Monday, August 18, 2008

A Speech for Obama on Energy Prices

My fellow Americans,

In the last year the price of energy, and especially gas at the pump, has gone way up. While it has come down a little in recent weeks, it is still much higher than before, and it is squeezing the budgets of families all across the country. This expense is all the more difficult to bear at a time when the economy is sputtering and paychecks are stagnating. People are looking for answers.

What I am going to say today will surprise you – but I will get to that later. First, I want to clear up the issue that everyone is talking about right now, offshore oil drilling. What’s my position on that?

If you listen to the energy experts, they all agree that drilling for more oil off our coasts will have little effect on the prices we pay for gasoline and other energy products. First, it will take many years before exploration uncovers productive oil fields, and more years to build the platforms and transportation systems to bring this oil to the market. So no matter what we do about this issue today, it will not have an effect on today’s prices. But the experts also say that the potential output of these fields, compared with global supply and demand, is simply not enough to move prices more than one or two percent. If we had another Saudi Arabia lying off our coast it would make a big difference, but we don’t. So, while I wish there were a simple decision we could take that would bring immediate and substantial relief to families struggling with energy costs, I don’t think offshore drilling is the answer.

But the issue won’t go away. This is an election year, and the polling companies are working overtime to tell us what the public thinks about every topic. And if we can believe their numbers, a large majority of Americans think that we should give offshore drilling a try anyway, on the principle that if you have a problem you should do everything you can.

We live in a democracy. If a substantial majority favors a policy, and if the policy does no harm, we should respect the will of the people. So, even though I’m not optimistic about what more drilling can do, I’m willing to reverse the ban we’ve had in recent decades.

Democrats in the House and Senate are preparing legislation along these lines. To keep to the requirement of “do no harm”, this legislation will see to it that any offshore oil production adheres to strict environmental standards, so that we don’t have oil spills fouling our beaches — the problem that led to the ban in the first place. We will also have controls on the ability of big oil companies to reap windfall profits from these finds: their oversized profits are part of the problem and cannot be part of the solution. Together, these stipulations will guarantee that a change in policy on offshore drilling, whatever its benefits, will not impose significant costs. If Republicans agree to a careful, responsible shift in regulation we can move forward quickly.

But as I said, whether we drill a little more or a little less will not have much impact on sky-high energy costs. If we are serious about addressing this issue, we must move beyond the debate over drilling and address the underlying causes. That is my real purpose today.

We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.

But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.

Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.

For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?

Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.

But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.

The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.

Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.

This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.

Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back.


buermann said...

"I’m willing to reverse the ban we’ve had in recent decades."

In a partisan speech like this, that should probably include a cat-calling reminder, like "reverse the Republican-supported ban the past three decades", given that the GOP only flip-flopped on in the past couple of months

Anonymous said...

If Obama made that speech he would be neglecting to mention that

- peak oil is unproven and cannot be 'proven' in advance other than on the basis of forms of geologic determinism which, given the quality of available information and necessarily imperfect knowledge of future developments, is highly speculative.

- Production has risen, breaking the 2005-2007 plateau, while OECD demand is 659,000 b/d lower than same five month period year before and it is more than unlikely that non-OECD demand growth will provide offset, especially as U.S. recession spreads.

- the price channel from physical trades to futures prices began breaking down during the later 1990s and was largely reversed with Saudi Arabia, Iran, Kuwait's 2001 shift to use of futures markets determined prices as benchmarks within the post-1987 formula pricing structure.
Which is to say that price formation became further distanced from actual supply and demand but became merely real market related and that this greater financializing of prices corresponded with increasing entry of long-only funds into commodity-futures-in-general which, on an index basis, is dominated by energies.
Then as well indications of traditionals such as hedge funds herding into the trade -- yet, Mr Obama, you fail to mention just the speculation noted by numerous Congressional investigations since 2005 and, after much hem and haw, grudgingly admitted to by the CFTC, one of which Commissioners, Jill Sommers, had previously been a International Swaps and Derivatives Association (ISDA) lobbyist.

- as has been covered by Brad Setser, Rachel Ziemba, others, a large portion of those dollars paid to oil exporters have not disappeared but have been recycled directly, and indirectly through third parties, into dollar denominated assets. In 2006 and 2007, new strategic stakes in the EU, especially the UK, likely exceeded those in the U.S., which still attracts a majority of GCC foreign assets. ( Ziemba, June 2008) (emphasis added)

On the same line: Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States, according to interviews with brokers who handle their investments at leading Wall Street banks, veteran traders and congressional investigators.
The agency regulating the market said it had not picked up on this activity by sovereign wealth funds. ...

But the CFTC is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as "swap dealers" who often operate on unregulated markets, sources familiar with the transactions said.

(Cho, WP, August 12, 2008)

Dollars, Mr Obama, are not gone but, through the mediation of finance and governments, unequally redistributed. Higher prices would most likely exacerbate rather than bring the desired 'post-Fordist' solution.

Peter Dorman said...


I won't get into oil pricing (on which I rely on others), but there is a crucial point to be made about the recycling of our payments for oil imports: it comes back in the form of credit. Oil exporters buy our Treasuries, our agencies and other assets, which means that we go further in hock. That's a problem on an individual level and socially as well. I've also argued on this blog that it underlies the bubblicious character of our economy, and that it is ultimately unsustainable.

Anonymous said...


I agree that the recycle game can't be permanent and was using the term 'dollars' as it was used in 'the speech'.

Have you looked into the U.S. debt service to export ratio? I haven't but suspect it has begun to acquire few decades ago LatAm characteristics.

Peter Dorman said...

One of the problems with debt-to-exports is that it assumes exports are independent of imports. How much of US exports consist of components to be assembled at overseas platforms and re-imported back here?

Anonymous said...

As I've noted before, in 2006, related party trade accounted for 46.8 percent ($863 billion) of U.S. consumption imports and 30.8 percent ($319 billion) of total exports, so sure enough there are transnational assembly lines.

Whether this should be understood as 'trade' and whether these should be considered 'U.S.' is another matter, though I tend to think that assigning a particular nationality has to do with relying upon a political unit of analysis which may have held true for a long period but with second phase globalization has become moreless anachronistic.

I was not assuming debt service to export earnings to be independent of exports or anything else but was thinking that ratio's change might say something about (systemic) dependence on the recycling 'mechanism' without which this debt-loaded corner of the world likely could not fulfil it role as 'consumer' even as many other corners internal mkts are less than fully developed. And that global exports and intrafirm transfers could not but be affected.