A New American Energy Policy

Dec.22.08 | About: VanEck Vectors (GEX)

One has to wonder when a country has such fine engineering schools why its “engineering economy” is in such disarray. Think of all the great engineering schools in this country: MIT, Cal Tech, Stanford, Georgia Tech, the University of Illinois, Cal Berkeley - the list goes on and on (sorry if your alma mater was omitted). These engineering schools are regarded amongst the best in the world, and students from India, China, the Middle East and Europe, all across the world come here to study.

With all these fine schools, the inevitable question pops up: why are we non-competitive in cell phones, automobiles, mass transit, and leading edge manufacturing? There is some good news…the US is home to Google (NASDAQ:GOOG), Boeing (NYSE:BA), and some high level electronic and computer systems design, and we are real good at military defense (although certainly not cost efficient in that area), but overall, when it comes translating our engineering school prowess into US economic advantage, we seem to be lacking. What is that vital ingredient?

The answer is twofold: management and policy. How else can one explain Motorola’s (MOT) fall from inventor of the cell phone to a 3% market share? Or the “Big 3” automakers' approaching bankruptcy? Let’s face it - US management of multi-national corporations couldn’t care less about American economic performance. Greed is their biggest concern, as shown by the tremendous increase in CEO executive pay. It’s hard to notice many of these same executives became very wealthy while they drove their companies into the ground. Seems like anyone could do that, so why pay out the nose for a Harvard MBA with a pedigree? You might be much better off with an engineer!

From a policy perspective, Congress is only too willing to participate. For years, companies were actually rewarded for shipping jobs overseas. Small businesses were given tax breaks to purchase SUVs, thereby negatively influencing Detroit’s problems. Congress sold out to big oil and auto lobbyists and refused to raise fuel-efficiency standards. Let’s face it, engineering expertise in America is sufficient if not superb, but management and policy is pathetic. Throw in unregulated financial markets and some unwise decisions from Washington, and boy, are we in for a world of hurt.

I was reading the Saturday edition of the Wall Street Journal when I came upon an article about Obama’s desire to increase the percentage of the Transportation and Infrastructure budget stimulus package dedicated to mass transit. It would take this additional share from the highway and bridges, and showed this chart:

Highways & Bridges
Environmental Infrastructure
Click to enlarge
Total $85.43 Billion

Traditionally, the article says, mass transit is usually funded at 25% of highways and bridges, so this budget (40%) is an increase. Although I agree very much about increasing funds toward mass transit, what does this table tell us about “management and policy”? Well, first off, I cannot help but noticing the total of $85.43 billion is much less than the $700 billion given Paulsen to “bail out” the Wall Streeters and bankers. Second of all, wasn’t it Hank Paulsen who years ago was such a big supporter of the deregulation of the financial industry which is partly to blame for its demise? Ok, well, I suppose it’s time to reward him for his excellent performance in that regard. So much for “management.”

With respect to policy, what this chart tells me is, despite $145/barrel oil and $4.50/gallon gasoline, we still don’t seem to get the big “policy” issue right, and of course I am speaking about energy. Although I agree wholeheartedly with spending more on mass transit, why is the highways and bridges portion funded at such levels when we have seen a drastic reduction in the number of miles driven this year? Doesn’t it seem more strategic to make sure you have the right vehicle mix (NGVs, electric, and hybrid) to drive on these roads and bridges before building out the infrastructure further?

Also, I sure would like to see a breakdown of the “environmental infrastructure” portion of this budget. How much for natural gas powered transportation and infrastructure? Sure, it’s a fossil fuel, but it is considerably better from an environmental aspect than is gasoline. What about electric battery research and development? A recent article in the Economist magazine opined the US is about to trade its dependence on foreign oil to Asian dependence for electric batteries. That can’t be good.

What about rail? Does that include high speed rail or is that considered “mass transit”. Why is rail so small? What constitutes “Other”? Bottom line, it is amazing to me that we can send Paulsen $350 billion, and now he’s back for the next $350 billion, with a blank check, and then we look at what is being spent on “infrastructure” and not only are the numbers much smaller, but I have to seriously wonder about the “management” and “policy” measures indicated by the raw numbers shown in this article. The Obama team has a wonderful opportunity to begin some great programs with this stimulus money – are they going to blow it?

Which of course brings me back to my favorite subject: how can America engineer an economic recovery and take control of its future economic performance? The answer is simple: adopt a strategic, long-term, comprehensive energy policy. Apply common sense management to this policy, and the country has a chance. Windfall profits taxes on big oil? Certainly not! That is a big policy mistake. Bailing out GM and Chrysler without requiring the existing CEOs to step down? That is a big management mistake. So, Congress continues to make management and policy errors (big surprise huh?). That said, below I give them an energy policy. It is up to them to manage it properly. Here it is.

A Strategic Long Term Comprehensive Energy Policy

STEP 1: Acknowledge the Problem

No difficult problem can be solved until it is first acknowledged. US government and media need to honestly inform and educate the American people and policy makers at every level about the threat worldwide oil supply/demand realities pose to the US. The US uses 25% of worldwide oil supply, yet owns only 3% of the world's proven reserves. The US imports 70% of its oil, enriching unfriendly countries such as Russia, Saudi Arabia, Venezuela and Iran. We are going bankrupt in the process, not to mention funding both sides of the "war on terror". Our US dollar currency is weakening. These are the basics of the energy challenge facing America.

The energy crisis needs to be attacked with realistic information and wise policy decisions. A strategic, long-term, comprehensive energy policy must be adopted, publicized, and executed. The basic components of such an energy policy are listed below.

STEP 2: Conservation and Energy Efficiency

  • Increase gas guzzler tax penalties and encourage gas sippers via increased tax rebates.
  • Increase CAFE standards. "Open fuel standards" autos should be encouraged.
  • Impose a top speed limit of 60 mph nationwide.
  • Adopt four-day workweeks wherever and whenever it makes sense.
  • Conservation and efficiency guidelines should be issued by federal, state, and local governments with respect to building codes, lighting standards, etc.

STEP 3: Transportation Initiatives

  • Government encouragement and tax incentives for development of non-gasoline powered personal transportation and mass transit. This includes natural gas vehicles (NGVs), electric vehicles, and hybrids.
  • Natural gas transportation initiatives: develop affordable natural gas refueling appliances for home garage installation; build out natural gas refueling stations along the nation's interstate highway system; government vehicle fleets should switch to NGV’s. Encourage local municipal use of natural gas (refuse pickup, buses, mass transit, etc).
  • Develop electric and natural gas powered mass transit for people and goods.
  • Institute a new federal gasoline sales tax – let’s call it the “energy freedom tax”. This tax will begin at $0.04/gallon in 2009 an increase $0.02/gallon every year for the next 20 years. The revenue generated will go *only* toward building the natural gas, nuclear, and electrical infrastructures.

STEP 4: Prioritize and Invest in Non-oil and Oil based Energy Sources

  • Construct a trans-Canadian natural gas pipeline from Alaska to the lower-48.
  • Begin a government sponsored “battery technology” program (similar the successful Sematech organization for semi-conductor technology) in order to insure that the US is not only the leader (we are way behind now…) in battery research and design, but also in battery *manufacturing*.
  • Invest in natural gas infrastructure, wind, solar, nuclear, geothermal, and tidal energy to power non-gasoline powered transportation solutions described in STEP 3 above.
  • In order to use the power generated from the above non-oil sources to power automobile solutions, update the natural gas & electric grid infrastructures and dramatically increase the capacity of both.
  • The government must deem electric transmission lines a matter of national security and thereby invoke eminent domain in order to construct them as needed to deliver solar and wind energy from source to consumption.
  • Wind and solar power generation of hydrogen via electrolysis as a storage mechanism for calm and cloudy days. Hydrogen power generation needs encouragement.
  • Streamline permitting and construction of LNG terminals on both US coasts.
  • Streamline permitting and construction of latest generation nuclear power plants.
  • Open the continental shelf and Alaska to oil and gas drilling. Extract royalties on these resources to assist funding of the non-oil based components of this energy plan.
  • Research and development of clean coal-to-liquids and coal gasification.
  • Biofuels should be encouraged but not at the expense of runaway food inflation.
  • Abolish corn ethanol mandates. They cause major distortions in the food chain, inflation, and development of other more economic alternative energy sources.
  • Abolish import taxes on Brazilian ethanol.

STEP 5: Social Initiatives

  • Encourage local sustainability in energy, food production, and transportation.
  • Encourage population control through education.
  • Encourage green power education, business, and industry.
  • The US voting public should demand energy accountability by its political leadership.

These are the tenets of a sustainable and strategic long-term American energy policy. However, as shown before, policy is insufficient without effective management: we need both.

The other day a friend of mine said “Fitzman, you do realize the greenies are going to kill the US economy?!” To which I replied “while that is a projection, it’s quite clear the current oil-centric policies of the US are not only killing the economy but also the environment along with it.” So, many folks still don’t agree with the need for such a comprehensive energy policy to move away from oil, and current low oil prices do nothing to support my advice. That said, the only way we can insure our economy will prosper in the long-run is to reduce our dependence on foreign oil.

Does anyone really believe once the world economy recovers and oil demand picks up again, oil prices won’t again reach skyward? Foreign oil producers will again be in the catbird seat and will be able to checkmate the US economy (again), like a horribly bad movie re-run. In an era where worldwide oil supply will not keep pace with worldwide oil demand, a country that uses 25% of the world’s oil simply must take steps to reduce that oil dependence.

The energy policy above does just that. We could easily reduce our foreign imports by 10% in one year by adopting this policy. Moving a portion of our cars and trucks and fleets to natural gas over the next 5 years could save another 5-10%. That’s an easy 15-20% of imports (some 3 million barrels of oil a day) that is relatively low-hanging fruit, meaning it’s achievable via policy adoption and currently available technology and American resources. That buys us valuable time to begin the build out of wind and solar and nuclear energy supplies and infrastructure. It also buys us time to develop the battery technology and electric cars to make use of the new alternative energy supplies.

America can have a bright economic future, under our own control, while simultaneously reducing green house gas emissions. But we need less financial tom-foolery, more applied engineering, and a strategic energy policy driven by competent management. Only then will we have equity and currency markets that will be worthy of long-term investing. It can be done. There would be a plethora of investment opportunity associated with such energy policy initiatives.

The jury is still out on whether or not the Obama team has the right stuff to craft stimulus policy directed toward our biggest challenge (foreign oil dependence along with an oil based economy). Hopefully they do (I am available at no charge if they need help). The next decade is critical for the US to solve its energy problems. We must make a gigantic leap in the right direction starting in 2009. We likely will not get another chance and we have a few short years before the realities of peak oil and the worldwide supply/demand equation catch up with us yet again. We had better be a good way toward solving the problem by then - there won’t be anyone to bail America out of the next energy crisis.