Since the oil crises of the 1970s, every U.S. president has in some form or another proclaimed “energy independence” as a goal of American energy policy. The policy aimed to reduce dependency on foreign oil following the gasoline rationing, long lines at the pump and spiking prices that resulted from the 1973-74 oil embargo and the 1979 Iranian revolution. Along with the creation of the Department of Energy, the Strategic Petroleum Reserve and a buffet of efficiency standards and other mandates, the nation implemented a ban on crude oil exports to ensure American oil was available for use by Americans.
Here’s the problem: Energy independence is meaningless as a metric that affects consumers. The price of oil reflects its global scarcity, not its source. Even if we produced all of our own oil, the price at the pump would be just as affected by world events as if we didn’t produce a drop. U.S. policy can affect gasoline prices only by changing the intersection of supply and demand of the entire global market.
By ignoring the market realities, government leaders often employ expensive policies in the name of pursuing this so-called energy independence. Everything from vehicle efficiency standards to domestic oil production tax breaks have been found to be vastly inefficient compared with simply letting the market work (though there are other good reasons for reducing demand for gasoline). That we employ ineffective strategies to pursue a goal that doesn’t help most Americans’ wallets only adds insult to injury.
Historically, Republicans have assailed Democrats for embracing policies like these where the costs exceed the benefits, undermining market forces. But now, the Republican party has gone even further with a new, emptier and more self-defeating slogan: “energy dominance.” Beneath the rhetoric, it’s a policy agenda that simply aims to make America’s fossil fuel producers profitable even if it means completely dismissing the market and fleecing taxpayers. Here’s how.
First, the most straightforward way to make the fossil fuel industry profitable is to simply write them checks, courtesy of taxpayer dollars. That’s one proposal being floated by West Virginia Governor Jim Justice, and at least considered by the administration. At a time when many are talking about taxing coal due to the extraordinary harms it inflicts on human health and finding other ways to revitalize coal communities, Justice and others want us to pay plants to use coal.
What’s his rationale? We’re relying too much on natural gas for electricity generation. Justice argues that the U.S. natural gas industry is doing so well that our abundant use of this relatively cleaner fuel is now a threat to national security. His proposal directly interrupts all market forces, and is reported to cost $4.5 billion annually. Where would the government get that money? You guessed it: You, the taxpayer. Where would the money go? To coal barons, like him.
Another way the Trump administration is kicking public funds back to industry in the name of “energy dominance” is through changes to an obscure provision that determines royalty payments. When the government auctions off mineral rights, it is entitled to royalty payments that depend on the value of the commodity being mined. Historically, this value was based on the price of the first sale, with a lower first sale price meaning a lower royalty payment to the government. But firms have figured out that they can circumvent the market and depreciate the value of their first sale of coal by effectively selling the coal to themselves through affiliates at a steep discount before subsequently receiving the full market price from an unrelated party. In Wyoming, for example, more than one third of coal sales are to affiliates.
This is, in a word, fraud. While the Obama administration ended this practice by making sure royalties were determined by the price of the first unaffiliated sale, President Trump has rescinded this reform in the name of slashing burdensome regulations. The reduced royalty is a taxpayer-funded subsidy for coal production on federal land—even if the money never passes through the Treasury. Ironically, this also drives down coal employment in Appalachia, where it is more labor intensive.
There is at least one Trump administration policy that is following market signals instead of fighting them: expanding exports of U.S. liquefied natural gas (LNG).
Unlike oil, which can be easily loaded on tankers and shipped abroad, the U.S. fracking boom has yielded a tremendous surplus of natural gas with nowhere to go. This has caused natural gas prices to plummet, making it harder for coal to compete in the electricity market. It has also caused the wholesale price of electricity to go down, hurting nuclear and renewable generators who rely on higher revenues to cover the up-front costs of investment (and for nuclear plants, substantial fixed costs to continue operations each year).
Expanding natural gas exports helps ameliorate these issues. It also reduces the potential for large gaps between American, European and Japanese spot prices, and will improve reliability for our allies in Europe who currently depend on the whims of the Russian government to keep from freezing in the winter.
“Energy dominance” is the name given to an inchoate roar for more masquerading as national security or economic policy. More coal. More oil. More gas. But, at what cost? While expanding natural gas exports makes sense in the current market, many of the Trump administration’s policies completely ignore market signals in order to line political allies’ pockets with public funding. If they had carefully examined these market signals, they would see that expanding supply works at cross-purposes—i.e. raising coal output in Wyoming reduces coal (and employment) in Appalachia. And, if “dominance” ultimately means exporting our fossil fuels, then subsidizing energy production garnishes American wages through the tax code, and gives that money to foreign consumers of fossil fuels in the form of a price discount.
So much for making the best deal for America.