Double, double oil and trouble

Little publicized fact: the $787 billion stimulus bill that Obama signed last week contains $16.6 billion for the Energy Efficiency and Renewable Energy (EERE) Office of the Dept of Energy. This increases the EERE’s budget tenfold, and it’s yet another signal that Obama is serious about alternative energy. That’s good.

Also this week, crude oil dipped below $40 for the first time in 2009, which has caused a stall in new energy projects. That’s bad. Oil prices are low because the economy is in terrible shape, which stifles demand. But the longer prices stay low, the harder it will be to commercialize advanced biofuels, which by one estimate will need an oil price of $80-$120 in order to be competitive in a reasonable timeframe.

This is a paradox worth watching as it plays out over the next 25 years. Ideally, you want clean and cheap energy. But that's still a ways off, and for now it seems like you can mainly have one or the other. Which is more important? How do you balance the two demands?

(photo from ifijay's photostream)

The new green economy: what role for government?

The Economist has an interesting leader this week on the perils of government-led investment in solutions to climate change. If I understand the arguments correctly, the thinking goes that there is an upside to climate change; namely, the naissance of a new and profitable green-tech industry to combat it. Millions of new “green collar” jobs will be created as money is funneled into alternative fuel and energy research and implementation. If the government subsidizes this industry, it will lock in those jobs domestically, boost the economy, and achieve policy goals like energy independence and fighting global warming.

Of course, the problem with any government-led subsidy program is the issue of picking winners. Resources are scarce, especially if you’ve seen the federal debt numbers lately. You can’t subsidize everything, and by subsidizing any particular form of alternative energy, the government is expressing its confidence in that fuel’s viability. But the government, a semi-closed organization with limited human capital and a bureaucratic (read: slow) outlook, is almost certain to be less efficient at distributing resources and picking winners than a market. That’s why we live in a market society, and that’s why communism doesn’t work (sorry, Ms Klein.)

None of this is new, but it bears repeating for two reasons. First, Mr. Obama has named energy independence as his top domestic priority behind stabilizing the financial system and the economy. Second, the financial crisis has so badly tarnished the reputation of markets that resistance against government leadership on green investment is unlikely. Thus, we may be on the cusp of a massive government-funded research program for green technology, and so we need to carefully consider the downsides of such a policy prescription. After all, the United States is still happily subsidizing corn-based ethanol, which is a terrible idea.

There is a central role for governments to play in a market society. Moving forward, there will be a leading and constructive role for government to play in the fight against climate change (please can we have a carbon tax?) However, in an ideal situation markets and government complement one another. Each has its own strengths and weaknesses. But above all else, we should strive to avoid a situation where one of these institutions usurps the role best played by the other.

(photo from montanaraven's photostream)