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Energy Policy

The Energy Policy that Wasn’t

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The Junkie

One of Barack Obama’s key campaign pledges back in the summer of 2008 was to craft a new energy policy for the country, and to do so in an open and transparent manner. The American people were justifiably suspicious of Vice President Dick Cheney closeting himself with oil executives in ‘closed door’ sessions to develop their own energy policy during the Bush Administration. Nothing much came out of those closed door sessions other than the push to drill in the Arctic National Wildlife Refuge, and why should we have expected it to? With oil at US$## a barrel back in 200#, the oil executives were raking it in, and continue to do so.

Well, nothing much has come out of President Obama’s pledge to develop a new energy policy. In fact, the Obama Administration has egregiously failed to address the energy issue during its tenure in office.

There has been some lip service: the President sponsored a clean energy bill to channel investment into renewable sources; some subsidies for carbon capture technologies for the coal industry. Given the disaster with the Deepwater Horizon and with the Iranian threat to Gulf oil supplies, it is surprising that the President has abdicated so completely his role as leader of the nation on this critical issue. In other words, it has been business as usual.

There is nothing wrong with business as usual if you happen to hold shares of Exxon Mobil and don’t live on the Gulf Coast in Louisiana or Mississippi; in fact, business has never been better and will remain so for the foreseeable future. But if you are one of the majority of Americans who don’t own stock in an oil and gas major, business as usual is a disaster.

Captured by Carbon

It is not an exaggeration to say that the US is a carbon addict, with all the symptoms and weaknesses of any other narcotic dependency.

Take, for example, the US balance of trade. Although the Chinese are the villains of the day – having replaced the Japanese of the 1980’s as the boogeyman to American business – our dependency on foreign energy imports is an equally large and fundamentally more dangerous source of concern.

Take a look at the charts below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bureau of Economic Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bureau of Economic Analysis

Since 1999, imports of petroleum and petroleum products have doubled from less than 10% of all imports to more than 20% of all imports, by value. Only part of this increase is due to the increase in the price of oil through this period.  If we eliminated our dependence on foreign energy imports, we would wipe more than half of our current account deficit.

Would that solve our problems? No. But it would mean that the US economy would no longer be held hostage to unsavory characters in the Persian Gulf, Siberia and the Gulf of Maracaibo.

Breaking bonds

It could also mean more jobs for Americans. Implementing a new energy paradigm for America is not as easy as flipping a switch, mores’ the pity. It would require massive investment, both public and private, in new infrastructure and in new technologies. New transportation networks, new production and transmission facilities, new carbon sequestration techniques, improvements to public and private buildings.

That is the very essence of a jobs bill, folks. And here’s the kicker: we already have to pay for a lot of this stuff anyway. Our electrical grid is 50 years old and grossly inefficient; our transportation infrastructure is crumbling; our rail network has decayed; our cities are underfunded and underinvested. At some point we have to start rebuilding much of this infrastructure: why not do it now as part of a strategic investment in our future?

A further argument is that the stuff is eventually going to run out anyway. Estimates vary, but pessimistic scenarios indicate that conventional crude oil production already peaked in 2004, and new production has failed to keep up with rapidly increasing demand from China and India. (2)

What is incontrovertible is that US peak production was reached in the mid-1980’s. Take a look at the chart below to see the unsustainable divergence in production and imports.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: US Department of Energy

This doesn’t mean that the world economy is likely to grind to a halt anytime soon; nor are we all going to start freezing in winter. There are “unconventional” oil sources, like oil shale, tar sands and heavy crude oil which are not counted towards proven reserves. They are more expensive to extract and refine, and in some cases the technologies to do so are still in their infancy, but the world still has fossil energy to exploit. Even so, the economic arguments against renewable energy sources are not as strong.

A (perhaps) more important argument in favor of renewable energy is that it is always domestically produced. We wouldn’t depend on the whims of oligarchs and the stability of dictatorships to produce as much energy as we like.

A long-term, strategic energy policy would bring immediate benefits to the economy and perpetuate the economic leadership of the United States well into the middle of the century:

  • Immediate job creation: The combination of Federal spending and private investment in new infrastructure would immediately put people back to work and would have beneficial second order effects on large swaths of the economy. The Pew Trust calculates that between 1998 and 2007, the alternative energy economy added jobs at a rate of 9.1% vs. 3.7% for the economy as a whole (2);
  • New business investment and creation: In the same period, almost 70,000 new business were created with a venture capital investment of over $18 billion. (2) A long-term energy policy would settle the legal and regulatory framework for the next decade, as well as demonstrating public funding commitments over that period. This sort of clarity and stability is a prerequisite for business investment in large-scale projects. Existing businesses would feel confident of profitable returns on their investments, and new businesses would also develop independently to take advantages of niche plays and newly created markets;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: The Cleantech Group, LLC (2009) courtesy of Pew Charitable Trusts

 

  • Research boom:  Building a XXIst century energy infrastructure requires investment in XXIst century technologies. A long-term energy policy will not only dedicate more federal funds to technologies like renewable energy sources, fuel cells, and carbon sequestration (among others), it will create the long-term expectation of profits that will stimulate private investment in new technologies. The multiplier effect of keeping R&D in the US is critical for our future competitiveness. Between 1998 and 2008, there were a total of 8,384 new patents for clean technologies  (2);

 

  • High-tech manufacturing: Building a new energy infrastructure will require lots of material beyond steel and cement. The government needs to ensure that the energy policy includes sufficient incentives to bring high-tech manufacturing jobs back to the United States. The wind turbines, nuclear reactors, fuel efficient automobiles, electrical equipment – the key inputs to the infrastructure – should be manufactured in the US by US workers (and if it can be done by US capital, so much the better). It is a grave error to believe that we can outsource 100% of our manufacturing to our lower cost trade partners; a comprehensive energy policy should aim at establishing US preeminence in both technologies and manufacturing capabilities, as a driver of US exports to the world; 
  • Lower energy costs: A fundamental goal of any energy policy should be to reduce the cost of energy to consumers, both individuals and businesses. The fact is that new energy production will initially be more expensive than buying oil and gas from overseas. The only way to make this beneficial to the average consumer is by increasing the efficiency of the energy produced – making it work more for the same amount of production. That can be accomplished by reducing the loss rate in distribution of energy, increasing the efficiency of homes, buildings and appliances and eventually by gathering the economies of scale of these new energies as they come to replace the old sources.Lower energy costs would bring immense benefits to the US economy. Consumers would have more disposable income for either savings or consumption; business costs would be reduced to the degree of energy intensity in any given industry; the economy as a whole would be more efficient, profitable and competitive.

Bring in the Feds

Republicans in Congress have opposed the Administration’s earlier initiatives on developing a clean energy policy for two reasons: firstly, because it is in their nature to oppose everything that President Obama proposes; and secondly, because they argue that these bills are an enlargement of the “bloated and inefficient” public sector.

That is not at all the case. The Federal government has a critical role to play in creating a new energy economy that does not require the addition of a single federal job.

  • Establishing a new regulatory framework – The Federal government must ensure clarity of goals and means for a long enough period in the future to convince private investors that there will be a market and reliable profit stream to pay them back. A key part of this effort is removing regulatory obstacles from these markets to encourage investments in these new opportunities. The Department of Energy and the Environmental Protection Agency are already charged with this task, it depends on the Administration to instruct them in how to implement these changes.

 

  • Harmonizing standards – As of 2009, 29 states and the District of Columbia have established renewable portfolio standards for their public utility companies; 19 states have established energy efficiency resources standards; 14 states have adopted the stricter California emissions standard for vehicles. The Federal government has a key role to play in harmonizing these standards in order to provide businesses with clarity on a national level making their investment, marketing and sales decisions easier. The government also has a major role in establishing energy efficiency standards in building codes, beginning with those owned by the Federal government. The Departments of Transportation and Energy, and the Department of Housing and Urban development are already charged with this work;

 

  • Streamlining patent procedures – Patent procedures in the United States need to be updated to XXIst century standards, and not just for clean energy technologies. Making it faster and easier to patent new technologies and processes is a source of competitive advantage to start-up companies and will enable the US to remain the global leader in innovation and technological development;

Some measures would require an expansion of the Federal government – a publically incorporated infrastructure bank would mean more public sector (anathema to Republicans); but like the Federal Reserve Banks or the Federal Depository Insurance Corporation (FDIC), this entity would have to pay for itself from the returns on the investments it makes.

The key message is that only the Federal government is in a position to provide long-term clarity, direction and leadership at the national level that is required. It requires coordination of federal and state regulations, standards, policies and a prioritization of public investment in research and infrastructure which is beyond the capacity of 50 individual states. Only thus can we create a national market for clean energy that will spur the investments in wind farms in the Dakotas, tidal generators in Virginia, nuclear plants in Tennessee and refineries in Louisiana.

President Obama, don’t waste another year on mere politics. Show leadership and give the country what it needs.

Sources:

(1) Bureau of Economic Analysis, US International Transactions 1978 to 2010, Table 2a.
(2) Zittel, Werner; Schindler, Jorg (October 2007) (PDF). Crude Oil: The Supply Outlook. Energy Watch Group. EWG-Series No 3/2007.
(3) Urahn, Susan; Reichert, Joshua. “The Clean Energy Economy: Repowering Jobs, Businesses and Investments across America”, June 2009, The Pew Charitable Trusts.

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