Too Big to Fail

There has been a lot of commentary over the last few days on the causes and effects of the undersea volcano of oil in the Gulf of Mexico. The Obama Administration has been criticized for not reacting quickly enough to the disaster (Katrina, anyone?); the Alabama AG is warning citizens not to rush into a settlement with BP; and still, no one knows how or why this happened in the first place. It is an environmental, political and civil catastrophe, and we are in the thick of Week 1. So we can expect a lot more coverage, anger, and political hedging in the coming weeks. But so far, as much as I can tell, there has been relatively little discussion of the systemic societal conditions that backed us into this corner. If this "spill" (it is far more than that) indicates anything, it is the deep and unfortunately requisite entanglement of energy companies with the federal government. BP is contracted, insured and aided by the government, yet the oil company raked in $6 billion in profits in Q1 2010.

Now, to turn a profit is no societal sin. Indeed, a competitive, entrepreneurial spirit is a key element of the American condition. And the main problem, as I see it, is not runaway capitalism either; this is less a case of unregulated institutional chaos than the banking crash of 2008. No, the problem here isn't too little government involvement--it's too much. Bill Maher put it best over the weekend:

Maher: Oil companies are worse than banks. They're also too big to fail. And their cost to society is also, just like the banks, too great for society to sustain it.

Despite the fact that BP finds itself on the hook for the billions in cleanup and remediation costs, the disaster is still being attended to by the Coast Guard, Homeland Security, Interior, and the President himself. Our national resources are being deployed to respond to a disaster caused by a for-profit company. All of a sudden, we start to notice that energy, the literal lifeblood of our American capitalist economic infrastructure, is helpless without the Invisible Hand of the Government. Here's Vaclav Smil on the subject:

But it would be naive to see these and virtually any other twentieth-century prices either as outcomes of free market competition--or as values closely reflecting the real cost of energy. Long history of governments manipulating energy prices has brought not only unnecessarily higher but also patently lower prices due to subsidies and special regulations affecting distribution, processing, and conversion of fossil fuels, and generating electricity. During the twentieth century governments provided direct financing, research funds, tax credits, and guarantees to advance and subsidize particular development and production activities, thus favoring one form of supply over other forms of energy (Smil, Energy at the Crossroads, 86).

Smil was specifically addressing price controls on energy conversion and extraction, but his point is applied with equal efficacy to global operations in the energy industry. If the heartbeat of the world economy remains linked to the availability of carbon fuels, we will see a rise in government protection, remediation and even acquisition of energy assets. Imagine the current Deepwater Rig explosion, followed by a continuous flood of oil in the Gulf of Mexico, but now add in an armed fight over the reservoir between the US and Venezuela, with Russia and Brazil on the sidelines. As they did in the Unocal affair, the US government will increasingly interrupt international private bidding contests for extraction contracts; as we have seen in the Middle East for half a century, armed conflicts over energy will increasingly exacerbate geopolitical tensions already fueled by poverty and religious zealotry. No matter the exact year of global peak oil production, the addition of 2 billion people to this planet by mid-century will precipitate a huge outstripping of demand over supply if we remain addicted to fossil fuels. This addiction will carry the cost of countless lives, as it already has.

We need an energy infrastructure fueled by clean technology, for which the failure of a single link in the chain does not precipitate a disaster like the one we're currently navigating through. We need technological innovation that fuels capitalist competition, not too-big-to-fail institutions like oil companies. We need energy production run by civilians, not armed soliders in the most culturally turbulent region of the world. Reduced terrestrial pollution; decentralized power production; an end to armed conflicts over energy--the greenhouse gas problem doesn't even have to be a variable in the equation to make this a no-brainer.

Avoiding a state-run energy economy

DailyClimate asks the question, Can the green economy survive in a policy vacuum? The short answer is yes, but that we need both public investment and policy to thrive and compete in a global green economy with players like China and the European Union (and Japan, Brazil, India, and South Korea).

Truman Seman, a principal with GreenOrder, a New York-based consulting firm specializing in sustainability, said the "tremendous investment and innovation" happening in the absence of coherent carbon policy is a sliver of the market's potential. "There would be much, much more if we had clear rules," he said. "The biggest barrier to significant economic advancement is securing clear climate policy in the US."

Mr. Seman is talking about the crucial interplay between private investment and government policy. The interaction between the two is starkly different when looking at clean tech versus dirty energy. Anyone familiar with the 2005 attempted acquisition of Unocal by the Chinese firm CNOOC should be fully aware of growing role the federal government plays in global energy markets. This is a future we want to avoid. The funny thing is, it was congressional Republicans in 2005 who blocked the acquisition in favor of CNOOC's competition, Chevron. In short, congressional Republicans interfered with the market to favor an American company. As world oil production peaks, probably within the next five years, we can expect more and more state influence in private business transactions by the US, Russia, India, China, Japan and Europe.

This messy, conflict-ridden future is the most likely scenario if we do not pass a climate-energy bill. An ideal bill would raise revenues by finally setting a price on carbon and invest in making clean energy cheaper and more broadly available. Instead of the federal government fighting geopolitical battles over coal, oil and natural gas, let's have the federal government guide our researchers and entrepreneurs towards an energy future not fraught with war, energy insecurity and global depression.