Toward a U.S. Energy Policy

There’s a new green box on the EIS home page that says, “Rx for U.S. Energy Policy.” It brings you to a summary of my policy prescription for dealing with the coming energy catastrophe.

Catastrophe?

Yes. Only a few months of $100+ oil is already starting to cause working class pain in the U.S. This pain in nothing compared with what will be felt during Crunch Time when oil and gas prices will reach extremely high level – perhaps five times what they are now. When? Perhaps as soon as five years from now.

The poor will be hurt most, obviously and then the working class. But working class pain means recession or depression which will also infect the managerial and owner classes in OECD countries. A global economy unable to grow due to limited energy but with rapid inflation caused by rising energy and food costs will cause stock markets and bond markets around the globe to drop. There will be a global depression.

Is It Preventable?

Very high oil and gas prices cannot be prevented by any government policy because no policy initiative can reduce demand or increase supply fast enough to counter the natural and man-made forces that are limiting the global supply of oil and rapidly increasing its demand. Very high energy prices are resulting from the flow of oil and gas available to importing nations – those countries that do not produce enough themselves – being outrun by their demand for such imports.

There is not enough potential oil supply available to make a significant difference in global oil flow even if the U.S. were to begin to drill now in Anwar and offshore. We must conserve and we must produce alternatives, but neither of these things can be done quickly. When I say “we” I mean the entire world economy.

We must transition virtually our entire ground transportation infrastructure from petroleum to electricity. While the earliest stage of the transition has already begun the full process in the U.S. will take 20 years. Doing it during a global recession with a shortage of the energy needed to build new infrastructure will make the task seem tougher than rebuilding Iraq during a civil war. It will need to take place all over the world simultaneously. It will be like a race car going 90 mph trying to make an immediate 90 degree turn. There will be blood and guts all over the track.

Don’t take my word. A full analysis of exactly this transition was done a few years ago by a consulting group that often works for the Defense Department, Called “The Hirsch Report,” it concluded that unless steps were taken to mitigate Peak Oil 20 years before it occurred the pain of the required transition would be great. Experts generally now think Peak Oil (1) will occur within the next five years.

Defining “Good” Policy

There is one and only one test of useful government intervention. Does it help us get to where we will inevitably have to end up or does it push us in some other direction? If it speeds us toward where we must go then it is productive and thus good. If it tends to move us toward some other end point it is counter-productive and therefore bad because that movement will only have to be undone later at further cost.

Where we need to go is toward electrical power and away from petroleum or natural gas based power. Therefore, a government policy that tends to wean us from oil and gas and/or helps us generate and/or use electricity in transportation – and heating – will be good. That is one reason why the gas tax holiday is a bad idea. It tends to reinforce the use of gasoline. It does not help people move toward an alternative.

The Electric Future

How can we be certain that electricity is our future, not gas and oil? I think you know the answer. Natural gas and oil are finite resource so by definition they will run out at some point. The only alternative energy sources are coal and nuclear (which will also run out but not for a much longer time) and the renewables – hydro, solar, wind, tidal, geothermal. What do all of them have in common? They make electricity. So electricity is our future. It is what the remaining, non-petroleum energy sources create.

You could argue that the alternatives also could be used to make hydrogen. That’s true. But if and when hydrogen fuel cells are proven more cost effective than using electricity directly, it is a fairly simple matter to convert any given electricity generator into making hydrogen. In fact, it takes electricity to make hydrogen. In that sense hydrogen is really only another form of electricity storage device, or battery.

Government Does Not Need to Pick Winners

The idea of government being a sort of venture capitalist, choosing a winning technology among various alternatives often does not work. Witness the syncrude efforts under Pres. Jimmy Carter. Choosing between various technologies to harness the sun or convert non-food inputs into ethanol are particularly ill-suited to government decision makers given the rapid technological changes we are seeing and will see.

But my policy recommendation is demonstrably different from that. It is not about the government deciding which sort of solar technology or bio-fuel technology is best.

Rather, it is about adding artificial incentives to the natural marketplace that will encourage a more rapid transition from petroleum to electricity. When you tax carbon you also simultaneously put subsidies in place for renewable technologies – any renewable technology. That is different from funding a particular company or technology. You are just saying to any entrepreneur with an idea for a renewable – you can make this happen sooner than otherwise would be feasible.

What about the economic pain of making oil and gas – already very expensive – even more so? That is a challenge. The answer is two-fold. One is that some of the tax revenue must to redistributed back into the economy in horizontal tax reductions such as fixed dollar amounts of tax credits and/or per capita distributions. The other is that by making the development of alternative technologies more economically feasible, the policy will hasten the development of new enterprises that will create many new jobs, thus bolstering the economy.

Will such policies hurt some segments of the economy more than others? Sure. Trucking will be disadvantaged while rail transport will get a boost. That will tick off he truckers. There will be many other oxen gored. I do not say the policy is easy for politicians to pass. But it is what we should do.

My Policy Prescription

Here’s an outline of the actions that I think the U.S. Federal government needs to take to minimize the enormous pain the country will experience during the rapid transition from a petroleum based transportation system to the inevitable electricity based system of the future. While they all seem self-evident to me, please feel free to disagree.

1. Encourage Fossil Fuel Conservation
   • Carbon Tax: high and permanent
   • Gas Guzzler Tax: high and permanent
   • Tax Credit for High Fuel Efficiency Cars, not subject to AMT
2. Encourage non-food based ethanol and biodiesel (and end food based subsidies)
3. Encourage Urban All-Electric City Car Systems
4. Encourage Intercity Electric Rail Systems
5. Encourage Electricity Generation from Solar, Wind, Nuclear, and Clean Coal
6. Encourage DC Transmission

* “Encourage” means to provide Federal subsidies, tax credits, coordination, and other assistance as appropriate. Federal action is needed because market signals will not make these inevitable changes happen fast enough to deal with the looming energy crisis. The bulk of taxes levied to discourage consumption should be reinvested in the economy to promote alternatives to oil and gas and re-distributed equitably among the population.

(1) “Peak Oil” was once seen as a geological problem only and in a strict definitional sense it still is that – the time when the geologically possible flow of oil is at its maximum and must decline from then on. But in a practical sense, analysts now understand that a form of peak oil is when global oil production is maximized due to a combination of geological and above-ground forces. The latter include wars, political instability, hoarding, etc. Sometimes “peak oil” is loosely used to indicate the time when oil demand outruns supply.

Comments

[BrianPursley]

How do you know oil is finite? Hydrogen is the most common element in the universe and carbon is the fourth most common element in the universe. And assuming electricity replaces transportation fuel that doesn't change the fact that every consumer product in the modern world is made from petroleum including the food you eat. Every calorie of food you eat requires 10 calories of hydrocarbon energy to produce.

wolf.readinglitho.co.u...

Air conditioners, ammonia, anti-histamines, antiseptics, artificial turf, asphalt, aspirin, balloons, bandages, boats, bottles, bras, bubble gum, butane, cameras, candles, car batteries, car bodies, carpet, cassette tapes, caulking, CDs, chewing gum, cold, combs/brushes, computers, contacts, cortisone, crayons, cream, denture adhesives, deodorant, detergents, dice, dishwashing liquid, dresses, dryers, electric blankets, electrician’s tape, fertilisers, fishing lures, fishing rods, floor wax, footballs, glues, glycerin, golf balls, guitar strings, hair, hair colouring, hair curlers, hearing aids, heart valves, heating oil, house paint, ice chests, ink, insect repellent, insulation, jet fuel, life jackets, linoleum, lip balm, lipstick, loudspeakers, medicines, mops, motor oil, motorcycle helmets, movie film, nail polish, oil filters, paddles, paint brushes, paints, parachutes, paraffin, pens, perfumes, petroleum jelly, plastic chairs, plastic cups, plastic forks, plastic wrap, plastics, plywood adhesives, refrigerators, roller-skate wheels, roofing paper, rubber bands, rubber boots, rubber cement, rubbish bags, running shoes, saccharine, seals, shirts (non-cotton), shoe polish, shoes, shower curtains, solvents, solvents, spectacles, stereos, sweaters, table tennis balls, tape recorders, telephones, tennis rackets, thermos, tights, toilet seats, toners, toothpaste, transparencies, transparent tape, TV cabinets, typewriter/computer ribbons, tyres, umbrellas, upholstery, vaporisers, vitamin capsules, volleyballs, water pipes, water skis, wax, wax paper

[User 190596]

No to your Carbon Tax. Gas is already ridiculously high.

What defines a gas guzzler? I'd approve <20mpg average.

I agree with the rest. However, I would add:

7. Encourage the building of new refineries.
8. Encourage the development of domestic oil supplies wherever they are.

We have to throw the kitchen sink at this oil crisis.

[insideoil]

Perhaps you should start throwing some rocks at your local Nimbies, both on LNG import facilities as well as new refineries. As long as it costs a fortune to get approvals in place to build - never mind the actual cost of building - refining capacity, imported energy, conversion of coal, and even new nuclear plants just will not happen in the time frame required to meet demand. The US Joe is now the victim of his own foolishness, simply as a minority was allowed to dictate the price to be paid by the majority. There is no one else to blame but your own past silence.

[bluesmoke]

Brian, you need to look at the big picture. Yes, petroleum use is all around us. The author is showing us the path of least resistance. Transportation, one of the biggest culprits, doesn't require petroleum. It can use other fuels. So I agree, this is a good step towards a targeted solution.

[yank]

Brian:
You have correctly put your finger on the "key" issue. That is the undeniable fact that petroleum is "embedded" in just about every segment of our economy. To blithely say "We need to go green and get off oil" is just plain wishful thinking. It's not going to happen folks. In other words the main problem is the lack of economical, suitable, and available "substitutes"... for oil in the supply chain. I do agree however that transportation fuel use should migrate to either nat gas or electric.

[ThomasRogers]

I agree that the future is electricity. I would like to see the government initiate a crash program such as the Apollo space program to do whatever it takes to develop batteries that will allow private industry to create an affordable, plug-in electric automobile suitable for commuting to work and back home. I wouldn't want to guess as to the percentage of commuters who are one person per car, commuting 20 miles or less to work, but I imagine it is very significant. Even with a crash program such as this, we are talking years and years before it could make a dent in our use of gasoline. So why are we procrastinating?

[FLYLOW]

We need to think long term to solve the energy issue. However, the current US political system does not encourage long term planning.
We had the first large wake up call in 1973 (the Oil Embargo). Some counties made radical long term policy decisions. As an example Denmark just about went broke then, as energy cost went from 10 % of the GNP to 20% -almost overnight. However, within 7 years the country
had become the most energy efficient nation in the world, by changing just about everything from building codes to the use of alternative energy sources. Wind power supplies about 20% of the Danes energy use today-fed into the electric grid. The worlds largest wind turbine manufacturer is also Danish (Vestas).
If someone a year ago had said, lets put a R & D tax of $5/barrel in place, we would have had a large public outcry. Instead we are being taxed by OPEC.
The US should along with selected other counties -perhaps Japan, the UK,Germany & France start a Manhattan Project on alternative energy,
with a large annual budget-funded a $/barrel import tax. No tax on domestic production.
Encourage solar by using tax credits-the same for wind power.
Make it a NATIONAL priority!

[Whisper OnThe Wind]

A mini windmill on top of every SUV... ?

[rbblum]

Jim, admittedly the compilation of your energy sector writings may be one of the best in providing pertinent, in-depth overview regarding the industry in mostly macroeconomic terms that the general public has access to.

But don't you believe you are preaching mostly to individuals who could be classified as your choir members? That is, folks more readily in tune to the energy environment; whereas, it is the failings of the US Congress that places party partisanship, interests of lobbyists and maintenance of their own self-created fiefdoms above the interests of 'the people'.

Given the mindset of how the US Government has presented itself in modern history is, in fact, not only a disgrace but what the National priority should be focussed on: cleansing and righting the US Congressional mindset as well as creating and implementing thoughtful, actionable, long-term plans in a transparent manner. And if not now, then when and by whom?

[User 183217]

No, no, no to taxes, subsidies, credits, reduction in freedom of choice, reduction in standard of living, and government planning and regulation.
Look at the government-created ethanol boondoggle.
Yes to "market signals" to a free capitalisc economy for the"transition.&q...
Please don't force your vision of dinky electric cars and increased taxpayer subsidies for public transportation on me by prohibiting my market choices. American can decide for themselves when to buy golf carts and ride trains. As oil prices increase, more marginal sources become available. If I want to run my a/c for weeks in a row, or fill up the tank on a 300 hp car, I don't need extra taxes to increase my anger towards a mostly incompetant government.

[JREwing]

Hear, hear!