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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 the 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.
- 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
- Encourage non-food based ethanol and biodiesel (and end food based subsidies)
- Encourage Urban All-Electric City Car Systems
- Encourage Intercity Electric Rail Systems
- Encourage Electricity Generation from Solar, Wind, Nuclear, and Clean Coal
- 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.
Tags: peak oil energy investments
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9 responses so far ↓
1 paultaut // May 8, 2008 at 12:44 am
“Encourage” is not enough….the word should be “mandate”. It should be invoked under a National Emergency Law and done so yesterday…
Unfortunately, this generation will not see the results come fast enough.
2 Isaac // May 8, 2008 at 8:50 am
Excellent thinking. In order for the government to avoid choosing the fossil fuel replacements, any subsidies and tax credits to alternatives should be on a btu basis. A btu of energy produced by a CSP facility could compete for the federal incentives equally with a btu produced from a Pebble Bed reactor, or a wind farm. This would allow an “apple to apples” economic sorting of the alternatives. And I agree with the strong imperative language by “paulaut”
3 Keith Renick // May 9, 2008 at 11:14 am
Mr. Kingsdale’s post and comments are 100% correct. The Hirsch Report is correct. Paultaut’s comments are correct. But I believe we’ve waited too late. I like the following comment by R. Buckminster Fuller in his book Critical Path. “I have discovered that one of the most important characteristics of most economic trends is that they are too slow in their motion to be visible to humans. Humans do not get out of the way of that which they cannot see moving.” Maybe this may why we did nothing about peak oil in the 1970’s. I also like the two axioms spelled out by Colin Mason in his book The 2030 Spike. Axiom One: ” Useful change is likely to come only if it can provide as demonstrable, equal and general benefit as possible to the community in which it is planned.” Axiom Two: “If proposed soultions don’t take the lowest common denominators of human nature realistically into account, they will not work.” While I agree with these two axioms, I don’t believe it will guarantee the outcomes successful. Look at Page 44 of the May 5, Newsweek. “In 2000, to gain support Mugabe began seizing land from white farmers and giving it over to liberation struggle veterans who knew nothing about raising food. Today Zimbabwe is starving, and the war vets have become regime enforcers.” What the article doesn’t tell you is that it wasn’t just the land that was being taken. It was their houses, farm equipment and their lives. More that 4,000 white farmers were shot dead over the years. Others were allowed to leave with only their clothes. My point is that you can placate to the masses but this doesn’t mean that it solves the problems and in some cases it can even make it worse. As I have said before, Tourism is the world’s biggest industry, not oil. Look at Businessweek May 5, 2008. “Crossing Borders Golobally, the number of international tourist trips is headed to 1 billion per year. Tourist arrivals worldwide grew by 6.1% in 2007. Think for one minute how much liquid fuel is required to move one billion people around per year. I don’t know where you guys live but here in Georgia, it’s non-stop building roads and strip malls and fast food places. Non-stop! Polulation growth, more cars! More immigration, more cars. More roads…..more roads and more roads, more strip malls, more Disney Lands and more Six Flags, and more cars. It seems like the entire peak oil debate rest on one core belief that almost no one will give up, personnal mobility. The masses will have private transport or mass transport regardless what happens he will still be able to travel 5 miles, 50 miles, 500 miles or 5,000 miles anywhere he wants, anytime he wants and for any reason he wants and he will be able to afford this in the future. It’s the modern mind just a little schizophrenic? Electricity will win by default. But again as I have often pointed out, when I was born there were only 150 million Americans and 2.5 billion people on the earth. Today, there are 300 million Americans and 6.4 billion people on the earth. I don’t believe we will have 450 million Americans zipping around in personnal cars and 8 to 9 billion people on the planet buying 100 million new cars per year. Americans want a quick fix with no pain. I truly believe our government will make the problems worse. Last comments, Thanks to Mr. Kingsdale website the information I read about Petrobras helped me pull the trigger and buy the stock May 30. I am up $28 dollars per share. Thanks Mr Kingsdale. I also recommended to our investing friends on that day FMC Technologies (FMI) and I am up $18 per share and I recommended Camron (CAM) and I am up $9 per share. I think there is a term in economics, it’s called “bad steady state.” It means, bad things can happen to good countries.” Best regards to all, Keith Renick, Peachtree City, Georgia
4 the garrison show » 5/9 - the web needs a nap // May 9, 2008 at 11:26 am
[…] few ideas about a coherent energy policy and the government’s role in the […]
5 Keith Renick // May 9, 2008 at 5:23 pm
Oooops! I made a typo. Sorry. I recommended to our investing friends on this website. Petrobras, FMC (FMI) and Camron (CAM) on March 29 or March 30, 2008 not the above May 30. Now I don’t know what to do about my Exxon? I bought Exxon the last time it split and picked it up at $38 per share. I am thinking about dumping Exxon. I think they are buying so many shares they will not be a public held company by 2022. What do you guys think? There has always got to be a boogie-man and Politics will pick Exxon as the big bad boogie-man to blame everything on. It’s Exxon’s fault! They make too much money! The public will believe these things. Maybe it’s time to sell and move on to better things? How could anyone think that windfall profit taxes would help them personally or cause the price per gallon at the pump to fall? Any ideas? Is it time to sell Exxon? Yes? No? Any ideas? Thanks, Keith, Peachtree City, Ga.
6 paultaut // May 11, 2008 at 11:51 am
Keith…this is a personal opinion based on Exxons recent quarter…they produce enough oil to utilize 2 million of their 4 1/2 million brl per day capacity…the rest is purchased on the open Market…when those refineries were built it was for their output only…Their production has decreased by over 50% in the past 30 years. In the next 24?…give me a break…you know you aren’t going to hold it that long…besides an asteroid is supposed to hit the earth around then…
Any way, I have been and will continue to push everyone into the Canadian Royalty Trusts…when their trust status expires, they will become oil companies with large unexplored acreage…most of which will yield continueing discoveries…my current favorites are PVX,HTE and PWE…PGH dropping back to under $19 will be another choice.
For the reasons you mentioned, I think it is unwise to invest in US oil companies in general though I believe some of the mid tier companies can still be bought…MMR and EXXI….I own all of the above except for PGH.
7 Keith Renick // May 12, 2008 at 9:10 am
Hi Paul! Thanks for the great info. I sold Exxon this A.M. Great info on the Canadian Royalty Trusts. I am looking into them now! Thanks again! Keith, Peachtree City.
8 Keith Renick // May 12, 2008 at 5:29 pm
Hi Guys, today I bought Hecla (HL) and gave $10 per share. I like silver and think it’s undervalued by any measure. I also bought at my local coin shop Canadian Silver maple leaf coins today, I think these are one of the most beautiful coins in the world. (CDE) and (HL) are not for the weak of heart, you have to have big coconuts to buy these stocks and hold. FYI some of you might want to go to google and enter energytechstocks.com/wp/?p=819 and hit search. Then look for “Dean of Oil Analysts Maxwell (part 1 of 4) Shortages. Click and read all 4 parts. It’s very interesting. For you info, some of you might be interested to go to google and enter http://www.paulchefurka.ca./WEAP2/Energy_GDP_2050.html and then hit search. Look at the top of page and click on to Energy and GDP in 2050. Happy investing! Regards, Keith, Peachtree City, Ga.
9 Keith Renick // May 13, 2008 at 3:50 pm
Thanks Paul, Today I bought at market (MMR) (PWE) and )PGH). Many Thanks, Keith
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