An Energy Policy that Makes Cents (and Sense)

by: Michael Fitzsimmons

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 (NYSE: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 (NYSE:GM) and Ford (NYSE:F) got their way, yet they have continued to lose market share to Honda (NYSE:HMC) and Toyota (NYSE: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 (NYSE: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.