Why America Must Focus on Domestic Energy Solutions Instead of Imports

by: John Petersen

On September 17th, the White House released a report titled, 100 Recovery Act Projects That Are Changing America. Since the report included eight companies that were awarded a total of $1.1 billion in ARRA battery manufacturing and vehicle electrification grants in August 2009, I created the following table to summarize the first tier job creation impact.

10.25.10 Jobs.png

As I pondered over the relatively high cost per first tier manufacturing job, I decided it might be better to look at the overall value chain including second tier job creation impacts (new jobs in companies that make equipment for the ARRA funded factories) and the third tier job creation impacts (new jobs in companies that will sell raw materials and components to the ARRA funded factories). That process brought me back to the following table from a June 2010 report on the advanced battery sector from Goldman Sachs.

Click to enlarge

10.25.10 Value Chain.png

While the Goldman table is by no means definitive, it clearly shows that a substantial share of the initial funding will be used to buy imported equipment and a substantial share of the future material and component inputs will likewise be bought from foreign manufacturers. It's enough to make you wonder whether ARRA wasn't more effective at creating offshore jobs than domestic jobs.

While bloggers like me frequently note that current energy policies are merely substituting one dependence on imports for another dependence on imports, we usually focus on the reliability and stability of global supply chains rather than a fundamental economic issue that strikes me as far more important – stimulating domestic production as opposed to stimulating foreign production.

Most of us understand the concept of fiscal multipliers where $1 million in spending on a new factory turns into several million dollars of GDP as one company's capital investment becomes revenue to a contractor who then pays his employees who then buy goods from businesses that then pay their suppliers etc, etc. Most of us also understand that fiscal multipliers are stronger contributors to GDP when the second and third tier impacts create domestic jobs instead of overseas jobs. Frankly I have a hard time getting excited about energy policies that don't focus first and foremost on converting spending on imports into spending on domestic products.

The following chart comes from an Energy Perspectives Overview that the Energy Information Administration published as part of its Annual Energy Outlook 2009. It shows that the US was self-sufficient in energy until the 1950s, when consumption began to outpace production. By 2009, net imported energy accounted for 24 percent of all energy consumed. The bulk of those imports, or roughly $200 billion per year, are imported crude oil.

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When I consider the massive annual outlay for imported oil, the first question that comes to mind is "Why aren't we doing more to shift consumption from imported oil that impoverishes the nation to domestic natural gas that would enrich the nation several times over through the fiscal multiplier effect?" While my calculus skills aren't strong enough to nail the analysis down to hard numbers, it doesn't take a lot of math to recognize that every dollar of energy consumption that we can shift from imported oil to domestic natural gas will reduce the import drain by a dollar and increase domestic economic activity by several dollars. While advocates argue that cost of shifting transportation from oil to natural gas is a compelling value proposition in its own right, by the time we account for fiscal multiplier differentials between imported oil and domestic natural gas there's simply no contest.

America's strengths are legion and it became a prominent global power by playing from its strengths instead of its weaknesses. The two strongest players on America's energy team are domestic natural gas production and the minimization of waste through energy efficiency. Truly smart energy policy must merge with the broader issue of truly smart economic policy by keeping energy spending at home instead of sending it overseas.

Disclosure: None