An Energy Policy That Makes Sense, Revisited

by: Michael Fitzsimmons

On April 4 (2008) I published my first energy policy here on Seeking Alpha. Oil was around $100/barrel. Roughly one month later, oil is up another 20% and now over $120/barrel; the US dollar is dropping like a rock; the S& P500 has done nothing in years, and inflation, food and otherwise, is high and rising. CEOs of major oil companies took the unprecedented step to publicly say at the World Economic Forum in Davos, Switzerland 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 $120/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. Yet still no word from the President and Congress on a real energy policy to prepare and protect America from the realities of peak oil. Why?

I again submit a comprehensive energy policy below. It has been updated with the excellent feedback I received from the readers of Seeking Alpha. I commend you all for your interest, intelligence, and passion.

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. It needs to be implemented with the urgency of a “crash” program, like the Manhattan project. We must be up to this task. There is no alternative to failure.

  • The first step in an energy policy that addresses peak oil is to acknowledge 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 a large component of imported oil usage (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 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 [as in NOW]. 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. Internal combustion engines should be required to satisfy the so-called “open fuels standard”. That is, they should be required to run on gasoline, ethanol, methanol, or any combination of these fuels.
  • 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 alternative vehicle solutions will likely be powered, in part, by electricity. We therefore need a massive governmen- 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 NOW. 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 cost of grains has 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 in a cost effective manner. 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. ConocoPhillips and BP have committed to building this (no Exxon participation?). Governments and industrialist should support this effort. Planning and construction need to begin immediately and be accelerated.
  • 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). Biofuels (cellulosic ethanol and methanol) surely have a significant role to play, but let’s not get emotional on the subject. Let the scientists and engineers make the call, not politicians. Geothermal should be utilized where appropriate and cost effective.
  • 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 oil assets will take years to bring online, and we need to start NOW.
  • We need to increase the tax on gasoline, not decrease it! I know this will not be popular, but we must discourage gasoline consumption. Meanwhile, the gasoline tax receipts should go directly to support wind, solar, and nuclear energy production.
  • We need to develop electric mass transit for people and goods. The French have done it and power it with nuclear energy. The Germans have done it and powered it by solar and geothermal. The US again lags in energy policy. Aren’t Americans tired of falling behind Europe in terms of energy policy? Are Europeans really that much smarter than Americans?
  • We need to encourage local sustainability in energy and food production. We need to encourage people to grow their own gardens, supply locally available solutions. We need to encourage population control both in the US and globally. Self reliance and frugality is required.
  • Lastly, the citizens of the US must demand political leadership on this issue. As voters, we must make it clear that we will not re-elect politicians that continue to put the number one threat to US national security on the back burner. There is no issue that demands more political urgency than peak oil. Period. We need qualified and knowledgeable people to run for office on a platform that places an energy policy front and center.

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.

Windfall profits taxes on the oil companies is an idiotic idea and counter productive. We have an oil supply problem, so tax the US companies that are providing oil? This is madness.

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 rendering it less hazardous. We should increase research and development of all stages of nuclear energy. Bottom line is this: we face such a huge energy crisis 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. Now, the solutions of either address both, but I bring up the distinction because it is a question of priorities and urgency, If only people and media used the phrase "peak oil" as much as they do "global warming".

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 now. 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 chooses 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!

I firmly believe peak oil will be the dominant investment theme of the next few decades. ConocoPhillips (NYSE:COP), Schlumberger (NYSE:SLB), Neighbors Industries (NYSE:NBR), StatOil (NYSE:STO), and Chevron (NYSE:CVX) all remain favorites of mine. For mutual funds, I recommend that people stick with Vanguard Energy (MUTF:VGENX), Vanguard Precious Metals (MUTF:VGPMX), and Fidelity Select’s Energy (MUTF:FSENX), Energy Services (MUTF:FSESX), and Natural Gas (MUTF:FSNGX). For high yielding energy plays in 401k plans, the Permian Basin Trust (NYSE:PBT) and Hugoton Royalty Trust (NYSE:HGT) are attractive. I continue to advise investors to stay out of the broad S&P500, US Bonds, and to have some US dollar hedges in your portfolio. In addition to the energy investments above, I think one should have some precious metals exposure in terms of gold and silver bullion or with the GLD and SLV ETFs.

Disclosure: The author owns all of the above listed securities except SLV.

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