is the best answer. He needs to be able say that he wants to be judged on whether he can raise Americans' standard of living, and then make doing so the central organizing principle of his campaign and Administration. I think a better response would be "I want to improve the lives of every day Americans who have worked so hard and gotten so little these last few years, and bring the troops home from Iraq." Or something like that.

A risky strategy some might say. For what happens if incomes don't rise? I think we already know the answer to that, as the GOP has shown us in recent years. If the standard of living of Americans don't improve in the next few years, the Democrats should expect to suffer the same fate as the GOP in this decade, and find themselves out of power. Unlike China and Russia, we still are a democracy, and as such, must make the fate of the people of the United States the central focus of our politics...

Keith Johnson, of the Wall Street Journal’s Environmental Capital blog, has a solid summary of where the media narrative on drilling sits: Republicans are winning the battle. This narrative is backed by a new Rasmussen poll that has 64 percent of Americans supporting offshore drilling, and 42 percent seeing it as the "best way to reduce oil prices." Rasmussen also tells us that Americans believe McCain wants to find more sources of energy, while they believe that Obama cares more for limiting energy use. Unsurprisingly then, Americans two-thirds of Americans side with McCain’s approach.

The New Republic’s editors make some interesting but debatable points today about how the narrative has gotten to this point, arguing that blaming speculators and going after oil companies may not have been the best plan of attack. TNR also argues that the Obama and Pelosi shift toward allowing more offshore drilling in a compromise bill that would also include support for renewables and efficiency was the second losing move in this argument, and that Democrats’ inability to debunk the drilling idea in the minds of voters was troubling.

As I argued yesterday, the shift on drilling will not be a big deal, and will likely remove drilling as a wedge issue into the fall. The more important voter perception is that Americans believe that Obama cares about energy austerity while McCain wants to do everything he can to increase production. (His actions don’t bear this out, but perception is what matters.)

Whether drilling specifically will be a voting issue is unknown, and this is likely a case where Republicans are winning the battle on drilling but setting themselves up to lose the war on energy as a whole. However, being portrayed as promoting austere energy use is extremely dangerous for Democrats. Obama has already begun to recast the debate on energy about investing in a clean energy economy, which is forward looking, as opposed to the McCain Republican petro-economy of the past, one that, as Michael Moynihan notes, continues to have dangerous ramifications in foreign policy.

At the end of the day, the most important argument to make and win is that energy policy is central to the economy: energy to power the economy, energy impacting American households and families through gas, home heating, and overall prices, and energy jobs and investment allowing average Americans to enjoy the broad-based prosperity they knew in the 1990’s, but that disappeared in the Bush administration. Transitioning to a clean energy economy will not be simple or easy, but, done responsibly, it is a key to future prosperity. Americans already feel austerity in their pocketbooks; being perceived as asking them to feel it in their energy use is not in Democrats' interests, especially when the better option of investing in a clean energy economy exists.

New York City - The reappearance of a belligerent Russia on the world stage, buoyed by high oil prices and newfound wealth, would appear to signal a new era in global politics. For anyone still clinging to the idea of the unipolar moment, the spectacle of Nicholas Sarkozy brokering a deal between Russia and Georgia, shows that the moment of a single superpower is probably over, and something like a return to the era of the Great Powers, at best, or the Cold War, at worst may be in store--absent real U.S. leadership to the contrary.

Nor is it an accident that high oil prices have ushered in the return of authoritarianism to the global stage. Securing and maintaining oil wealth has never been pretty or conducive to democracy. The huge payoff from controlling the wealth has always encouraged factions to vie for its control and, once they obtain it, quash opposition. So it was throughout Central Asia during the years of the Great Game and remains today, not only in Russia, but also in Saudi Arabia, Iran and even Venezuela. From Putin to Ahmadinejad to Chavez, oil-emboldened strongmen are again asserting their power.

However, as glamorous as unbounded oil wealth inevitably seems, it equally comes at a tremendous cost that in a modern economy, can entirely cancel out its benefits. That is because through the phenomenon of Dutch Disease--the phenomenon noted in Holland after the discovery of North Sea oil, it has an incontrovertible tendency to undermine the rest of a nation's economy. The high profits obtainable through oil, gas, or indeed any valuable commodity, tend to make other industries non-competitive by driving up costs. This is the dark cloud that threatens Russia's future.

Indeed, as Philip Stepens notes in today's Financial Times, Russia faces a raft of deep-seated economic problems that belie her new found swagger. Russia is losing population at an alarming rate due to low birth rates. Infrastructure is crumbling. And the corruption problems that have plagued her for decades have only grown worse as she has become more dependent on oil and gas revenues. Indeed, Russia's decision yesterday to suspend Robert Dudley, the British head of its TNK-BP oil venture, for trumped up reasons, testifies to the absence of the rule of law, likely continued capital flight, and corruption that still characterizes commercial dealings in the country.

Oil wealth always tends to contain the seeds of its own destruction. Were it not so, countries like Iran, Venezuela and Mexico would dominate the global economy. Thus, Russia is riding high for now. However, with her econmomy increasingly dependent on oil and gas, a drop in prices would have strong and swift effects. Russia, herself, would benefit in the long term from diversification away from oil but this is a goal that has always eluded those who worship at the altar of oil.

From a U.S. strategic point of view, shifting energy consumption away from oil and gas toward renewable energy that is not tied to any one geographic locations can, thus have important strategic as well as economic benefits.