Lower medium-term crude oil prices could act as a tax cut on US consumers
The North American energy world has been turned on its ear in recent years – a pressing need to build natural gas import facilities has become an export discussion, as gas and oil output significantly increased taking most industry observers by surprise. At the same time, oil consumption decreased, renewable energy made strong power generation inroads and the need to address climate change has only become more urgent.
This confluence of issues and trends is how Michael Levi, Council on Foreign Relations Senior Fellow for Energy and the Environment, began his remarks on a recent briefing call to introduce his new book “Power Surge – Energy, Opportunity, and the Battle for America’s Future.”
America is facing a new energy landscape, and “climate change should be central to decisions about how to address this,” said Levi. “In order to capitalize on opportunities we need sound rules from Washington to ensure bad actors don’t ruin the party for everyone else,” he said, mentioning the Deepwater Horizon accident as one such hurdle toward maximizing North American energy potential.
Peter R. Orszag, Vice Chairman of Global Banking, Citigroup; CFR Adjunct Senior Fellow; former director, Office of Management and Budget, also participated in the discussion and highlighted the economic opportunities for the US associated with increasing petroleum output and decreasing liquid fuel consumption.
New oil production from the US could account for 7% of global GDP by 2020 – according to research conducted by Ed Morse and his team at Citi – said Orszag. “And overall, oil prices could be reduced by 16% by 2020, so what does this mean for GDP?” Real GDP could increase by 2 or 3 percentage points, which would have secondary effects, such as providing consumers with additional disposable income, as they spend less on energy. “It acts like a tax cut,” he said.
Circling back to the energy/climate change relationship, Orszag put forth the oft-cited view that establishing a carbon price – either through cap-and-trade or a straight carbon tax – will be crucial to mitigating global warming going forward.
Arguing in favor of pricing carbon, Orszag said revenue from a carbon tax could raise billions of dollars annually, that would help limit or erase the sequester’s impact. “It would not only generate revenue but stimulate the shift to natural gas from coal for power generation and transport. It’s very important to attach some price to carbon or we won’t address climate change as we should,” he said.
Levi and Orszag also fielded questions about other hot energy topics of the day, including US LNG exports, the possibility of US crude oil exports, the extent to which natural gas will penetrate the vehicular fuel market and the future of US coal exports. Regarding the latter, Levi questioned how we think about coal exports in a carbon constrained world, saying we don’t yet know if US exports will replace other sources of coal in consuming nations or add to them. “We have poor understanding of this, new research and analysis is being done now,” Levi said.
