McCain's Energy Plan: Correct Diagnosis, Killer Prescription

With gas topping $4 per gallon and oil prices seemingly reaching new highs every week, more pain at the pump is certain in the foreseeable future, and energy policy is rightfully claiming its place as a major topic of the 2008 election. Indeed, John McCain gave a major campaign speech earlier this week in Houston specifically on energy (the full transcript can be found here) and addresses the issue again this week in Santa Barbara. It is worth looking in more detail at how he describes the current situation, and what he is proposing.

The first thing to note is that his description of the current situation is largely correct. While he probably overemphasizes the role of speculation in recent price rises, he does point out that this is correct only as far as it represents a fundamental shift between growing demand from places like China and India and supply which has had trouble keeping up lately. He also rightly points out that US dependency on imported oil has been growing, and that the amounts of money paid out to often hostile oil-exporting countries are reaching record levels. He also pointedly reminds us that the policies of the past 40 years have done little to change this trend.

And his first policy recommendation is most appropriate: "energy conservation is no longer just a moral luxury or a personal virtue. Conservation serves a critical national goal." This is, of course, an obvious dig to the current occupants of the White House, and in particular to Dick Cheney who famously said that "conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." Putting conservation and energy efficiency, i.e., action towards demand reduction, at the forefront of his policy proposals is a good thing and would be a real change from earlier policies.

In his Santa Barbara speech, he also emphasizes energy efficiency, and he fleshes out some sensible proposals in that respect, including direct action to make government offices and vehicle fleets energy stingy. He also suggests to set up a kind of "X-Prize": a $300 million prize for a highly efficient car battery system. These prizes have shown their effectiveness to motivate inventors and entrepreneurs in other fields, and while this may be criticized like a gimmick given the scale of the challenge, it's certainly focusing on the right things.

Further, McCain acknowledges systematic climate change, and the widely-supported theory that fossil fuels play a significant role in fostering it. He specifically argues that energy policy must include measures to curb carbon emissions, via cap-and-trade mechanisms. This is another politically-savvy change from the current administration, given that overwhelming majorities of Americans agree with him on this.

But when one moves to his recommendations, the gap is suddenly yawning with this diagnosis. His concrete proposals include more drilling in the USA, more nuclear energy, and, in an apparent nod to standard Republican economic fare, less regulation (for refineries) and lower taxes (on gas). "Apparent" because the targets seem wrongheaded: if no refinery has been built in the US over the past 31 years, as McCain asserts, that does not mean that "refining capacity" and runs has not increased in the past 15 years via investments on existing sites, and it does not mean that there are any refining shortages.

In fact, refining margins are significantly lower than last year, making the increase in gas prices much less than the increase in oil price would have warranted. And lowering gas taxes can only bring results in direct contradiction to his stated goals. By reducing prices at the pump, it will increase demand (or stop demand reduction efforts); more likely, it will lead to higher margins for oil companies -- which probably don't need the help. Either way, it will not help moving away from the addiction to oil, as diagnosed by President Bush in his 2006 State of the Union address.