The U.S. Bureau of Labor Statistics just announced the latest inflation numbers. Overall inflation is at 7.1%, with energy prices at 13.1%. Energy inflation is down from previous months, but still represents a price burden as families head into the winter season. With a split Congress following the mid-term elections, lawmakers should use energy prices as an opportunity to pursue a pragmatic, non-political solution to the burden facing America families.
According to the U.S. Energy Information Administration, the average American household will be facing heating costs between 5 and 28 percent higher than last winter. While this is a burden on consumers’ wallets, the increase in Europe is even worse due in part to its reliance on Russian imports. Unfortunately for consumers, many proposed solutions focus more on political agendas than on fixing the underlying problem.
Recent legislation contained in the Inflation Reduction Act focused on transitioning away from traditional energy sources in the form of petroleum, natural gas and coal. Within the legislation was $369 billion in investments toward renewable energy and climate change. While cleaner energy and domestic production shouldn’t be viewed as adversarial positions, they do require an honest conversation about energy demands.
Currently the prime energy sources in descending order are petroleum, natural gas, renewables, coal and nuclear. Renewables only account for 12 percent of U.S. energy use. Therefore, forcibly transitioning sectors of the economy to more reliance on renewables will result in a strain on a small sector U.S. energy. Any pragmatic approach to energy policy needs to recognize where most of the energy comes from, which is petroleum and natural gas.
While petroleum and natural gas may come under fire from environmental groups, there’s no denying that currently these sources are necessary to maintain a modern lifestyle. There’s also no denying that not all countries are equal in terms of environmental impacts from the production of these two sources.
The majority of U.S. imports of petroleum as of 2021 came from Canada at 51 percent. The rest of the importing countries had a marginal share, with Mexico coming in second with just 8 percent. In terms of greenhouse gas emission intensities for crude oil production, Canada has higher emission concentrations than the U.S. For consumers concerned both with the cost of fuel and the environment, this means that transitioning away from U.S. drilling will result in more global emissions.
Another approach to energy prices comes from Republicans in Congress. Senator Steve Scalise (R-LA) and Congresswoman Beth Van Duyne (R-TX) published a joint op-ed introducing their plan to “maximize production of reliable, cleaner, American-made energy and cut the permitting process time in half.” While the policy specifics have yet to be delineated, this plan focuses on increasing domestic production by addressing the current permitting process with the goal of establishing energy independence.
Increasing permitting speeds to facilitate more domestic production is a key step in improving energy policy without sacrificing the environment. However, energy independence may be a more political than practical goal.
Oil can be categorized by density and sulfur content. The oil that is less dense is referred to as “light” and the denser oil is referred to as “heavy.” During the refining process, the difference in density matters, as refining heavier oil results in lower quality products. The U.S. tends to produce lighter oil, but it tends to refine and import heavier oil.
Increasing domestic production is a necessary step in reducing energy costs; however, given the disconnect in what the U.S. produces and refines, such an increase is still unlikely to result in true energy independence. Building capacity to refine and produce domestic oil will require investment, which is unlikely given the volatile industry. Incentivizing investment will require stability that lasts beyond temporary political control.
Political goals such as transferring to renewable energy or striving for full independence do nothing to address the high level of energy inflation U.S. consumers are currently experiencing. Lawmakers should put away political goals and focus on addressing high costs. Practical solutions like streamlining domestic production and permitting processes will go a long way in maximizing domestic production and shielding against inflationary pressures.
Published in the Economic Standard on December 15, 2022.