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The gulf oil spill and the myth of affordable energy


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Materials for economics teachers dealing with the gulf oil spill, affordable energy, and externalities

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The gulf oil spill and the myth of affordable energy

  1. Free Slides from Ed Dolan’s Econ Blog The Gulf Oil Spill and the Myth of Affordable Energy Post prepared May 30, 2010 Terms of Use: These slides are intended as a resource for economics teachers. You are free to use these slides in your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. Check it out at . Check regularly for more slides like this
  2. . . . but of course we need affordable energy—don’t we? <ul><li>The Gulf Oil spill (or better, undersea gusher) has brought a new focus on US energy policy </li></ul><ul><li>Apologists for the oil establishment are on the defensive—but they deflect all criticism with the tag line, “but of course, we need affordable energy!” </li></ul>Posting P100530 from Ed Dolan’s Econ Blog “ We need the oil that comes from offshore to keep this economy moving” —Sen. Mary Landrieu (D-LA) in WSJ A ban on offshore drilling will hurt growth “by undercutting our nation's access to affordable, reliable, domestic sources of oil and natural gas” —Jack Gerard, President, American Petroleum Institute on CNN “ Access to affordable energy affects every sector of our economy, every state and every American family” —Eric Milito, American Petroleum Institute in NYT
  3. So what are the facts? <ul><li>Let’s cut through the rhetoric and look at the data </li></ul><ul><li>Do economies of the world that keep oil “affordable” (read: cheap) really outperform those that have high prices? </li></ul><ul><li>Since the price of crude oil is more or less the same around the world, we will use retail gasoline prices as a proxy for national energy affordability </li></ul>Posting P100530 from Ed Dolan’s Econ Blog
  4. Germany ($5.38/gal): World Export Champion <ul><li>Some argue that “affordable energy” is an essential condition for competitive exports </li></ul><ul><li>A look at the world’s four biggest exporters suggests the opposite: The US and China, with “affordable” energy, trail far behind Germany and Japan in exports per capita </li></ul><ul><li>Productivity is the key to strong exports, and retail gasoline prices correlate positively with a country’s overall productivity </li></ul>Posting P100530 from Ed Dolan’s Econ Blog
  5. Norway ($4.37/gal): Resilient Economy, No Debt <ul><li>Norway is an oil exporting country that keeps its domestic energy prices purposely high </li></ul><ul><li>As the chart shows, its economy has weathered the global crisis better than the US and better than the average of the wealthy countries that make up the OECD </li></ul><ul><li>The US has net national debt of 56% of GDP (2009) and rising fast. Norway has net assets that exceed liabilities by 140% of GDP! </li></ul>Posting P100530 from Ed Dolan’s Econ Blog
  6. Iran ($.29/gal): Economic basket case <ul><li>Iran has the world’s second cheapest gasoline and the world’s second largest oil reserves </li></ul><ul><li>Its economy is a basket case, with 12% unemployment and 17% inflation that create a constant threat of social unrest </li></ul><ul><li>Despite its huge oil reserves, Iran has to import gasoline to keep the price down, creating a big national security problem at a time when the country is threatened with international sanctions </li></ul>Posting P100530 from Ed Dolan’s Econ Blog Image source:
  7. So Why is Cheap Energy Bad for the Economy? <ul><li>For a market economy to work properly, prices of goods and services must reflect opportunity costs </li></ul><ul><li>US gasoline prices (and those of most other forms of energy) fall far short of opportunity cost, for three reasons . . . </li></ul>Posting P100530 from Ed Dolan’s Econ Blog <ul><li>Climate change: US energy prices do not reflect the damage done by CO2 emissions </li></ul><ul><li>Other pollution: US energy prices do not reflect external costs like oil spills, smog, and damage to habitats </li></ul><ul><li>Congestion: US gasoline prices do not reflect the fact that cheaper gas means more traffic, more congestion, and more accidents </li></ul>Source: EPA
  8. What Needs to be Done <ul><li>US energy should be priced at a realistic level that reflects all opportunity costs—oil spills, climate change, smog, the works </li></ul><ul><li>Yes, that would mean doubling the price of gasoline </li></ul><ul><li>Yes, it would mean changes in the American way of life—changes for the better </li></ul><ul><li>The economics is completely clear—only the political courage is lacking </li></ul>Posting P100530 from Ed Dolan’s Econ Blog Source: EPA Image source: Energy Information Administration
  9. There Ain’t No Such Thing As A Free Lunch <ul><li>Abraham Lincoln had a favorite Riddle: “How many legs does a dog have, if you call a tail a leg?” </li></ul><ul><li>Answer: Four. Calling a tail a leg doesn’t make it a leg </li></ul><ul><li>By the same logic, calling cheap energy “affordable” energy does not make it affordable. </li></ul><ul><li>There Ain’t No Such Thing as a Free Lunch — if we don’t pay for our gas at the pump, we pay with a weaker economy, a dirty environment, and threats to our national security </li></ul>Posting P100530 from Ed Dolan’s Econ Blog Image source: