TCS Daily


The Irony of Barack Obama's Non-Energy Solution

By John E. Tamny - May 17, 2007 12:00 AM

In a speech last week before the Detroit Economics Club, Senator Barack Obama made the excellent point that, "Every single president since Richard Nixon has spoken in soaring rhetoric about the need to reduce America's energy dependence." Rather than note the irony and stop right there, Obama offered up some of his own "soaring rhetoric" meant to fix the problems of U.S. automakers, all the while curing America's alleged "addiction to oil. Obama's speech was long on platitudes, but short of anything that could be deemed a solution.

Obama proclaimed that the solution "starts with our cars - because if we truly hope to end the tyranny of oil, the nation must once again turn to Detroit for another great transformation." Obama's "bold new plan" is to raise "our fuel economy standards by four percent - approximately one gallon - each year," yet the irony of such a plan was seemingly lost on the Democratic Party's rising star.

Ignored by Obama is a basic truism of economics that when a product becomes cheaper, the product in question is consumed more rather than less. In short, if reduced fuel consumption is truly his goal, the enforcement of greater fuel economy standards will work at cross-purposes with his desire to get us to drive less and consume less gasoline. As a Wall Street Journal editorial noted in response to his speech, domestic fuel economy has risen 60% since 1974, but as Obama correctly pointed out, energy consumption stateside keeps on growing.

Obama endorsed "generous tax incentives" in return for U.S. automakers upgrading plants for the production of more fuel-efficient vehicles, but didn't pick up on the reality that if U.S. consumers desired more efficient vehicles to the exclusion of other amenities, there would be no need for the tax incentives that he proposes. Ironically, U.S. automakers experienced their greatest success in the late '90s when vehicles of the gas-guzzling variety were flying off the lots. More on that later.

Seeking to attach himself to the fad that is hybrid cars, Obama promised "to partially defray" the rising healthcare costs weighing on U.S. carmakers' profits in return for greater hybrid production. Simply put, if elected president, Obama will fleece U.S. taxpayers to achieve a production result that isn't necessarily desired by consumers. Also lost on Obama is the morally hazardous problem of fixing bad decisions made by U.S.-based companies. The lesson for future firms is that in return for acting in ways that please those in power, there's the potential to offload on taxpayers irresponsible decisions.

While he decried the U.S.'s oil consumption for "sending $800 million a day to countries that include some of the most despotic, volatile regimes in the world," Obama failed to note that behind the Middle East, North America is the second largest oil producing region in the world. Indeed, our friendly neighbor to the North, Canada, is our biggest "foreign" supplier of oil.

What Obama missed in talking about energy independence is that the very idea is a mirage. We could surely switch all of our oil buying to friendly countries, but it wouldn't change the fact that oil is a world commodity, and if we seek to make Canada our sole-supplier to the exclusion of Middle Eastern countries, the latter countries will simply shift their exporting capacities to other countries not deluded by the false notion of energy independence. So long as the U.S. and the rest of the world are buyers of oil, oil-producing countries of all stripes will gain oil-based profits. Who we buy from is irrelevant.

Amidst a variety of non-solutions, Obama opined that, "We are held hostage to the spot oil market - forced to watch our fortunes rise and fall with the changing price of every barrel." Unfortunately, Obama didn't tie the gyrating dollar to the spot market for oil, and in failing to do so, missed the chance to unveil the elephant in the room when it comes to nominally expensive oil empowering our enemies, weakening U.S. automakers, and creating the perception of a scarce good that we're addicted to.

Oil is of course priced in dollars in the spot market, and as such every oil "shock" since the '70s has in truth been a dollar shock caused by the greenback falling in value. Doubters need only Google "oil price history" to see that before the dollar was floated the world oil price was largely flat. Despotic oil regimes were largely irrelevant before abandonment of our commitment to a strong dollar in the early '70s unleashed inflation and skyrocketing oil prices on the world. And just as we frequently hear about looming oil scarcity today, the money illusion caused by the weak dollar in the '70s similarly led to catastrophic predictions of oil shortages related to our "addiction." History tends to repeat.

Since the '70s, oil has been nominally cheap when the dollar has been strong. Not surprisingly, U.S. automakers thrived in the most recent strong-dollar era, with GM shares alone rising 110 percent from 1996 to 2000 when a strong dollar kept oil and gasoline prices low. Without excusing the various self-inflicted wounds plaguing U.S. carmakers, the weak dollar of recent years has hurt them the most. If we reversed course in favor of a stronger, more stable dollar, oil prices would fall, scarcity and addiction would become yesterday's news, and the GMs of the world could operate on firmer footing as consumer desires shifted to larger cars.

In a speech meant to address our oil addiction, despotic regimes awash in petrodollars, and the flagging fortunes of the U.S. auto industry, Senator Obama did not once mention the dollar and the way it impacts all three in ways real and imagined. Obama ignores the dollar at his peril, particularly if he's elected president. Solutions that don't include stabilizing the dollar will consign him to the list of presidents going back to Nixon who sought to fix the energy "problem" and its various offshoots, but failed.

John Tamny is the editor of RealClearMarkets. He can be reached at jtamny@realclearmarkets.com


Categories:
|

TCS Daily Archives