Can an “all of the above” energy policy really work?

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Bryan from Houston writes:

How about some elucidation on what both sides believe in terms of energy policy? Are the two sides really that far apart? Sounds like everybody is advocating the kitchen sink method…drill, nuclear, wind, solar, natural gas/hybrid cars….why doesn’t Congress just do it already?

Bryan’s right that both campaigns sometimes sound like Paris Hilton on energy policy, which isn’t a bad thing. McCain’s “Lexington Project” on energy is even subtitled “An All of the Above Energy Solution.”

Read through McCain’s and Obama’s energy platforms and you find lots of the same buzzwords (cap and trade, clean coal, next-generation biofuels, renewable energy, energy efficiency, etc.). But you pretty quickly come across a crucial difference: Where McCain leans toward offshore drilling and expanded use of nuclear power, Obama leans toward conservation. Oh, and Obama wants to give people a tax rebate paid for by a windfall tax on oil companies, while McCain wants (or wanted; you don’t hear him talk about it so much anymore) a federal gas tax holiday.

My own sense (influenced by one too many conversations with Amory Lovins) is that saving energy through conservation is cheaper (and thus more economically efficient) than producing energy through new deepwater drilling and nuclear plants. Then again, conservation has its limits, so conservation and drilling and nukes would seem to make sense. All of the above, in other words.

There is a complication on the oil-drilling front, though. I’ll let Austan Goolsbee (writing for Fortune back in 2005, before he was Obama’s economic adviser) explain:

Most oil that was cheap to produce from the U.S. was used up long ago. Today the largest potential sources of oil in North America, be they the shale deposits in Utah and Wyoming, the oil sands of Alberta, or the deep-water offshore pools in the Gulf of Mexico, are all much more expensive than the cheap oil coming out of the Middle East. Our average production costs in some places are as high as $15 per barrel. Cost estimates for places like Iran and Saudi Arabia go as low as $1.50 per barrel.

If U.S. demand (which is the largest of any country in the world) falls substantially, it will drive down oil prices. When prices are low, many U.S. oilfields become too expensive to keep open. That is why our lowest share of foreign oil imports in the past three decades came in the early 1980s–when oil shocks drove prices to record highs and encouraged development of the higher-cost U.S. sources.

Without question, driving down oil prices by reducing our demand could reduce the total amount of money going to the Middle East. We should be aware, though, that this reduction will cause far greater damage to the world’s high-cost producers of oil, such as those in the U.S. than it does to OPEC, and there is little chance it will reduce the share of our oil that comes from abroad.