In his State of the Union address last week, President Obama characterized this moment in history as a “Sputnik moment” for clean energy technology.  He promised to send to Congress a budget to help meet the goals of investing in better research and education to position the United States to win the clean energy technology version of the Space Race to the moon.  He called upon Congress to back such innovation by eliminating the subsidies of “yesterday’s energy,” the oil industry.  His goal is to have 80% of America’s electricity come from clean energy sources within 25 years. 

Needless to say, in the current economic climate, with many newly elected to Congress on platforms of holding the line on taxes and reducing the deficit, increased or new spending in any areas, even in “investments” having high economic multiplier effects, will be a tough sell.

In 1973, President Nixon made a similar call for energy independence, recalling the “lessons of the Apollo project and of the earlier Manhattan project.”  He pledged that by 1980, under what he dubbed “Project Independence,” America would be able to meet its own energy needs. 

As we know, America’s dependence on oil, especially foreign oil, continued to grow and Project Independence never got off the launch pad.  While this failure may in part be due to the cloud of the Watergate scandal hanging over President Nixon at the time, American motivation to focus on achieving energy independence waned as a result of poor economic conditions, concerns over government deficits and the easing of the oil crisis. 

The graph below shows inflation adjusted prices for a barrel of crude oil since the end of World War II.  From 1973 until 1979, crude oil prices dramatically increased.  This coincided with a period of “stagflation”, where inflation and high unemployment caused a swelling of budget deficits, greater government borrowing and increased interest rates, leading into the recession of the 1980’s.  By 1986, the price had fallen back to something resembling pre-oil crisis levels, lessening the pressures to push for a new energy policy. 

Throughout the first decade of the 21st century, however, prices again rose, spiking at an all-time high in June of 2008.  Crude oil prices today remain high, hovering around $90 per barrel and showing an upward trend.  The question posed by many during the last two years is whether the economic conditions are again ripe for a period of stagflation 1970’s style.

If President Obama is to obtain the investment in clean energy technologies that he seeks, he will have no choice but to offset that “investment” spending with savings on government programs that do not set the stage for this country to lead in the clean energy future.  While U.S. GDP grew 3.2% in the last quarter of 2010, it remains too early to tell whether the predictions of another period of stagflation will prove correct.  To the extent the price of oil continue to rise or remains high, it will do at least as much as government investments to stimulate the growth in clean energy technology.  The reduction in oil subsidies called for by the President, if Congress actually adopts it, will help maintain a higher price of oil.  The challenge this time is to avoid triggering stagflation and an economic downturn like that which contributed to the collapse of Project Independence.

The President’s upcoming budget will be the first test of his resolve to reduce spending while investing in a new energy future.  Let’s hope that he delivers a budget that will permit the many new members of Congress to return to their districts to report that they have reduced spending while wisely prioritizing the remaining expenditures to safeguard our future.