It is a truism of economics that labor is the one true scarce resource, and with a sufficient supply of labor the supply of any other resource can either be increased or a substitute found. With enough labor any good can be created.

In our modern industrialized economy, non-human energy has been substituted for some of that labor. Now, admittedly, labor is needed to extract or capture that energy, so labor is still at the base of all things, but it is permissible in many contexts to view energy as a labor substitute. After all, the oil extracted by ten men does the work of much more than those ten men, so in a way energy reserves allow us to amplify the labor done by the small number of men extracting that energy.

Which means that reducing the available energy is to effectively reduce the supply of labor. As labor is the one limit on the economy, when we have less energy available the economy shrinks.

Yet one of our two presidential candidates is proposing precisely that, making energy more scarce. Through windfall profit taxes, maintaining restrictions on exploration, imposing restrictions on carbon emissions, and favoring "alternative energy", Obama's proposals will do nothing but make energy more scarce in the foreseeable future. To a degree he admits this, though his plan to ameliorate this through increasing energy efficiency will not do enough to offset the harm done.

Let us look at each aspect.

Windfall Profits

Obama has joined many in the idiocy of threatening oil companies with windfall profit taxes. First, as I have written before, oil companies are actually no more profitable than any other corporation, in fact they may be a bit less. Even if they were exceptionally profitable, it is not as if those profits accrue to some mysterious cabal of "big oil magnates", the companies are publicly traded so those profits go to individual investors, attracting new money for exploration, expansion of facilities and repairs. But in reality there is no such massive "windfall", most of it being on paper, as accounting practices make the apparent profits of oil companies much greater than they really are, since profits are based on original purchase price rather than replacement costs.

So, what would be the likely outcome of windfall profit taxes? Normally, taxes are offset by an increase in prices, allowing companies to pass the tax burden along to the customers. However, as the proposal is to confiscate all profits above some threshold, any increase in prices will simply lead to more money being confiscated. So, companies will have only two alternatives, either they can reduce the dividends paid to shareholders or they can cut reinvestment. In either case, the growth in the value of the company will be slowed, which may be more damaging in terms of investment than cutting dividends would be.

Whether the company chooses to cut dividends to allow it to reinvest or chooses to forgo reinvestment to pay dividends, the company's profile, as far as investors are concerned, will be less desirable. The lower dividends will probably have the larger immediate impact*, but forgoing reinvestment will likely cause enough technical problems that cutting dividends will be the viable option. In any case, as the company's profits are confiscated, growth will be slowed greatly and the value of the company will drop. This will prevent the company from attracting new investors, will make the sale of any treasury stock difficult, and will make it harder to secure loans or issue bonds. All of these will exacerbate the decrease in profits to reinvest, resulting in a gradual breakdown of infrastructure. Likely the oil companies will be able to maintain some level of function, but likely one producing less than they currently do.

Given all that, the one certain effect of the windfall profit taxes will be to reduce the overall output of domestic oil companies subject to the taxes.

Drilling Restrictions

The impact of maintaining drilling restrictions really needs no additional explanation. If we declare oil rich areas off limits, we reduce the possible oil supply. Were those regions to be opened up, they would doubtless be exploited by some company and the overall supply would increase.

I have heard only two counter arguments.

First, that the oil would "go overseas" and not effect the domestic price. Of course this is absurd. Domestic price is set on the world market, and an increase of available oil worldwide would clearly reduce the world, and thus domestic, price. It doesn't matter where a specific barrel goes, the addition of a barrel lowers the overall price.

Second, some speak about all the oil fields currently not being exploited. However, those arguments assume that the unexploited fields are equal in quality to those currently off limits, which has not been proved. It also assumes that the cost of exploiting current reserves is equal to the cost of exploiting fields currently off limits, which has not been proved either. In short, this claim is based on any number of assumptions which I have yet to see proved**.

Thus, keeping some areas off limits serves to do nothing but restrict the available supply of energy.

Carbon Emission Limits

Carbon emissions restrictions do not technically limit the amount of energy available, but they do make using that energy more expensive for end users, which means that they will be able to use less. Of course, in the long run, as the consumers can afford less energy, they will also demand less, which will have the end result of causing less energy to be produced. As this will generally result in a loss of some economies of scale, it will not only cap the total amount of energy demanded, but will also increase the per unit production cost of energy.

Green Technologies

In his platform Obama devotes considerable space to "green" technologies and "green" sources of energy. As these supposedly reduce the environmental impact of industry, they are quite popular among the environmental crowd. However, the fact remains that "green" energy is more costly, as otherwise it would be competing with traditional energy sources successfully. The reason is obvious, that for a variety of reasons, "green" energy sources simply cannot provide energy as reliably and cheaply as traditional sources. Which means that should we force the nation to use "green" sources for even part of it energy supply, we will end up with less energy at a greater cost.

Energy Efficiency

Whenever confronted with the fact that their plans will result in less available energy, the environmentalists argue that they will increase energy efficiency to offset the loss, and Obama is no different. The fact is that energy efficiency has been implemented as much as is cost effective. Businesses conserve energy to the extent that doing so costs less than the savings in energy. So we already have energy efficiency steps in place. Which means that any "improvements" they suggest will be the less efficient steps that ahve been decreed not cost effective at present. That suggests that their rosy predictions are far from likely. More likely any future improvements will produce ever decreasing returns at greater costs.

The Result

And so we have the net result of Obama's energy policy. The shrinking of the domestic oil industry, continued restrictions on domestic oil production, coerced conversion to more costly green sources of energy, and an attempt to offset the entire loss through relatively inefficient strategies to reduce energy needs.

In short, the shrinking of available energy. And, as I stated at the beginning, that translates into a shrinking of the economy.

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* At present oil companies are not paying a particularly high return, and their return on equity is not high, so if we reduce these numbers more, they will definitely be low in the eyes of investors, whatever the government may believe.

** It is also possible some fields are being held in reserve to maintain a continuous supply in the future without the need for exploration, as exploration in the US is pretty limited, mainly by government restrictions. However, if new fields are added, that would mean that they could be exploited without touching other reserves, so the fact that there are untouched fields does not mean the new regions would not be touched as well.

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POSTSCRIPT

Others will doubtless point out that McCain is "just as bad" on this topic, but I would disagree. McCain does propose the idiocy of carbon emissions caps, and he still opposes ANWR drilling, but he has recently come to his senses on off-shore drilling and supports new nuclear generators. So, while he would be bad on energy production, he is much less dangerous than Obama.

And more important, he has shown a recent move in the right direction, so there is hope he may yet have a change of heart, while Obama has been becoming more extreme, not less.

UPDATE 06/27/2008

I actually saw yet another explanation for the number fo leases held unused by oil companies which I had not considered. Even if oil companies have those leases, they don't necessarily have drilling permits. So they may have land they want to drill, not held in reserve, yet still not be able to drill due to lack of permits.