Bush's Energy Plan: More Power? Or Hot Air?
Subject Comparative Statics
Topic Equilibrium
Key Words Energy supply, market, shortages, income tax credit, competition, energy-efficiency, royalties, regulations
News Story

The White House has unveiled its energy plan, designed to increase energy supply over the next twenty years. It has 105 recommendations for regulatory, legislative, and marketplace changes. For example, in the oil market, the Administration would like Congress to authorize oil exploration in the Arctic National Wildlife Refuge in Alaska. It would like cities to have more freedom to swap blends of lower-emission gasoline to ease shortages. It wants to review sanctions against oil-producing countries. The Corporate Average Fuel Economy (CAFÉ) standards are to be reviewed. A temporary income tax credit for purchases of vehicles powered by hybrid engines or fuel cells is proposed.

In the coal and electric market, President Bush proposes more competition, greater regulatory certainty for generating electricity using coal, a national electricity grid to remove bottlenecks, higher energy-efficiency standards for appliances, expanded tax credits for electricity produced using wind and biomass, and the use of royalties from drilling in the Arctic for research into alternative energy sources.

However, the White House is powerless to enforce many of the proposals. In some cases, Congressional agreement will be needed, which may be tough when the environment is threatened; in others, government departments have to conduct their own analyses of regulations; and in yet others, the private sector has to decide that it is in their financial interests to comply, by, for example, upgrading electric grids and the natural-gas pipeline system. Also, the plan does not help the immediate problems of shortages in places such as California.

(Updated July 1, 2001)

1. Draw a supply and demand diagram of the market for oil. Show the initial equilibrium price and quantity.
a) Show the effect on price and quantity of permitting drilling in the Arctic Refuge and the removal of sanctions against oil producers.
b) Now show what would happen if fuel economy standards were toughened.
c) Would the levying of royalty payments on oil producers help increase the supply of oil? Why or why not? Illustrate.
2. Draw a supply and demand diagram of the market for electricity.
a) Show the effect on the equilibrium price and quantity of more competition in the market.
b) What effect would more stringent efficiency standards have? Illustrate on your diagram.
3. Draw a supply and demand diagram of the market for alternative energy sources.
a) Illustrate the consequences of giving tax credits for using the wind to produce electricity. Explain what you have drawn.
b) What would be the effect of awarding tax credit for buying vehicles powered by fuel cells? Explain and illustrate.
4. The President's proposals are touted as a plan for increasing supply. Is this totally true? Refer to your answers above.
Source Jeanne Cummings and John J. Fialka, "White House Unveils Details Of Energy Plan," The Wall Street Journal, May 18, 2001.

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