We were
fortunate enough to speak with the well known economist Ed Dolan on various
energy and economic issues.

In the
interview Ed talks about the following:

• Why
cheap energy is not vital to economic growth
• Why high oil prices
aren’t necessarily a bad thing
• Why the U.S. Oil and gas
boom is hurting Russia’s global influence
• Why Obama’s desire to
cut oil industry tax breaks could be a great idea
• Why energy policy needs
to be completely reformed
• Why Russia’s Arctic
Exploration could cause the worst environmental disaster to date
• Why renewable energy
investors should be very worried about the Natural gas boom
• Why the EU was flawed
from the start
• Why subsidies for
renewables are just plain wrong.
• Why we should give QE3 a
chance
• Why abundant natural
resources can bring a curse of riches

Ed writes
the popular economics blog Ed Dolan’s Econ Blog and has just recently
released a book:TANSTAAFL
(There Ain’t No Such Thing As A Free Lunch) – A Libertarian Perspective on
Environmental Policy, which you can find out more about here

Interview
by. James Stafford of Oilprice.com

James
Stafford:
Access to cheap energy is vital to economic growth. What do you see happening
with the economy over the coming years as the time of cheap oil comes to an
end?

Ed
Dolan:
In my view it is a myth that cheap energy – "affordable energy" as
many people like to say is vital to growth. The idea that there is a lockstep
relationship between growth of GDP and use of energy is widespread, but the
data simply does not bear it out. Instead, what they show is that the world’s
best-performing economies have become dramatically more energy efficient over
time.

The World
Bank uses constant-dollar GDP per kg of oil equivalent as an energy
efficiency metric. From 1980 to 2010, the high-income countries in the OECD
have increased their average energy efficiency by 55 percent. The United
States has done a little better than that, increasing its energy efficiency
by 81 percent over that period. That’s pretty remarkable, considering that we
haven’t really had a policy environment that is supportive of efficiency.

Think what
we could do if we did.

Even after
the efficiency gains in efficiency we have made, we still have a long way to
go. The US economy is still 15 percent less energy efficient than the average
for high-income OECD countries, giving it plenty of room to improve.
Switzerland is almost twice as energy-efficient as the US, and the UK is 68
percent more efficient.

Some
people say that the only reason the United States has been able to grow while
using less energy is the deindustrialization of its economy, outsourcing
heavy industry to China. However, compare the US with Germany. Germany is an
export powerhouse and Europe’s best-performing economy, yet its energy
efficiency has increased at almost the same rate over the last 30 years as
the United States, an 80 percent gain in efficiency compared to 81 percent.
Furthermore, despite being proportionately more industrialized than the US
and a major exporter, Germany squeezes out 41 percent more GDP from each kg
of oil equivalent.

In short,
we don’t have to hypothesize about the possibility of someday breaking the
lockstep relationship of growth and energy use—we and most of the rest of the
advanced world are already doing it.

James
Stafford: What
effect can you see America’s Oil & Gas boom having on foreign policy?

Ed
Dolan:
On the whole, I see it as beneficial. Energy dependence has led us to buy a
lot of oil from countries that are unstable and/or unfriendly to us. Anything
we can do to reduce that dependence gives our foreign policy more room to
maneuver. The beneficial effects reach beyond our actual imports and exports.
The US gas revolution is having repercussions all the way to Russia, where
Gazprom is seeing its market power undermined, and Russia, as a result, is
losing some of the geopolitical leverage its pipeline network has given it.

James
Stafford:
From Siberia and Poland to China and Qatar – the shale revolution has
politicians salivating at the thought of a cheap and abundant source of
energy. But can the results seen in the U.S. be easily replicated in other
parts of the world?

Ed
Dolan: I
think you’re going to have to ask someone with more engineering background
for the technical details, but from what I read, the answer is that it won’t
always be easy. It is my understanding that some countries where shale seemed
just recently to have great promise have already encountered disappointments
in practical exploratory work. Poland I think is an example. Furthermore, the
environmentalist opposition to fracking seems even stronger in many European
countries than in the United States.

Still, I
am hoping that the shale revolution will pan out in at least some countries.
Think how much difference it would make, say, to Ukraine’s foreign policy if
they were able to break their dependence on Russian gas.

James
Stafford: Gail
Tverberg has written a recent article suggesting the world is suffering from high-priced
fuel syndrome, which has the following symptoms:

• Slow
economic growth, or contraction
• People in discretionary industries laid off from work
• High unemployment rates
• Debt defaults (or huge government intervention to prevent debt defaults)
• Governments in increasingly poor financial condition
• Declining home and business property values
• Rising food prices
• Lower tolerance for immigrants
• Huge difficulty in funding retirement programs, programs for disabled, and
regular pension plans
• Rising international tensions related to energy supply

Do you
think this is too convenient and an oversimplification of the problems facing
world economies at the moment? What would you blame for the plethora of
economic woes being experienced at the moment?

James
Stafford:
I don’t buy the argument at all. Yes, when countries are hit by unexpected
upward shocks in fuel prices, we do see short-run results like slower growth
and layoffs, but those are short-term problems. When the proper structural
adjustments are made, countries with high fuel prices manage to achieve
strong growth and full employment.

Where are
fuel prices lowest? If you look up the data and rank countries by retail fuel
prices, you find the low-price end of the rankings crowded with countries
like Egypt, Cambodia, Iran, Pakistan—not exactly economies we would like to
emulate.

We’ve got
big economic problems, but a lot of them don’t have much to do with energy.

What about
a healthcare system that delivers mediocre results at the world’s highest
cost?

Health
care isn’t all that much energy driven. What about our steady move down the
international rankings in education—are you going to blame that on the high
cost of heating classrooms? Hardly.

James
Stafford: Oil
prices have been near to the $100 a barrel mark for some time now, and don’t
look likely to drop back to previous low levels. What effect could this
increased price have on oil importing economies compared to oil exporting
economies?

Ed
Dolan:
Clearly, any oil price increase has the short-term effect of transferring
wealth from using countries to producing countries. However, the long-run
effects are what matter.

In the
long run, high prices just accelerate the trend for using countries to become
more efficient and less dependent. Meanwhile, the producing countries often
don’t manage their oil riches well. They fall victim to the "curse of
riches." The curse takes the form partly of a loss of competitiveness in
their non-energy sectors (the so-called "Dutch disease"). Partly it
takes the form of corruption of their political systems. Russia is a poster
child for both aspects of the curse of riches.

James
Stafford:
Renewable energy is more expensive than fossil fuels, so how can people be
persuaded to choose the less economical option of renewables over the likes
of coal and natural gas?

Ed
Dolan:
There is only one right way to promote renewables, and that is to introduce
full-cost pricing of all forms of energy. Full-cost pricing is a two-part
program.

First, it
means pricing that covers the full production costs for every form of fuel.
No subsidies for anyone—not for oil, not for ethanol, not for wind or solar.

The second
half of full-cost pricing is to include all of the nonmarket costs, what
economists call the "external costs" or "externalities."
The most publicized of these are pollution costs, whether those take the form
of local smog, oil spills, climate change, or bird kills. Some people, I am
one of them, would like to count in something for the national security costs
of dependence on unfriendly and unstable foreign sources of energy supply.

Full-cost
pricing accomplishes two things. First, it levels the playing field so that
each form of energy competes on its economic merits, not whether corn-growing
states have early primaries or oil companies have big SuperPacs. Second, by
raising prices to consumers to a realistic level, it accelerates the trend
toward energy efficiency that is already underway.

Subsidies
for renewables are just plain wrong, even if you look at them from a
hard-core environmentalist point of view. With a subsidy, on the one hand,
you say, "produce more green energy" and other the other hand, you
turn around and tell the consumer, "waste more green energy." We
don’t want to waste energy from wind or solar any more than we want to waste
oil and gas. We shouldn’t forget that even the greenest renewables can have
significant environmental impacts.

The whole
"affordable energy" idea is based on the myth that if we don’t
include those external costs in the price—the pollution costs, the national
security costs—they just go away. They don’t. Keeping prices artificially low
just transfers those costs to someone else, someone unlucky enough to live
downwind, someone who owns beachfront property that gets eroded away as the
sea level rises, someone who has to go off to fight a war to keep the
shipping routes open. There are two things wrong that. First, it’s immoral.
If we believe in the market economy, the rule of law, and all that, we have
to respect people’s property rights and their human rights. Second, it’s
inefficient. It doesn’t strengthen our economy, it weakens it. If there’s one
thing we can’t afford, it’s "affordable energy."

James
Stafford:
Obama has made clear his desires to cut the $4 billion a year tax breaks
given to oil companies. What affect do you believe this would this have on
the US economy and the US oil industry?

Ed
Dolan:
If it is done as part of a comprehensive move toward full-cost pricing, it
could only strengthen the US economy. The oil industry would whine, but if we
cut subsidies and tax breaks for competing energy sources at the same time,
oil will remain a competitive part of the energy mix for many years to come.

James
Stafford:
The oil industry has enjoyed decades of subsidies and grants, so do you think
it is unreasonable to already start cutting the subsidies to renewable
energies and expect them to survive on their own?

Ed
Dolan:
As I explained above, the answer is yes, provided it is done as part of a
package that reforms our energy policy as a whole in the direction of
full-cost pricing.

James
Stafford:
Economic growth is generally dependent on the access to energy. As the supply
of energy grows, so too does the economy (more or less). Global oil supplies
are pretty much stagnant, so do you predict that only nations that
successfully convert to a renewable energy mix with an abundant supply of
cheap energy will be able to experience continued economic growth at a
similar level experienced by the developed countries of recent years?

Ed
Dolan:
Again, I just don’t buy the doctrine that growth is dependent on
ever-increasing energy use. For sure, those countries that pursue sound
policies, like full-cost pricing to rationalize their energy mix and promote
efficiency, are the ones that are going to keep growing.

James
Stafford: As
the arctic ice melts at a rapid pace the world’s superpowers are jockeying
for position to exploit the region’s vast oil & gas & mineral
deposits. Environmental groups are rightly concerned, but is this a resource
that we cannot afford to ignore?

Ed
Dolan:
Arctic oil, like any other source of energy, should pay full freight for any
environmental impacts it has. If it can bear those costs and still be
competitive, I think it should be in the mix. I am worried about Russia,
though. It has a dangerous combination of an environment-be-damned attitude
and low technical competence that could lead to headline-grabbing disaster worse
than the Gulf blowout or Exxon Valdez.

James
Stafford:
What effect do you see the shale revolution having on investments in
renewable energy?

Ed
Dolan: If
I were trying to make money by generating electricity with wind or solar, I’d
be worried about gas. I don’t have all the relevant numbers at my disposal,
but my gut feeling is that even if you price in full environmental costs for
wind, solar, and gas—including environmental costs associated with
fracking—gas is still going to be pretty competitive.

James
Stafford:
What are your views on Ben Bernanke’s QE3?

Ed
Dolan:
I’ve written repeatedly about QE over at Economonitor, so I am on record as
saying we should try it. The trouble is, QE is not a magic bullet. Properly
executed and properly communicated, it can help support the recovery, but it
can’t do it alone.

That is
one point where I agree 110 percent with Ben Bernanke Here is what he said in
a speech at the Fed’s Jackson Hole conference at the end of the summer:

"It
is critical that fiscal policymakers put in place a credible plan that sets
the federal budget on a sustainable trajectory in the medium and longer runs.
. . Monetary policy cannot achieve by itself what a broader and more balanced
set of economic policies might achieve." http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm

James
Stafford:
How do you see the EU solving its debt crisis?

Ed
Dolan: I’m
afraid I’m a euro pessimist. The US debt situation is hard enough to resolve,
but Europe’s is worse. At the same time, whatever you say about gridlock in
Washington, our political decision making is a model of streamlined
efficiency compared with the EU.

James
Stafford:
Do you think the EU was doomed to fail from the start with the format that it
has? Could more success be seen in a split EU, with the northern/richer
nations using one currency, and the southern/poorer nations using a different
currency?

Ed
Dolan:
Doomed, I don’t know, but flawed, certainly. Just recently, I was looking
back at what economists were writing about the prospects for the euro back in
the early 1990s, when it was still just a project. They were telling us, for
one thing, that Europe is too diverse to be ideal for a currency union—and
that was when there were only 15 EU countries. Second, they said that you
can’t run a monetary union without a central government, a fiscal union, and
a banking union. You still don’t have any of those.

I am not
sold on the idea of a northern euro and a southern euro. If the currency
union doesn’t work, it doesn’t work. Break it up. Sure, some countries will
find it works for their special circumstances to tie their currencies to a
large, stable neighbour. I could see the Danes or the Latvians keeping a link
to the German currency, for example, and I’m sure the Vatican will continue
to use whatever currency Italy uses. But a formal, north-south divide doesn’t
make much sense to me.

James
Stafford:
In terms of tackling the current economic situation in the US, of the two
main presidential candidates, who do you suggest is the best man, and why?

Ed
Dolan: I
do not think we can tackle the current economic situation without a
thorough-going fiscal policy reform that includes three key elements:
Spending cuts, revenue increases, and a rewrite of the whole tax system to
eliminate loopholes and cut marginal rates. Furthermore, the package can’t be
heavily front-loaded like George Osborne’s austerity program in the UK, which
has sent their economy back into recession. Ours should be back-loaded, with
an element of stimulus now and an ironclad commitment to move the budget
toward surplus as the economy improves. It’s a lot to ask for.

We are not
going to get good budget policy out of the GOP unless members of that party
make a clean break with mantra that they will not accept a dime of new
revenue, not even if it comes from eliminating the most loathsome tax
loopholes. Personally, I am never going to vote for a candidate for
President, the Senate, the House, or any office who has signed that
nonsensical Grover Norquist tax pledge.

At the
same time, I have been very disappointed at the lukewarm support Obama has
given to the kind of program I would like to see. During the first debate,
Romney said that when Obama didn’t "grab" Simpson-Bowles—that was
his word, and a good one—it was a failure of leadership. That was one point
where I agreed with Mitt.

Then, you
also have to take into account the vote for Congress. I’m afraid there is
going to be continued gridlock as long as the GOP controls the House. In the
Senate, there are at least a few people in both parties who are willing to
meet behind the scenes and talk compromise, but not in the House, not right now,
anyway. Maybe what we need in the White House is someone who is a real
politician, a negotiator and dealmaker in the mould of a Clinton or an LBJ.
Instead, we have the choice between a manager and a law professor. I’m not
optimistic that either of them will be able to do what needs to be done.

Source: http://oilprice.com/Interviews/The-Myth-of-Affordable-Energy-Interview-with-Ed-Dolan.html

By. James
Stafford of Oilprice.com