What Mitt Romney’s Energy Plan Should Look Like

Following Mitt Romney’s release of his energy plan, I intended to offer a detailed critique. However, there are already numerous critiques out there that would not differ much from my own. My critique would have been a near mirror image of Michael Levi’s Pipe Dreams at Foreign Policy, so instead here I offer some qualitative comments on the plan — as well as how I feel it could be strengthened.

In a nutshell, Romney’s plan looks to me like half a plan due to all of the things it does not address.┬áIt is mostly a series of Republican talking points, some of which make sense, some of which are over-reliant on dreams of U.S. energy independence, and some of which, in my opinion, should be modified. The highlights of the plan are:

  • Empower states to control onshore energy development
  • Open offshore areas for energy development
  • Pursue a North American Energy Partnership
  • Ensure accurate assessment of energy resources
  • Restore transparency and fairness to permitting and regulation
  • Facilitate private-sector-led development of new energy technologies

The Ingredients of a Sound Energy Plan

The plan is based on a number of very optimistic projections about the future potential for oil production in the U.S. The plan is long on supply side elements, but short on demand side elements and oblivious to political considerations. I devoted an entire chapter in my book Power Plays to the topic of a bipartisan energy policy, which I excerpt below:

A sound energy policy should take into account the supply side, the demand side, and the possibility that projections will be wrong on one or both counts. Energy policy decisions must also factor in the impact on current and future generations, and they should be capable of weathering changing political climates. Unfortunately, when energy policy decisions fail to meet these criteria, the result is a dysfunctional, inconsistent energy policy.

Based on what I think makes for a sound energy policy, Romney’s plan fails this test. Without a doubt U.S. oil production is on the rise, but this is not the first reversal in oil production trends since U.S. oil production peaked in 1970. During President Carter’s first two years in office, U.S. oil production increased by 600,000 barrels per day as the Alaska Pipeline came online. The present shale-driven reversal has been even more impressive. Monthly oil production has risen by more than 1 million bpd since President Obama’s first year in office, but is still 4 million bpd below the peak levels of 1970. Romney’s plan presumes these increases can continue for years to come, but that is an unknown.

As an aside, one thing I have pointed out before is that President Obama will be the first president since LBJ to preside over 4 straight years of increasing domestic oil production. The reasons for that are explained in detail here. But as a result of that, it will be more difficult for President Obama’s political opponents to paint him as an opponent of U.S. oil production.

How the Romney Energy Plan Can Gain Bipartisan Support

In my opinion Romney’s plan would be staunchly opposed by Democrats, and it does not consider alternate outcomes. Let’s say, hypothetically, that the optimists are wrong and that the U.S. can’t continue to expand oil supplies for years to come. What then?

I do believe that to the extent that the U.S. requires oil we should develop our own oil to the greatest practical extent. So there are aspects of Romney’s plan that are a good start. But I would make a specific change to the plan that would help address objections from Democrats, and would make a contribution toward reducing demand. To the extent that new areas are opened up for exploration, I would 1). Structure those contracts so that royalty rates escalate along with oil prices; and 2). Earmark the proceeds of lease sales and royalties toward programs that reduce dependence on oil. Those programs can be toward conservation, efficiency, or alternative sources of energy.

The purpose of the first change is so the U.S. government — and in theory U.S. citizens — can better share in windfall profits that would occur if oil prices rise to $200 (for example). Those windfall profits in turn could funnel a lot of money into programs for reducing oil dependence. Alternatively, some of that money could be rebated directly to U.S. citizens in a manner akin to the Alaska Permanent Fund that returns oil dividends to Alaska’s citizens each year. I think these changes would make it far more likely to gain bipartisan support.

Romney’s plan has been criticized for failing to acknowledge climate change, as well as failure to offer sufficient support to renewables. Romney has promised to eliminate the Production Tax Credit (PTC), which I think would be a mistake if done abruptly. I have complained before about the harm of inconsistent energy policies that result from shifting political power. In order to address that, I would propose to phase out the PTC over the course of 10 years. That way producers have some long term certainty over how much support they will receive, and opponents of the PTC will see the credit phased out over time.

One final word on Romney’s plan. Some conservatives are unhappy that Romney indicated his support for the Renewable Fuel Standard (RFS). While I have said many times that my preference is for market-based approaches instead of mandates, I do not favor simply scrapping the RFS. Doing so would have a devastating impact on the economy across the Midwest. So while longer term there are alternatives to the RFS — and I have discussed some of them in depth — the risk of simply getting rid of it is far too great.