An Energy Policy that Makes Cents (and Sense)

Advocates of the peak oil theory, such as myself, have a patriotic duty to propose solutions to the challenges of addressing peak oil. Before the policy is unveiled, there is first need for some discussion.

The challenges of dealing with peak oil are so daunting as to require strong government action (federal, state, and local). Some folks believe government should stay out of ALL business issues and let the "free markets" solve all problems. However, governments do have a role to play in very large endeavors affecting the entire nation. Raising and maintaining armed forces and the interstate highway system are two examples where government activity is and was required. Don't even get me started on the Fed's current activities with Bear Stearns (BSC), which I will address in a future posting. For now, suffice it to say that the challenges facing the United States as a result of peak oil are so daunting, and the economic threats are so serious, as to require the government to act in a substantial, urgent, and intelligent fashion.

Oil is at $100/barrel and rising; the US dollar is dropping like a rock; the S& P500 has done nothing in years, and inflation is high and rising. CEOs of major oil companies took the unprecedented steps to publicly say, at the World Economic Forum in Davos, that worldwide oil supply will not keep up with worldwide oil demand by the year 2015. That is only 7 years from now. If oil prices are $100/barrel today (while oil supply and demand are balanced), what will prices be in 2015? Regardless, it is well past the time to take action.

Since the US has no real energy policy today, the time constraints enforced by peak oil will require our new energy policy to be correct the first time around. I suspect we will not get a second chance. Below is an outline of a comprehensive energy policy that tackles the challenges of peak oil head-on. It will require sacrifice and present many challenges to the people of our nation. We must be up to the task.

• The first step in an energy policy that addresses peak oil is to start acknowledging the problem at the highest levels of government. No difficult problem can expect to be solved until it is first acknowledged. We need to make the words "peak oil" as prevalent on the lips of Americans as is "Britney Spears" or "Hannah Montana". Every citizen needs to know exactly what is at stake here.
• Although the policies listed below are, for the most part Federal initiatives, it should be understood that state and local governments, including the association of governors, should be major role-players. They are best able to address issues like mass transit in their cities, power generation and transportation issues which are unique within their boundaries, and other similar aspects of an overall energy policy which are best dealt with at the state and local levels.
• Since transportation is the US's largest use of imported oil (gasoline), we need to immediately increase tax incentives for highly fuel efficient vehicles. At the same time, we need to place *very* large penalty taxes on purchases of low mileage SUVs such as the Hummer. Yes, Americans are free to drive what they like, but if they chose to buy a vehicle that threatens America's economic prosperity and security they must be made to pay through the nose. The tax revenue from the sale of these idiotic vehicles will directly fund the the tax rebates for fuel efficient vehicles. That way, if your neighbor drives a Hummer, you can thank him for helping to pay for your Prius.
• We need higher fuel economy CAFE standards passed sooner rather than later. The recent legislation Congress passed on CAFE standards won't be fully implemented until 2021(!). Are you kidding me? The game will be over by then if we don't take more intelligent and immediate action. We cannot continue to let the US automobile lobby draft legislation governing mpg standards.
• American automobile manufacturers must receive government incentives to design and manufacture alternatives to the gasoline powered internal combustion engine. The assistance received will depend on the quality and timeliness of delivery of said vehicle, be it an electric, natural gas, or hydrogen powered solution. The goal should be for the vehicle to have a range of at least 300 miles per fueling and be manufacturable by 2012.
• Such an alternative vehicle solution will likely be powered by electricity. We therefore need a massive government led initiative to build out our non-oil and gas based electrical power sources and to update our electrical grid infrastructure. We need to free up natural gas for transportation and heating.
• Power sources that should be financially and otherwise encouraged by the government are nuclear, wind, and solar. We will need massive amounts of electricity from these sources, and we need to begin right away. Nuclear plants require long lead times to license and build and we should have started yesterday.
• Ethanol is a losing proposition in my opinion. It has probably saved some oil, albeit at what cost? The price of grains have skyrocketed causing real inflation at the grocery store for everything from bread to beef and chicken. Also, with the affects of global warming, the water requirements of ethanol will become a real issue. Government should stop subsidizing ethanol and instead put these subsidies on wind and solar energy as well as building out the electrical grid. Besides, ethanol actually encourages further use of gasoline and in some ways gives American's the impression that it is the "answer" to higher gasoline prices. It is not.
• The US has huge coal reserves, but coal is dirty. We need more research done in the area of coal-to-liquids and coal gasification so that we can harness the energy in coal without destroying our environment. I don't know if that is possible, but surely we need to find out. Soon.
• The Federal government, the state of Alaska, and Canada, need to get off their collective duffs and commit to building a much needed, and long overdue, natural gas pipeline from the gas fields of Alaska and Canada to the lower-48. This is such a common sense deal I get ill everytime I realize it is STILL not a work-in-progress.
• Conservation guidelines should be issued by the government and local utility providers. I cringe when I see huge displays of Christmas lights which burn all night long. It makes me realize how clueless most Americans are and what a long way we have to go. We should be penalizing such indiscriminate use of power.
• "Alternative fuels" should be encouraged but only after careful study of all relevant data. Ethanol is an example where short-sightedness, simple analysis, conclusions, and "bandwagon" jumping can end up with failed policy initiatives which are harmful to the overall objectives of a sound energy policy. (I don't consider wind and solar to be "alternative" energy sources. Wind is economically viable today, and solar be shortly).
• Lastly, as a country, we really need to evaluate our policy of not drilling for oil off the coasts of California and Florida as well as the existing drilling limitations in Alaska and elsewhere.

These then should be the central themes of a comprehensive energy policy. The policy needs to be drafted in simple unambiguous terms. The tax policies need to be long term and phased in/out in a sensible fashion so that business can plan their budgets accordingly without having to worry about the outcome of the latest election.

Now, my friends say, "Mike, what's with the nuclear solution, I thought you were an environmentalist?" Well, I am an environmentalist! Burning coal is simply killing the environment, period. CO2 is one issue, but the mercury being dumped into our water table is just as serious an issue to me. Anyone know the half-life of mercury? We have ignored peak oil for so long, we have no choice now but to license and build nuclear reactors as quickly as possible. Yes, I understand the issue of nuclear waste. That said, the Energy Department has been working on the technology to post-process spent fuel and make it less hazardous. We should increase research and development of all stages of nuclear energy. We will need all the non-oil energy we can get.

With respect to global warming, all I can say is this: peak oil has the ability to completely wreck our economy by the year 2015. Global warming, which I am in complete agreement with, does not have the power to wreck our economy for decades. So, which is the most urgent threat? Answer: Peak Oil. The solutions of either address both, but I bring up the distinction because it is a question of priorities and urgency. I surely wish Al Gore's recently announced "Alliance for Climate Protection" campaign would have instead funneled their 3 year $200 million Euro resources into a campaign called "Peak Oil Education and Policy". It would have accomplished the same end result, but done so in a way that would have mobilized solutions at a much quicker pace. I'd give anything in the world if people used the phrase "peak oil" as much as they did "global warming".

Another question I get is, "Hey Fitz, why would you allow drilling off the coast of Florida and California?". Well, the obvious answer is because we need the oil! Also, drilling technology has become much safer,ecologically, than in the past. Some people say, "Fitz, aren't we smart to hold onto these oil reserves and use other's oil first? Our oil will just get more valuable, right?". Well, I suppose that is one way to look at the issue. The other is that we continue to devalue our currency by sending billions out of the country every day to buy foreign oil. Also, it takes from 4-10 years to adequately bring an offshore oil field online. My fear is that we simply don't have the time to wait any longer.

Other friends say, "Mike, we simply can't economically afford to do as you suggest." My response is that we cannot economically afford not to do what I am suggesting. For years the US auto industry has complained about higher fuel-efficiency standards. They cried "It will be the end of US automobile industry!" Well, GM (GM) and Ford (F) got their way, yet they have continued to lose market share to Honda (HMC) and Toyota (TM) at such a rate that, I believe, they will be out of business, or at least completely marginalized, within the next 3 years. Instead of looking at peak oil issues and spotting a huge opportunity, they have insisted on building large SUVs and Hummers and ignoring reality.

It amazes me.

The other side of the business aspect is very positive. General Electric (GE) is the largest builder of wind turbines in the world, and would benefit greatly if a massive program of wind energy were to be put in motion. Also, the variability of wind power has a need for software programmers and utility companies to work on solutions for maximizing delivery and use of wind MW. There is huge potential for developers in this area. Today, many solar companies are profitable, growing, and creating jobs and hiring employees. Boone Picken's company Clean Energy Fuels (CLEN), which trades on the NASDAQ, is pushing the envelope in natural gas powered vehicles (NGVs) and the infrastructure to support them. Pickens also has a vision of an economically revitilized mid-continent with economic activity centered around wind power up and down the central plains where favorable currents swirl. Pickens is now building a huge windfarm in the Texas panhandle. Organizations like Shai Agassi's Project Better Place are taking the lead in promoting electric vehicles and a concept he advertises as a "virtual oil fields". In fact, an agreement was recently reached between Better Place, Renault-Nissan, and the State of Israel to begin a mass deployment of electric vehicles and the infrastructure to support them. The end goal being to eliminate gasoline powered automobiles from the country. My understanding is that Denmark has also reached a similar agreement.

The longer the United States waits to address the realities of peak oil, the harder the task will become. If we do not act soon, it will simply be too late and we will suffer a decrease in our standard of living which, I can assure you, the American people are not only not ready for but can scarcely imagine. We are already beginning to see the affects of peak oil today, and in the last few years. On the other hand, prudent action, while requiring sacrifice and hard work, can revitalize our country and usher in an entirely new era of economic prosperity. I certainly hope the next administration choses the later path. You, the reader, can make a difference by speaking directly with your elected officials on the issue. Send them an email today with a link to this Seeking Alpha article. Remember, it feels good to be a true patriot!

Disclosures: I do not own HMC, TM, GE, CLEN, and I certainly do not GM or F.

Comments

[Michael Dwyer]

Words well said. Something that might well facilitate your approach is Tradable energy Quotas. See TEQS.Net.
Tradable energy Quotas is a system that subsidises the frugal energy user and the heavy user does the subsidising.
Further the market works out the subsidy.
Further, the 20 year budget ensures consumption comes in on target.
Its good. Have a look if you have time.

2008 Apr 04 07:26 AM

[bluesmoke]

This essay is so important it should replace our pledge of allegiance. I too am amazed at the lack of leadership our "leaders" have provided. Disgusted would be a better word.

2008 Apr 04 10:08 AM

[VirtualOptics]

Coal ALREADY has a means to make clean energy and that is through conversion to methane and methanol...see Methanex (MEOH) who is already doing this in South America. This in turn can be converted to gasoline and diesel fuel in the short term by the Fisher-Tropse process. This is described in the following article available online: gasification.org/Docs/...
The general process is called Integrated Coal Refinement (ICR) and can be researched easily online.

Reversal conversion of carbon dioxide to the atmosphere (creating greenhouse effect) has some active research in albedo modification through increasing cloud cover over the oceans. Here is a link to a basic paper on that proposal: ccc2006.ca/docs/Abstra...

2008 Apr 04 10:20 AM

[Mmarrkk]

I've had several people (including my wife!) ask if we have such a problem with energy, why doesn't the gov't put back in place the 55 mph limit. My response: COME ON PEOPLE! GOV'T CAN'T DO EVERYTHING. If you are worried about the price of gasoline and its impact on your budget, VOLUNTARILY drive 55 mph. Don't wait for the Gov't to legislate! Jeezum. My wife has started speaking to me again, barely, as she drives 80 mph down the road!! This is why we have a crisis; people want the Gov't to fix it. When did they fix anything???

2008 Apr 04 10:25 AM

[GH]

I'm with you philosophically, but you have a lot of obvious misperceptions here.

- Just taking coal out of the ground ruins the environment; no need to burn it.
- Just like coal, nuclear doesn't make sense unless you ignore the pollution it generates and the lost real estate and water. In 50 years of trying the waste issue hasn't been solved; stop throwing money at lost causes.
- Additional coastal exploration for fossil fuels damages a key ecosystem from which we're getting food.

I could go on. My only point is: go back to the books, you have a lot more to learn.

2008 Apr 04 10:36 AM

[retired358]

Fully agree with article.

Some additional thoughts:

We need to tap all available hydrocarbon sources. North America has some of the largest deposits of oil sands, coal and shale oil in the world.

There are processes available to convert these to fuel today at prices well below current crude prices.

The problem is the very large capital expenditures needed and the risk to these investments if crude prices were to fall.

The solution (not that I like gov. intervention but we have that already) is for Congress to pass a price support for all alternatives at say $60-65/B equivalent. This would allow the massive capital expenditures necessary to bring these (and other) alternative sources on-line.

And, it would cost the taxpayers nothing assuming crude prices remained above $65/B. Should crude fall to say $40/B, then, yes, taxpayers would support less than 20% of our energy needs at $65/B but the remaining 80% would be at $40/B for an average of $45/B. Would that not be better than the current price of $100/B?

And, if this policy were announced, crude prices would fall immediately - speculators would flee the futures market and crude producing countries would increase supplies to try to persuade companies not to invest in alternatives. They fear alternatives.

Seems like a win-win.

2008 Apr 04 10:49 AM

[retired358]

GH: Agree that nuclear waste issue needs to be solved.

However, coal can be used and converted to fuel in an environmentally friendly way and the land returned to a better state than it was (reclaimed). We can develop energy in coastal areas without destroying them (it is happening elsewhere in the US).

You point is to limit these potential sources of fuel. So, I assume that you would rather pay $6-10 for a gallon of gasoline in the future and live in a world with a much lower standard of living. You cannot have it both ways.

2008 Apr 04 10:55 AM

[User 172992]

Good article - a minor quibble GE is the largest company in the world which makes wind turbines, It's not the largest wind turbine manafacturer. Both Vestas and Gamesa sold more turbines (by value) and Enercon makes bigger turbines.

I agree with almost everything else you said - I think it will be a long time before the majority of people will follow this good advice. Most of them are stuck in the denial phase of the whole peak oil - coming energy shortage. I would have to say when the consensus opinion changes to believing this is happening in the states I think there will be incredable anger in the general population. "I cant drive as big a car as my dad could" is going to push some people over the edge. I worry about that.
At least in Europe we have (mostly) accepted that we are no longer the rulers of the universe and (might) weather this particular storm a bit easier.

2008 Apr 04 11:23 AM

[otis the impaler]

There are only two solutions 'if' peak oil is a reality now (meaning now or in the next ten years).

The first is the 'immediate' discovery of an as of yet unknown alternate source of energy that is on par or exceeds that of oil. Like the 'dilithium crystals' that power the Star Trek Enterprise. None of the current alternatives are scalable on a level that can sustain our current lifestyle and population or they are hazardous to our health and the longevity of the planet itself.

The other solution is mass enlightenment or an overnight evolution of our species that immediately allows us to realize that the civilization that we have created is simply not sustainable in the long run. This won't happen all on it's own. It might happen if the worst case scenario of peak oil becomes reality but there is no guarantee. What ever comes after the fall of this civilization may be even worse. Unbridled growth does not work on earth. The universe may be a different story. But we live on a planet where growth appears at least to be limited by natural forces.

So sit tight. Do what you can to prepare for the possibility. But don't forget to live a decent life today.

2008 Apr 04 11:31 AM

[Itsonlymoney]

I would like to add the idea that we can still do more with less, not just with increased fuel efficiency. So many people want to drill, mine,and process the last of the fossil fuels even before attempting to alter our hugely wasteful lifestyles. A generation ago we talked about "voluntary simplicity". Lets revive this idea as well.

The price of oil is still cheap when we consider the amount of work this energy will accomplish. We are still using it to perform meaningless activities so the price must necessarily continue to rise until its true worth is valued. As the costs increase, purchasers will and are evaluating the importance of their uses and adjust accordingly by using less or demanding alternative and more efficient means to accomplish the same tasks.

Travel to places where peoples can't afford personal transportation and you will see that flexible, efficient, and plentiful public transportation does exist. We suffer from the opposite dilemma here. Because almost everyone can afford their own car, the roads can't handle it and the transportation system breaks down.

The next President must have a coherent energy vision in order to stimulate positive rather than reactive economic changes. This President's activities have done us the service of pushing oil prices so high that our grim energy future has at least caught our attention. With luck, the next administration will seize the opportunity to stimulate investment in a clean, efficient, and sustainable energy outcome. We need to figure this out, not just for now, but for all time.

2008 Apr 04 11:59 AM

[yank]

Good points. The conservation issue should be linked with increased supply, and increased efficiency. However concerning the 55 mph limit, several young people performed an ad hoc test in the Atlanta metro area last year. They had 4-5 drivers get on the interstate at 6 am and all drive 55 mph. They each occupied all 4 lanes and by 7:15 am the entire loop around Atlanta was completely gridlocked. In many of our larger cities like Atlanta, the volume is just simply too huge to make a 55 mph limit practical. Simply a matter of physics I suppose. Too many people trying to occupy too confined an area. Your other points were excellent.

2008 Apr 04 01:59 PM

[Fred W]

Agree with much of what you say...however your view that natural gas is a fuel to utilize more is misinformed. We need to get away from NG asap, 51% is of the world's supply is in Russian and Iranian hands...U.S. supplies are very thin.

2008 Apr 04 02:19 PM

[vboring]

incentives are ridiculous and open to perversion.

just use the markets: cap and trade all CO2 production, including gas and diesel.

the markets will find the most efficient answer.

meanwhile, continue funding fundamental research no market would ever pay for.

2008 Apr 04 02:22 PM

[Michael B. Krause]

I totally agree with the jist of this... So much that I made my own contribution in a letter to politicians on the concept. Similar minds think alike I guess:

scriabinop23.blogspot....

And on ethanol: scriabinop23.blogspot....

2008 Apr 04 02:53 PM

[THofler]

Amen Mike (mostly). About the "let's increase the CAFE lots" issue: I think that's much too blunt of a tool. Here's a specific case in point. Would you like to buy a inexpensive car that gets 84 mpg highway?

It's called a VW Polo BlueMotion. I saw it at our local racetrack (Mazda Laguna Seca) in Oct. The VW rep. said it will never will never be imported from Europe to the US (not good enough in crash tests he claimed).

The fuel efficiency secret? It has an improved 3-cyl diesel engine. OK, it takes 12.8 sec for 0 - 60 mph, but it will do well over 100 mph. We don't need to slow down on the freeway; we need diesels! (And better aerodynamics.)

Heck, I'd buy one, but ALL diesel passenger cars have been ILLEGAL to sell in California for years! This is the real reason these cars are not being imported or built by US car makers. It is about time those of us with our heads screwed on put a stop to environmentalism run amok.

Diesels clatter noisily; its been fixed. Diesels smell bad; the sulfur has been removed. Diesels emit more NOx; its been fixed. Diesel engines cost more; $200 or $300? Chump change! Diesels emit sub-micron particles; a red-herring of a health issue, but its been fixed at a small cost to fuel efficiency.

Diesels always have lousy acceleration? Would you like a 500 hp super sports car that gets 25 mpg? Audi has an R8 sports car with a V-12 diesel.

Finally, the killer solution (but more expensive) is the plug-in diesel electric car that could be run on soy oil, or peanut oil, or jatropha oil, as well as that nuke power plant. But first we've got to stop the environmental insanity.

2008 Apr 04 03:21 PM

[hotdoggy]

A few years ago I read an article in Wired Magazine that suggested doing something similar to Kennedy's challenge in the early 60's to put a man on the moon but in terms of hydrogen energy (as I recall, anyway). Since then I've heard similar proposals and it's always seemed like a great idea to me, whether it's hydrogen or not. But, as Fitz points out, any major initiative (like this or others) needs to come from the top levels of government.

One point that I don't agree on with Fitz is the issue of nuclear energy. I've seen a lot more press about it in the past year particularly with regard to people that traditionally would have been against it (like Fitz, I'm assuming). One disaster on the scale of Chernobyl---whether accidental or a terrorist strike---makes it not worth it to me, particularly as these are closer and closer to large populations.

Nuclear waste is not the only issue and the arguments I hear in favor of nuclear power do not convince me. My favorite is that nuclear power is "green". It's only green until there's a problem and it's kind of like saying that transporting oil in the Exxon Valdez didn't pose a threat to the environment...until it ran aground.

2008 Apr 04 05:27 PM

[RSajan]

For those of you who are still worried about nuclear power, please take the time to challenge your fears by reading the book "Power to Save the World: The
Truth About Nuclear Energy", by Gwen Craven.

Ms Craven was very anti-nuclear, even before the Sierra Club turned against it. She has however changed her mind. You can read her editorial about her book on Amazon:
www.amazon.com/Power-S.../

Some interesting facts about nuclear energy from her editorial:

-Uranium is more energy-dense than any other fuel. If you got all of
your electricity for your lifetime solely from nuclear power, your
share of the waste would fit in a single soda can. If you got all your
electricity from coal, your share would come to 146 tons: 69 tons of
solid waste that would fit into six rail cars and 77 tons of carbon
dioxide that would contribute to accelerated global warming.

- Spent nuclear fuel is always shielded and isolated from the
public. Annual waste from one typical reactor could fit in the bed of
a standard pickup. The retired fuel from 50 years of U.S. reactor
operation could fit in a single football field; it amounts to 77,000
tons. A large coal-fired plant produces ten times as much solid waste
in one day, much of it hazardous to health. We discard 179,000 tons of
batteries annually--they contain toxic heavy metals.

- A person living within 50 miles of a nuclear plant receives less
radiation from it in a year than you get from eating one banana.
Someone working in the U.S. Capitol Building is exposed to more
radioactivity than a uranium miner.

US energy production:
* 75% of that baseload electricity comes from power plants that
burn fossil fuels, mainly coal, and emit carbon dioxide. Toxic waste
from coal-fired plants kills 24,000 Americans annually.
* 5% comes from hydroelectric plants.
* Less than 1% comes from wind and solar power.
* 20% comes from nuclear plants that use low-enriched uranium as
fuel, burn nothing, and emit virtually no CO2. In 50 years of
operation, they have caused no deaths to the public.

I hope some of these facts have at least made you question your fears about nuclear power. Hopefully Ms. Craven's book will help you realize just how environmentally friendly nuclear power really is. Hopefully articles like the one here by Fitzsimmons, will make it clear to all American's how incredibly important it is that we build up our nuclear power generating capacity.

Michael Fitzsimmons, excellent articles btw! Keep up the good work.

2008 Apr 04 06:16 PM

[E.D. Hart]

The government needs to start a mission on the scale of the Manhattan project to fund energy research, competitive projects that win dollars as they succeed.

Projects that don't pan out would get cut.This needs to be on the order of trillions of dollars of research for a decade or more.

One of the biggest tragedies of the Iraq war is that we will have spent $3 trillion or more by the end of the war and we will have not achieved peace in the middle east, nor democracy, and certainly not a reduction in terrorism, nor secure oils supplies.

What we will have achieved is the removal of a brutal and evil dictator, and it only cost $3 trillion.

That is money that should have been spent on National Energy security/research that would pay real dividends and economic benefits for decades.

It is both comedy and tragedy when Bush says "we need to break our addiction to oil". He has insured that we are addicted to oil by doing nothing.

2008 Apr 04 07:33 PM

[Tedspick]

I will copy and save and distribute this post to everyone I know. The various "yes but.." comments miss two key points: 1. The peak oil problem is an economic disaster that MUST be addressed FAST and 2. There are ways to handle the environmental concerns over drilling and nuclear issues and dirty coal etc. - they require research, development, regulation, and tax assistance but are not unsurmountable. Watching angry truck drivers do a "slow down" and seeing mass movements to turn off the lights for an hour along with other laughably ineffective efforts to do something offers a serious warning - just wait for the chaos that comes when gas is $5 per gallon. Those days are approaching. Note that the media prefer to offer air time to worthless rants against big oil corporations for so-called unconscionable profits instead of offering thoughtful analyses about the real cause of the problem. Our society at large is unfortunately ignorant of reality and are fed nonsense. The complicity of the media to continue feeding misinformation to the public is what's unconscionable.

2008 Apr 04 08:41 PM

[RMax304823]

All of your suggestions regarding "peak oil" seem to make sense in the short run and, possibly, in the somewhat longer run. In the REAL long run, there's only one solution that nobody wants to talk about, and that's population control. Without it, we have infinite growth in demand which, sooner or later, the planet will not satisfy. If we are blind to the problem of peak oil, we are positively insensate to the problem of too many people.

2008 Apr 04 11:19 PM