Is The Obama Energy Plan Really That Bad?

Daniel Ahn wrote a post here last Friday voicing strong disappointment with President Obama’s big energy speech. Here’s the core of his argument:

“President Obama’s speech on energy given Wednesday on Georgetown University’s campus was disappointing to say the least. In particular, the highlight of his speech, a pledge to reduce the nation’s oil imports by one third by 2025, is both conceptually unsound as well as difficult to achieve physically.”

I want to push back on a couple pieces of Dan’s case.

First, I’m with him on the argument that “energy independence” is a pretty silly goal. Like he says, the United States is integrated into global oil markets, regardless of its own import balance. But this is the reality of political rhetoric; if the underlying policy is sound, I’m willing to live with a sales pitch that uses some sloppy terminology. (It’s also worth noting that Obama didn’t really frame his own proposal as promising energy independence – he described past Presidents as having done so.) Of course, bad framing can ultimately distort policy. But it’s the potential policy distortion, not the rhetoric, that I’d rather focus on.

Second, it’s important to remember that prices aren’t the only thing that matters. Lower U.S. imports mean that price shocks have less negative macroeconomic impact. Dan says to ask someone who lives Norway about whether they see higher oil prices at home when world prices rise. I’d ask them a different question: how does your economy fare when oil prices went up? The answer is that it fares far better than the economies of large oil importers.

Last, and perhaps most important, is the question of whether the Obama goal is feasible. Dan points out that we’d need to cut U.S. oil imports from 11.2 mb/d in 2008 to 7.4 mb/d in 2025 to meet the goal, whereas the EIA projects that we’re currently headed to 9.4 mb/d of net imports. He’s skeptical of our ability to meet that goal; I’m less so.

Why? Here’s Dan’s case on the supply side:

“The bulk of the [currently projected] import reduction comes from the category of “other,” which includes biofuels and shale oil. More liquid fuel production may come from gas-to-liquids driven by plentiful natural gas supplies.”

That’s not quite how I read the EIA projections. The big gains projected for 2025 come from biofuels (as Dan notes) and from natural gas liquids. Shale oil, as far as I can tell, barely registers in the current estimates of where we’ll be in 2025. If shale oil pans out, we could see a 1 mb/d+ uptick in projected production circa 2025. Given that a good bit of the Obama energy blueprint focuses on resolving fracking concerns, I’d say that that’s pretty central.

How about the demand side? I don’t see why we can’t squeeze another 1 mb/d out of strong fuel economy regulations and perhaps some efforts to push gas into the transport sector (though I’m not convinced that the latter are wise).  Plenty of estimates suggest that you can cut consumption by something on the order of 1 mb/d with decently improved CAFE standards.  And last year’s EIA showed a potential to squeeze out a few hundred thousand barrels a day of oil consumption through modest substitution of natural gas in transport.

So I’m not nearly as pessimistic about the plan. That said, I’m with Dan on one bottom line: with or without the new “Energy Security Blueprint”, the United States will be vulnerable for a long time. We need a much more sophisticated policy for living with that vulnerability than we currently do.