Reading Tea Leaves in Washington

The vital signs of the US economy are troubling — the declining dollar, rising household debt, a costly war in Iraq, volatile stock market, and increasing likelihood of recession. We face worrying long-term trends that our system seems reluctant to address — climate change, an aging population and dysfunctional healthcare system, and the uncertain effects of immigration and globalization. Exacerbating these concerns is the sharply reduced confidence of the congenitally optimistic American people. The Abu Ghraib prison scandal and the debacle of Hurricane Katrina have undermined people’s belief in the goodness and competence of our government, and left them feeling more vulnerable than in any election year since 1980, when the US faced sharply rising energy prices and the Iran hostage crisis.

This sense of unease creates a volatile backdrop to the 2008 presidential election campaign, the first since 1952 not to feature an incumbent candidate. Although the President’s bargain-basement approval rating and the congressional election results of 2006 imply a Democratic Party victory, high negatives and undecided voters make it impossible to predict the winner with any confidence. The only certainties are that all the candidates will promise change and the campaign will be bitter, particularly so if Hillary Clinton wins her party’s nomination.

The candidate field is large and confusing. While Clinton tries to turn inevitability into enthusiasm, Mitt Romney projects his slick image of executive competence, and commentators wax lyrical about Barak Obama’s transformational symbolism, Iowa caucus voters are drawn to Arkansas Governor Mike Huckabee’s combination of Baptist rhetoric and folksy humor. There are signs of defection among some traditional Republican voters, including the business community, which is out in front of Republican politicians on health care, where it increasingly favors major reform, and environmental policy, where businesses see tighter carbon management as inevitable and seek an end to posturing and uncertainty. A presidential candidate offering pragmatic policies and convincing leadership could enjoy broad support.

One area where we can expect a new President and Congress to take action is on energy, and the environment, which has become inextricably linked to it. The US needs policies that accept the realities of climate change and higher energy prices and give business and investors the predictability they need to make major long-term decisions. A year ago, Washington seemed incapable of confronting auto and energy interests and the passage of California AB32 suggested that leadership on energy policy might have passed to the states. In the final days of 2007, however, Congress and the White House managed to agree on an energy bill. The energy bill avoids energy taxes or other direct demand management measures; the oil industry escaped most of the tax increases included in earlier bills; the auto industry secured credits for flex-fuel vehicles that will limit the bite of higher fuel efficiency standards; and the power industry postponed federal mandates on renewables. Perhaps the most dramatic element in the bill was the requirement to blend 36 billion gallons (2.35 mmb/d) of biofuels into transportation fuel supplies by 2022. This will require a technological breakthrough in cellulosic ethanol and substantial infrastructure investment.

The importance of the bill may be less in its precise content than in the messages it sends about future energy policy. First, a very broad coalition favors measures to reduce emissions. Second, both Detroit and the oil and gas industry have lost political influence: the oil industry has few friends even among Republican lawmakers and is dependent on presidential support. Whoever wins the 2008 election, the industry should expect to pay more of the technology and infrastructure costs of building a stronger and cleaner energy future.

Key Messages:

The 2008 US election year begins in an atmosphere of uncertainty, with faltering economic indicators, concern about long-term trends, and a sense of reduced confidence and trust in government. Energy security and climate change feature prominently among the long-term challenges that Washington has failed to address in recent years. The energy bill passed in December is not so much a long-term solution as a harbinger of a changed landscape ahead.

The energy bill is not the end of the story, but the first step on a journey into new territory. Companies should develop strategies that are in tune with the new era of environmental management and expensive energy.

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Robin West is the Chairman of PFC Energy. For further information on this article contact Enews_rwest@pfcenergy.com.