Trump's Backward Leap on Energy
Donald Trump gave a well-timed speech on Thursday, laying out his policies on energy. That day, for the first time in six months, oil hit $50 a barrel, and he was in North Dakota, which produces more oil than any other state but Texas.
The audience there welcomed his calls for greater production of fossil fuels, an end to the Environmental Protection Agency and the lifting of federal restrictions against drilling offshore and on public lands. His approach, he said, would produce such a windfall for the U.S. economy "that we will start to pay down our $19 trillion in debt, lower taxes and take care of our Social Security and Medicare," not to mention rebuild roads, bridges and airports.
But, if anything, Trump’s approach would backfire. He would encourage so much production of fossil fuels that prices would plummet, not increase. By recalling regulations that force fossil fuel prices to recognize the cost of pollution, he would also subvert the free market and jeopardize advances that could help pave the way for future U.S. economic growth.
Add up Trump's energy-policy pledges, and it's plain that he wants to flood the domestic market with fossil fuels. He promises to lift any environmental rule that threatens jobs. He would also approve pipeline construction, remove barriers to energy exports, revive the coal industry and set aside U.S. commitments in the Paris climate-change treaty. In other words: Drill, baby, drill.
As we saw with oil over the last two years, rapid supply increases from the shale boom sent prices plummeting to $26 a barrel from $100 in mid-2014. Dozens of small exploration-and-production companies defaulted on loans, and hundreds of oil wells were shut off. Stock markets plunged globally as lower prices fed the perception that growth was slowing along with demand for other goods and services.
The point isn't that U.S. policy should aim to keep energy supplies higher or lower. Lower supply (and thus higher prices) of fossil fuels would make it easier for wind and solar to compete and would help to lower greenhouse-gas emissions. But a policy whose deliberate goal is to boost supply, as Trump seems to want, would almost certainly drive down prices, causing even more of an oil-patch bust than the U.S. just experienced.
Trump's promise to revive the coal industry also misconstrues the role markets have played in driving coal into the ground. True, the Barack Obama administration has used environmental regulation to make it less economical to burn coal for electricity. Rules such as the Environmental Protection Agency’s Clean Power Plan, now under court review, are meant to force coal's price to include the cost of pollution.
But what's really driving the depression in coal country is the shale-gas boom. Because of fracking technology, natural gas is so plentiful that it has been robbing coal of market share for almost seven years now, long before the EPA's power-plant rules existed.
Encouraging more exports of liquefied natural gas, as Trump says he favors, might help coal's cause by pushing up domestic gas prices a bit. But the global LNG market is already having a hard time absorbing the available supply, as my Bloomberg colleague Liam Denning explains.
Not only do Trump’s energy policies misunderstand supply and demand in this market. He seems to be winging it, letting industry officials all but write them. As reported in SNL Energy, Robert Murray, the chief executive officer of Murray Energy Corp., said he recently urged Trump to favor lifting obstacles to opening LNG export facilities to reduce the natural-gas glut in the U.S. Trump was agreeable to the idea, but then asked, "What's LNG?" said Murray, who supports Trump.
Trump’s preference for favoring certain entrenched interests over the free market also extends to his stance on ethanol. While campaigning in Iowa in January, he said he favored the federal mandate requiring that ethanol be added to gasoline.
If Trump really favored free markets, he would see the federal mandate as a government subsidy for corn growers and processors -- and a price-distorting one, too. By diverting corn for gasoline blending, the U.S. is raising the price of corn for other food products and eventually consumers. As for the environmental argument for ethanol, that eroded when research showed it may not reduce greenhouse-gas emissions as once thought.
Then there's the matter of renewable energy. Here, Trump claims some expertise. "I know a lot about solar," he said on Friday, adding: "It's very expensive. When you have a 30-year payback it's not the greatest thing in the world." He added that wind power doesn't work without "massive subsidies."
He needs to update his knowledge. Solar-power prices are rapidly declining. A solar panel costs about 50 cents a watt, down from about $10 a watt in the 1990s. Even if government subsidies for solar power decline to 10 percent from 30 percent now, solar could soon be cheaper than fossil-fuel power in dozens of states.
In parts of Europe, wind is already the cheapest source of new electricity generation. By 2023, it will be cheaper to install turbines to generate wind power than to build new natural-gas plants in the U.S. That will be the case even without federal subsidies, which expire in 2017.
By relying on the past to map America’s energy future, Trump is putting the short-term profits of industries favored by Republicans ahead of the free market and smart management. The self-proclaimed outsider, it turns out, favors special-interest insiders when it comes to energy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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