Trump’s SAFE Fuel Rule Is Anything But
(Bloomberg Opinion) -- The Trump administration’s proposal to relax vehicle pollution standards got me thinking about the oil price. I don’t mean where it’s going, but what it is.
Those Nymex numbers flashing on the screen aren’t just the cost of oil. They are also the cost of insurance. Oil futures are how producers and users, aided by the ample liquidity of speculators, manage their exposure to everything from how much snow falls in New England to the occasional (alleged) exploding drone in Caracas.
Those contracts are, at a fundamental level, an expression of humility. That sounds weird for this business, but the oil industry and its associated consultants, investors, and journalists – including this one – are almost universally terrible at predicting oil prices. There’s just too much future to get your arms around. So, in order to keep the financing and the oil itself flowing, the world hedges.
The Trump administration and those lobbying for freezing America’s fuel-economy standards seem to have forgotten, or ignored, this essential element of how we obtain and sell energy. A rule couched in the language of prosperity, safety and security – its acronym is SAFE– ultimately risks all these things.
One justification for rolling back higher fuel-efficiency standards due to take effect from 2021 is that America is producing more oil:
In 2012, the agencies projected fuel prices would rise significantly, and the United States would continue to rely heavily upon imports of oil, subjecting the country to heightened risk of price shocks. Things have changed significantly … with the United States taking advantage of its own oil supplies through technological advances that allow for cost-effective extraction of shale oil. The U.S. is now the world’s largest oil producer and expected to become a net petroleum exporter in the next decade.
And, yes, it is. The resulting drop in oil prices compared to 2012 – when Libya’s collapse pushed them back above $100 a barrel – makes it harder to justify investing in efficiency in pure cost terms. It’s an argument that dovetails with the administration’s notably humility-lite slogan of “energy dominance.”
The shale boom has indeed wrought immense change in the global oil market. What all that fracking can’t do, though, is lift the U.S. off the face of the globe altogether.
Today, the U.S. still imports just less than three million barrels of oil a day, net; six million if you only count crude oil. Even assuming the country becomes a net exporter some time in the 2020s, it would still be part of the global oil market. Shale is a flexible supply source but not a swing producer operating like a tap.
Logistical chains built up over decades also mean that, for such big demand centers as the Northeast and California, what happens in oil markets overseas will quickly lap up on America’s shores. More domestic supply mitigates against higher prices and offers some protection against unforeseen disruptions. It doesn’t build a wall against them entirely.
Rolling back fuel efficiency standards may not boost U.S. oil consumption significantly; perhaps by just a few hundred thousand barrels a day by 2025, according to two recent studies.
These numbers belie the bigger impact, though, especially if California and some other states that follow its lead have their right to set more stringent targets taken away, as the administration wants to do. Incentives to invest in alternatives such as vehicle electrification or public transportation options will inevitably diminish, reinforcing an already curious position of the U.S. falling behind in cutting-edge technologies.
Inevitably, it would also mean higher emissions of greenhouse gases, with transportation having overtaken the power sector – busily decarbonizing already – as the leading source. The Rhodium Group, an independent research firm, estimates that, at the upper end of its range, freezing efficiency standards would result in extra CO2 emissions by 2035 that are, in absolute terms, bigger than the individual national emissions of 82 percent of the countries on Earth. Besides the sheer quantity of greenhouse gases, think of the signaling; this is akin to not only walking away from the Paris Agreement but taking a match to it in front of the other signatories.
Taking the shale windfall and squandering it this way is like buying a round for everyone in the bar on payday. Feeling flush, it’s hard to imagine you might ever lose your job. As Jason Bordoff, founder of the Center on Global Energy Policy, told a Senate committee late last month:
[P]olicymakers cannot predict oil prices reliably, nor, in an integrated world oil market, can they guarantee consumers low prices. Oil prices will inevitably go up and down, perhaps with more volatility in the future than in the past … The best way to reduce our exposure to future oil shocks is by reducing our oil consumption in the first place.
Relying, instead, on America simply being able to produce ever larger quantities of oil for its own (expanding) consumption is reckless (note, too, the draining of the Strategic Petroleum Reserve).
Fuel-economy standards aren’t ideal policy, it has to be said. A more straightforward policy would be a meaningful tax on carbon, spurring the market to find solutions that balance consumers’ desires with society’s longer-term needs. Pricing the negative impact of individual choices on our neighbors and descendants is about as truly conservative a position as you can get.
Yet, as we know, the current administration isn’t too into that either, nor raising gasoline taxes. Planning for an unknown future and hedging the potential outcomes is perhaps just too boring, especially when you feel like you have the whip hand. Unfortunately, that’s often when a little humility would serve you best.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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