Petroleum Subsidies

In the course of last night's State of the Union Address Mr. Bush explained the obvious with respect to energy:

America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology.

There followed a list of subsidies, initiatives, incentives and wishful thinking (none radically new) to encourage the use and development of non-petroleum energy sources.

The berserkers over at PowerLine are disappointed with the President's performance in this respect:

The weakest portion of President Bush's address, I thought, was his discussion of energy policy. The "addicted to oil" line and the discussion alternative fuel sources probably played well with most viewers, but that's no excuse for presenting what, as Jerry Taylor of the Cato Institute shows, was basically pap.

The cited piece from the Cato Institute, in turn, explains:

As far as the new subsidies for coal, wind, solar, nuclear, and ethanol energy are concerned, if those technologies have economic merit, no subsidy is necessary. If they don't, then no subsidy will provide it. Those subsidies have failed to produce economic energy in the past and there is little reason to expect that they will do so in the future.

The implicit argument, of course, is that if solar technology produced power at a cost such that its output could be sold at a price competitive with electricity produced by oil-fired boilers, then it would be. It can't, so it isn't. And that's certainly right as far as it goes.

For 70 years the United States has had to follow a policy of support and accommodation with respect to those states who find themselves in the fortuitous position of being located on top of lakes of crude oil. As a consequence, we have not been free to treat the dusty bandits who preside in Riyadh, Tehran or Bagdad as our history, experience, and cultural inclination would have us do: by ignoring them as violent, backward, and unreliable. Fit subjects for local color and comic relief in old movies.

Simply ponder what the world would look like from Washington if the oil beneath Saudi Arabia, Iraq and Iran were instead underneath Wisconsin. You get the picture.

What PowerLine and the Cato Institute ignore is the fact that the production of energy from petroleum involves incurring costs beyond those reflected in the crude oil futures markets. Or, more accurately, the price of crude oil already has built into it the assumption that the United States will bear those additional costs: Military, diplomatic and otherwise. This is a very real subsidy, whether we recognize it or no.

The bottom line is that the current cost of petroleum does not account for significant collateral costs. Thus, the fact that alternative energy production methods cannot compete is hardly a surprise, since those methods are competing with a product being produced at an artificial – subsidized -- price.