During the presidential campaign, Donald Trump seemed to advocate industrial policy to bolster global competitiveness of American business. But the idea that the government should choose winners and losers disturbs political conservatives who believe that the market should make the choices.
Whether that faith in markets is appropriately placed or not, that belief is at the core of our present day neo-liberal political consensus. It is more than a little ironic that our President, in many campaign address-es, focused attention on the need to resuscitate declining nineteenth century industries, like coal, with government support of one sort or another. We're sure that apostle of free markets, F.A Hayek, would've given Trump's plan the raspberry. The same goes for legendary management guru, Peter Drucker, we sus-pect.
But an industrial policy has not materialized. Instead, what has emerged is standard Republican deregula-tion policy. The government has begun to dismantle rules aimed at reducing power plant CO2 and methane emissions, protecting streams, improving automobile mileage and a requiring that financial firms act in a fiduciary manner towards their customers. The administration claims the rules increase costs, hinder busi-nesses unfairly and inhibit job formation.
To make room for higher defense spending, the President's proposed 2018 budget slashes research and development (R&D) spending at many federal agencies. It eliminates ARPA-E (the energy venture capital fund), and cuts R&D spending by 52 percent at the National Oceanographic and Atmospheric Administra-tion (NOAA), by 20 percent at the Environmental Protection Administration (EPA), by 17 percent at the Na-tional Institutes of Health (NIH), by 10 percent at both the Department of Energy (DOE), and the U.S. Geo-logical Survey (USGS) and by 6 percent at National Aeronautics and Space Administration (NASA). No word yet from National Science Foundation (NSF), National Institute of Standards and Technology (NIST) or the U.S. Department of Agriculture (DOA).
In the utility and energy sectors, the public will benefit if deregulation lifts burdens on business that do not produce commensurate benefits to the public. The resulting savings, if any, can be passed on to consumers in the form of lower prices. On the other hand, these new savings can be used to expand the business and hire more employees. That’s the theory anyway. Related: Bullish Oil Price Predictions Should Be Treated With Caution
We believe that the new regime in Washington will have a minor impact on the domestic energy and utility sectors. Utilities could extend the lives of aging coal fired power generating facilities, especially those where environmental retrofits would be uneconomic or impractical. Nevertheless, we do not expect a rush to construct new coal plants. The economics simply aren't there. Domestic natural gas is too cheap, as is wind power throughout much of the Midwest, from the Dakotas down to Texas. And lifting environmental restrictions on the U.S. natural gas industry will keep production costs low--making the competitive ad-vantage over coal even greater. The new rules, however, could protect the already thin margins of power producers insofar as they could avoid near term, environmental control costs.
Killing off tax subsidies to renewables might slow their installations but renewable costs have come down so far that many projects could compete with or without subsidies. The real problem is that electric de-mand growth is so anemic that few new power plants are needed, except to cut emissions and replace old plant.
We doubt that investors will put up new coal stations unless they could meet environmental restrictions that future administrations might impose. Putting domestic coal back in the electric power generation pic-ture, then, will requires processes that either can "scrub" coal of its objectionable polluting emissions or sequester them. All this has to occur against the backdrop of plentiful gas and relatively cheap wind power. Perhaps the coal industry, while requesting relief of all environmental obligations, should request increased governmental help for R&D expenditures to help it produce a competitive product.
The international market for environmental and electrical equipment exceeds that of the U.S. alone. Most of our major trading partners not only have an industrial policy for the energy sector but often own the companies within them. American firms have to compete with those companies. China has a “Made in Chi-na” policy — that’s what they call it — for science and technology products, “the main battlefields of the economy”, according to Chinese president Xi Jinping. The government targets a sector for expansion, di-rects billions of dollars to its development, keeps foreigners out of the domestic market so the local firms can achieve scale and then launches the expansion overseas. That’s the competition. We can proclaim "free markets, free markets" all we want. But in the international energy business outside of the U.S., vir-tually all of the competitors are government owned and controlled. That's the playing field--whether level or not. Related: Oil Prices Fall Further As U.S. Rig Count Inches Higher
Renewables are the fastest growing sector in the energy market. The two largest coal -dependent coun-tries, China and India, which did their best to sink the Copenhagen climate talks, have set their sights on replacing coal with renewables. India, where the government also owns the coal company, plans to triple renewable capacity by 2022. At a power contract auction held earlier this year, the solar power bidder won against a new coal plant. As it is, old coal facilities are operating at a low level of capacity and experts doubt that many of the coal-fired plants listed for construction will get built.
In China, the grid has been building ultra-high voltage DC lines to carry renewables from the distant prov-inces to urban load centers. This transmission technology is a new product to sell to the world. In both countries, the growth of electricity demand has slackened, following the pattern in more developed na-tions, thereby making a transition to lower carbon electricity easier.
The major industrial nations apart from the U.S. have accepted the notion of human induced climate change. Their energy suppliers and manufacturers, no doubt sensing opportunity, have decided to tackle climate mitigation as a business, often with government help.
In the United States, however, the Trump administration’s skepticism about climate change, and the R&D cuts that follow, are likely to relegate U.S. firms to the low tech, slow growth, commodity end of the en-ergy sector. But maybe not.
Analogously, conservative Republicans in the U.S. Congress (the Freedom Caucus of yesteryear) have fought tooth and nail to abolish the Export-Import Bank. and they hoped that the Trump administration would finally kill the beast. They viewed its activities as corporate welfare for big business. Perhaps they were right.
But other countries provide the same guarantees and subsidies to their exporters and the deals don’t get done without them. Getting rid of our subsidies or other forms of government support or ownership for ideological reasons while other countries retain theirs can be likened to unilateral economic disarmament. The Trump administration now supports the need for an Export-Import Bank. Perhaps we will come full circle on climate too and the Pentagon will covertly fund climate related research. If the seas continue to rise as predicted, all those coastal naval installations around the globe will have to be moved somewhere.
By Leonard Hyman and Bill Tilles for Oilprice.com
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