Wednesday, October 22, 2008

Energy Policy -- Part I

This was supposed to be only one post, but as I began to write it, I realized it was going to take three different posts. Here is the first part sort quickly explaining the current status of energy policy in the U.S. and how we got here. Soon to follow will be each Obama and McCain’s policy proposals.

For the last 30 odd years, U.S. energy policy hasn’t really been an important political topic. But this summer when gas prices were about $4 across the nation people started complaining. And politicians started paying attention. And until the middle of September, energy policy was probably one or two of the more important issues during this election cycle.

So how did we get here—from energy policy being almost a second thought to an issue that had Republicans chanting “Drill baby, drill!” at their convention? Well, simply, oil is pretty expensive right now and has been for the last three years. I’ll skip as to why oil is so high right now (in four words? Blame China and India). But the increase of demand in emerging economies combined with a few natural disasters here in the U.S. (like Hurricane Katrina) oil and gas prices have remained surprisingly high. Even today, as oil has fallen about half since this summer, the price of a barrel of oil is still about 40% higher than it was on Nov. 1, 2004.

The effect of high gas prices hurts Americans because over the short term gas is inelastic. And seeing that wages have not risen at the same rate as gas prices, it cuts into people’s budget. As a result people spend less (in theory) on non-necessary (elastic) goods. This is in part why the U.S. economy has slowed down over the last year or so.

But there is another big effect to the high gas prices that has sort of been over looked. Since the U.S. government does not tax gasoline all that much (especially compared to Europe), it encourages people to drive. And since gasoline has been so cheap in the U.S., it has allowed people to move far from city centers or their place of employment. When you combine citizens driving with the limited revenue for the U.S. government from gasoline taxes, there is less of a demand and need for public transportation.

With so many Americans living in areas that are inaccessible to public transportation or have poor public transportation options, it has been difficult for them to cut back on driving. Demand for gasoline has dropped in the U.S., but it has been marginal. So people are paying about twice what they were for a gallon a gas today than they were four years ago. And they don’t like it. Thus people have paid attention to both John McCain and Barack Obama’s energy policy.

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