Getting government to pay your customers for buying your products is no substitute for creating compelling value. A marketplace dominated by political decision-making will result in neither innovation nor wealth creation. So why is American business allowing itself to succumb to the weakening influence of wealthfare?
Take T. Boone Pickens, the quintessential American entrepreneur, an oil and gas man. He has been prescient about the opportunity natural gas presents for reducing our dependence on foreign oil and reducing carbon dioxide and other emissions. As a geologist, he understood the enormous difference fracking would make in both the price and availability of natural gas. As an owner of natural gas-producing properties, he has an economic need to get the price and/or the volume of natural gas use up.
Nothing wrong with that. He's spent over $80 million dollars promoting his plan for natural gas use. Nothing wrong with that, either; it's his money and he's trying to expand the market for his product.
Originally his plan included wind turbines to replace natural gas for electrical generation and free it up as a transportation fuel. But even Pickens underestimated the pace at which natural gas supplies would increase and prices fall. He abandoned his wind turbine project when he realized that the turbines, despite huge subsidies, couldn't compete economically with natural gas as an electrical source.
Now he is for using natural gas for both generation and transportation; he needs a bigger market for the increased supply. Nothing wrong with a business person changing his or her mind in the face of changing economics; good business people do that well. One of the problems with government subsidies is that they are intended to run counter to economics (why else subsidize?), so they are not subject to marketplace reality checks.
Pickens' need and good policy for the United States pretty much coincide. We have huge reserves of domestic natural gas; its price has gone down while oil prices have gone way up over the last couple of years. Natural gas has less carbon and sulfur in it than oil or coal, so it releases less sulfuric acid and carbon dioxide when burned. Natural gas can be used to generate electricity (as it already is) and to substitute directly for oil in powering cars and trucks and heating homes (again, existing uses). We don't use much oil for electricity generation; increasing the number of houses heated by natural gas means building more pipelines (which we should do, but will take time), while switching vehicles to natural gas means that we need more natural gas fueling facilities.
The heavy truck fleet is a good place to start, since much of it could be served by relatively few fueling stations. 16% of the 20 million barrels of oil we use per day goes to fuel heavy trucks, so a switchover could lead fairly quickly to reduced use of oil. More converted trucks will result in more fueling stations, which will make natural gas cars practical for more and more applications and people.
But there's a business problem. Building natural gas fueling stations costs money; whose money is going to get spent? Today, truck engines that run on natural gas initially cost more than oil-powered alternatives, even though, according to Pickens, the lifetime cost of running natural gas trucks is lower because of lower fuel costs and the reduced maintenance need that results from burning a cleaner fuel. American truckers are not investing in natural gas trucks as quickly as Pickens would like. We are not displacing a substantial amount of oil as a transportation fuel.
The solution in H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011 (a.k.a. the Boone Pickens bill) provides billions of dollars in new tax credits for building and buying natural gas vehicles – up to $64,000 per truck - and for building natural gas fueling stations. This wealthfare bill has bipartisan support, even in this time of huge budget deficits. It has 157 co-sponsors in the House; President Obama has mentioned it favorably; Pickens likes it; and columnist Joe Nocera of The New York Times loves it: "If Congress can't pass this thing, there's really no hope."
Promoters of wind and solar projects don't like natural gas elbowing its way to the subsidy table where they (and corny ethanol) have favored positions. There's an understandable business reason for their opposition – but this opposition is also an indication of the problem with the subsidy culture: It shouldn't be government that decides on fuel (or any other) technology. Government has an important role in regulation for safety and environment; in enforcing honest weights and measures and advertising; in preventing monopolies; and as a customer. But the marketplace should determine which technologies, within safety and environmental constraints, win or lose.
John M. DeCicco of the University of Michigan's School of Natural Resources and Environment is quoted in Yale e360:
In general, I do not look fondly upon these technology winner-picking adventures that have been, and continue to be, a hallmark of America's failed energy policy. The U.S. transportation energy market is way too huge to create a business case for anything through taxpayer subsidies .... How many times does the country have to get it wrong before realizing that such approaches don't work?
The business problem of customer reluctance to make capital investments so they can buy your products is not a new one. If subsidies (tax incentives are subsidies) weren't a possibility, Pickens would have easily figured out the solution. How did wireless carriers get us to buy smart phones when they still cost $500 and weren't a popular technology? They (the private companies) subsidized the price of the phones and recovered their money through a long term usage contract. How did cable companies "sell" us set top boxes? They didn't; they rent them to us explicitly or implicitly.
Pickens, whose book is entitled The First Billion is the Hardest, has plenty of capital of his own and access to more. He believes that the lifetime cost-of-ownership of a natural gas truck is less than that of an oil-powered rig. He could buy the trucks and lease them to his customers in a deal which includes buying natural gas from him. That might force his competitors to do the same including those pushing different technologies. Great!
How did we get a network of gas stations? The oil companies built them and leased them out. Natural gas magnates like Pickens could start by building fleet-filling stations (with an exclusive contract to supply them) and go on to public stations. This not rocket science. This is how economies grow and technologies change.
The subsidies already on the books for competitors like electric vehicles and corny ethanol are a problem that natural gas entrepreneurs have which only government can solve. H.R. 1380 methodically goes through the tax code and adds credits for natural gas where there are already subsidies for other politically-popular fuels. A much better approach would be to just delete each of these sections and all of the subsidies from the tax code.
Which brings us back to the question above: Why is American business allowing itself to succumb to the weakening influence of wealthfare? Answer: Business people have to go after the lowest price capital; if someone else is getting a subsidy, they need one as well in order to be competitive.
But grant-grubbing and subsidy-seeking is bad for the national economy and displaces innovation with lobbying. Let's remove the subsidies and some regulatory obstacles; we will probably then see a quick swing to natural gas, given the price of oil. Unless some better fuel comes along, which would be fine also. And we'll reduce the deficit instead of adding to it.