Reality Settling in at the White House

Hug the Green Industry, Kill Big Oil

When Barack Obama was campaigning for president, I thought he displayed a “comic book” view of the energy industry: Lots of stereotypes of the good guys and the bad guys.

He would support the good guys (those who aspired to produce renewable power) and deal with the bad guys (those who were actually supplying the fuel that allowed him to campaign across the country). If he was elected president, there would be green jobs galore, and we would embark upon a major transition away from fossil fuels. He seemed to believe that our high level of dependence on fossil fuels was more due to policy reasons than economic reasons, and the country needed a strong leader who could come in and put fossil fuels behind us.

Three years into his administration, there are signs that reality is beginning to settle in at the White House.

I often write about the money that has been wasted as the government has attempted to choose technology winners. The most recent high profile case was a company called Solyndra. President Obama visited this solar power company in 2010 and said “The true engine of economic growth will always be companies like Solyndra.” The company received a $535 million loan guarantee from the Department of Energy, and critics are now pointing out that the company has political ties to the White House and that the loan guarantee was fast-tracked without a proper level of due diligence. Now, only a year after the President’s visit, the company has declared bankruptcy and taxpayers will almost certainly be on the hook for paying off that loan. It is starting to look like our energy problems won’t be solved by just spreading money around to create this new green economy.

The Folly of Government Picking Winners

This is a perfect example of why I would change the way we incentivize renewable energy. We have numerous cases of the government attempting to pick a technology winner, throwing money at it, and then leaving taxpayers with the bills after the company fails to deliver. The government has a role to play here, but that role should not be to funnel money preferentially to specific companies.

Let’s first define what we are trying to accomplish. I am sure most people believe that there is value in reducing our dependence on fossil fuels — particularly imported fossil fuels — so most are probably willing to provide some level of government support to do so. But the current system often rewards companies before they deliver anything. We have to stop that. We need to place the prize at the end, not at the beginning. We need to reward companies that deliver, not those that promise to deliver. In many cases, companies simply squander this “free money” in ways that should not be tolerated. What we need to do is level the playing field for all companies and allow them to compete. Those that ultimately deliver will be the ones who collect the prize. That is the way business is supposed to work. That is the way great companies are built.

We could have a system similar to my recently suggested overhaul of the cellulosic ethanol incentive system. Offer subsidies for production, and let the companies compete for private funding, and collect the subsidies after they deliver. In this way, the best ideas will have the greatest chance to rise to the top. Our current system rewards those who are politically connected or who are good at hyping their technologies. We presently have too much money flowing to poorly managed but politically connected companies.

When Reality Hits Home

Of course as this new reality sets in at the White House, we find the Obama Administration angering a lot of their supporters by conceding to the realities of our oil consumption. In a recent interview, Energy Secretary Chu signaled that the administration was ready to support the controversial Keystone XL pipeline that would bring crude oil from the Canadian oil sands to Gulf Coast refineries. There have been a number of high-profile arrests at the White House as opponents of the pipeline believe it will simply continue to feed our addiction to oil that Obama promised to stop. In the interview, Chu laid out the reasoning for the Administration’s support of the pipeline:

“Having Canada as a supplier for our oil is much more comforting than having other countries supply our oil,” Chu said.

Chu noted that “the technologies that are used to extract tar sands oil . . . are improving dramatically.”

“The companies that are extracting these tar sands are making great strides in improving the environmental impact of the extraction of this oil and will continue to do so,” Chu added.

But the energy secretary also acknowledged that the final decision won’t satisfy everyone:

“In the end, it’s one of those things where it’s not perfect, but it’s a trade off.”

That’s what I always say: All of our energy choices involve trade-offs. Chu is signaling that the Administration is ready to bow to the reality of our oil dependence. After all, Obama must face voters next year, and voters are going to want to know what he has done in the name of energy security. Bear in mind that Secretary Chu believes that climate change is one of the most serious threats to civilization, and yet here he is defending the pipeline. To me that has all the signs of someone who has realized that if we don’t burn that oil, someone else will and we will just buy oil from some other place that is perhaps less politically stable than Canada.

On the topic of the proposed pipeline, Al Gore recently said something that struck me as absolutely bizarre: “Gasoline made from the tar sands gives a Toyota Prius the same impact on climate as a Hummer using gasoline made from oil.”Al Gore, Aug. 31, 2011 These are the sorts of extremist statements that have caused many to tune Al out. The fact is that his comment isn’t remotely grounded in reality. I was about to do the calculation for myself, but as I was searching for the source of the quote I found out that someone has already done it:

A Hummer gets 10 miles per gallon. A Prius gets 50. Gasoline from the oil sands entails roughly 15 percent greater emissions than gasoline made from the average barrel of conventional oil used in the United States. A Hummer using “gasoline made from oil” thus has 4.3 times the impact on climate as a Prius using “gasoline made from the tar sands,” not the same amount. None of these numbers are controversial (well, some in industry would claim that 15 percent is too high). Someone like Gore, who cares passionately about both climate change and scientific seriousness, should not mislead his followers on such a massive difference.

So Al wasn’t even in the ballpark, but that hasn’t stopped many opponents of the pipeline from regurgitating this quote. And this is exactly the sort of misinformation that distorts our energy policies.

In any case, Obama’s energy idealism seems to be giving way to energy pragmatism. I suspect he now realizes that there was more holding back the green economy than a lack of leadership.