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David Frum


by David Frum, posted April 13, 2011

President Obama is right: We can take the U.S. off oil. But he omitted to mention the fine print: Doing so will be slow, will be expensive, and will involve huge dislocations in American lifestyles and business.

When politicians talk about energy, they like to talk about magic machines: cars that run on hydrogen fuel cells, electricity that flows free from solar panels on the roof.

But when change comes, it will not come through magic. It will come because changes in relative prices have induced changes in behavior.

We’ve seen such changes before.

As oil prices spiked after 2003, sales of large SUVs plunged over 50 percent. Sales of Honda Civics jumped 30 percent in the single year 2004-2005. The National Association of Realtors reported that only 9 percent of home-buyers listed “short commute” as a prime concern in 2005 — 40 percent did so in 2006.

During the previous oil price spike of the 1970s, millions of Americans converted from oil furnaces to gas. Utilities mothballed oil-burning electricity generators. In 1978, half of all the oil burned in the United States was burned for heat or power. Today, less than one-third of oil is burned for heat or power.

These changes cost money: It’s expensive to junk a workable oil furnace. People will make such changes only if they feel a strong incentive to do so: most typically, if they believe that higher oil prices have arrived for keeps.

So a politician who wished to move America away from oil would begin by saying something like: “$4 a gallon gasoline is here forever. Even if the price of oil on world markets declines, we’ll impose extra taxes here at home. Make your plans accordingly.”

But of course, such a politician would soon be an ex-politician. So nobody ever does say that. What they say instead is what President Obama said this week: It’s the oil companies’ fault for selling us too much oil too cheaply. It’s the car companies’ fault for building the cars we prefer to buy.

The remedy?

“Some have suggested raising efficiency standards in our buildings like we did in our cars and trucks. Some believe we should set standards to ensure that more of our electricity comes from wind and solar power. Others wonder why the energy industry only spends a fraction of what the high-tech industry does on research and development — and want to rapidly boost our investments in such research and development. “

What these three “suggestions,” “beliefs” and “wonderings” in the president’s speech last week have in common is that they serve to conceal the economic cost of the transition they contemplate.

Solar power costs anywhere from 5 to 10 times as much as coal. So in order to make solar electricity competitive in an open market, government would have to impose a 500 percent to 1000 percent tax on coal power. But if government just orders utilities to substitute solar for coal, that 500 percent to 1000 percent markup does not vanish. It just melts into a higher utility bill, in ways that very few consumers will ever understand.

In the same way, if oil cost more, people would change their commuting patterns. They’d buy lighter cars. Auto companies would research alternative fuels and motors. Investors would develop private bus alternatives to single-passenger commuting. All those things cost money. They don’t get any cheaper if you just order people to do them without a price signal. But without a price signal, people won’t do them at all — as Americans by and large opted not to do them between 1985 and 2005.

We want to get the country off oil? Tax it. (Politicians may not wish to say it, but their advisers can at least think it.) Then liberate people to find their own best alternative — and incentivize industry to develop alternatives that make sense at the new higher price. And be prepared to argue candidly and straightforwardly in the marketplace of ideas why this new tax is right and justified.

If not, then kindly please spare us the grand speeches about how the status quo is the thing you will not accept. It is precisely the thing you are accepting.


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