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Market swings: global economy plays major role in U.S. energy strategy.

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The United States consumes 25 percent of the world's petroleum but has only 3 percent of its reserves. Many advocates of "energy independence" cite that fact as a reason for abandoning foreign oil and relying on domestic renewable energy such as wind and solar. Others argue that "energy independence" means we should substitute domestic oil shale, natural gas and offshore fossil fuels.

But both flavors of "energy independence" are based on false premises.

Even if by some magic the nation were to possess 25 percent of the world's petroleum and could close its borders, the United States would still be linked to the world's energy economy through trade. Oil is a globally traded commodity.

In the global economy, supplies will go to the highest bidder, and different types of energy that can be substituted will compete, directly or indirectly.

For example, Iran subsidizes gasoline for domestic use, as do many other countries. But by selling gasoline for only pennies on the dollar, Iran invites gasoline smugglers from neighboring countries to poach on the deal. They buy the cheap Iranian gasoline and sell it back home for a handsome profit. This is clearly a big drain on the Iranian economy.

Only by erecting retrograde barriers to free trade, such as stiff tariffs and tight border controls, can such phenomena be stemmed, and only ultimately at great expense to the consumer, and at a considerable loss of freedoms for citizens.

There is a better way.

In the past couple of months, we have seen a dramatic drop in the price of oil from the dizzying $147 per barrel over the summer, partly because the U.S. economy has lost perhaps up to a million barrels a day appetite for the stuff--that's still less than 5 percent of our daily consumption.

If the United States dropped its daily consumption of oil by another 5 to 10 percent, it could well bring oil down to $35 or less a barrel. If gasoline could be had fur $1 and change, what would happen to solar panels, windmills and geothermal pumps?

With oil at $150 there might have been "savings" by going to solar or wind, at around $100 the government would still need to give the alternatives an assist and pass the cost along to the consumer and tax payer, but at $35, the government would be carrying the projects almost entirely in its arms.

In a "renewables only" world where the government would not fund projects and would keep the borders closed to oil and gas, consumers would quickly recognize that compared to lighting their house with coal-based power or heating it with oil, the bill from wind or solar would be much more expensive. Most would probably agree that the premium would not be offset by any feeling of being "safer" be it for national security or climate change reasons.

If the cost of food and other products whose energy price component shot up under the new energy regime, then consumers would probably "vote with their feet" and have their homes and cars run again on cheaper coal, oil and gasoline.

A black market would soon appear, just as there is today for older toilets that consume more water. And unless the government outlawed the return to the cheaper non-renewable energy, or allowed it but put a stiff tax on it to keep it artificially higher, most people would abandon the new energies and come rushing back to the tried and true older non-renewable energies.

A useful example is what happened this summer about a month after it became obvious that oil prices were on the way down. News media were reporting in early September that alternative energy stocks were getting battered as investors were figuring the rush to alternative energies would not be as big or fast. Several projects such as coal-to-liquids were shelved or outright canceled.

With oil prices way down, the backers of alternative energy projects found that their projects no longer made economic sense to investors, even with government assistance, as the break-even points were being threatened and the projects were already verging on becoming white elephants.

Consider the current situation as a dry run for the "energy independence" folks who believe we can simply go off on our own and do as we like without worrying anymore about market economics.

There is another more sinister effect that few people discuss. Assuming that the U.S. government forced the economy to abandon our "oil addiction" overnight, where would the excess oil, about 20 million barrels a day, go?

The rest of the world would be awash with oil. It would take that world some 15 years of vigorous growth to absorb the excess oil. But the most damaging effect would be that such surplus would bring the price of oil to $12 or less, where it was 10 years ago. Countries such as China and India that subsidize oil consumption would gobble it up, and feel a lot less stress on their treasuries. Hummers would soon be the preferred way to get around and show off new wealth.

Foreign economies would grow dramatically while the U.S. would struggle under its new draconian energy regime. Even more outrageous and ironic, all the "green collar" jobs would probably be filled in oil-cheap and labor-cheap Asia. Most of the windmills and solar panels installed here are being already made over there.

In a generation, we would have done to ourselves what Great Britain did to itself between the two world wars when it insisted on returning to the gold standard. Not to mention that the Kyoto Treaty would be in a shambles and completely moot--the C[O.sub.2] emissions foregone by the United States would be more than made up by the increase in fossil fuel activity in exempted developing nations gobbling up cheap fuels. They'd be burning oil and coal like crazy, in complete disregard for environmental consequences. It would be a dangerous situation not just for the United States, but for the planet.

That's why the term "energy independence" has to be carefully applied--even the best of intentions cannot protect against unintended consequences.

"Energy security" is a more reasonable term that describes a far more desirable and attainable goal, but only if it does not contain by extension some or all of the assumptions associated with "energy independence." Unfortunately, people these days tend to blur these terms, so we prefer to use neither.

A better choice might be "national defense energy strategy."

There are several possible ways to pursue a national defense energy strategy. Domestic demand shift to new energy sources, new energy technology solutions, and diversification of energy sources and technologies, both old and new, are the three tenets.

It's worth mentioning that this is not a job just for the military. This is a job for all citizens. In a global economy, it's a job for allies and trade partners as well.

On the domestic front, by taking advantage of the gradual creep in the price of petroleum, the United States can reduce oil consumption. This is perhaps the easiest and most powerful thing we can do. The United States simply uses way too much petroleum for personal driving.

As a result, far more efficient vehicles are needed. Among them: lighter and smaller vehicles, better diesel engines, and hybrid vehicles--but not the plug-in kind, at least for now, as the latter would put strains on the already decrepit and overtaxed electric power grid that needs upgrading.

For lighting and heating homes, it would make sense to move in a case-by-case review to solar and wind for specific regions. If the cost of building out the grid to good wind and solar collection points is kept low, the amount of subsidies to solar and wind can likewise be kept low and so the eventual cost to rate and tax payers minimized. And if some solar and wind can be provided to power homes that are off the grid, so much the better.

Simply legislating that utilities must reach a certain percentage of renewables is too hamfisted an approach and will only generate anger from consumers when they see their power bills. European leaders are already conceding that they may have underestimated the costs and difficulty of ordering the energy industry around. In some areas, such as biofuels, Brussels is already in full retreat. Why not learn from their mistakes?

On the international front, military allies, trade partners and investors need to shift demand in a similarly evolutionary and not revolutionary fashion. A great blind spot in the "energy independence" and "energy security" debates is that there is no discussion about what nations other than the United States need to do. In a global economy, the United States cannot go it alone.

The idea that billions of dollars spent on foreign oil are financing terrorism is frankly as misleading as it is insulting to our allies and trade partners. It ignores the fact that much of that money ($240 billion) goes first and foremost to Canada and Mexico--the largest and third-largest suppliers of oil and also the largest and third-largest trading partners of the United States. Venezuela is fourth.

Then there is the argument that the first and second Persian Gulf wars were "only about the oil." It should be noted that the European Union and Japan are much more dependent on Persian Gulf oil than the United States. Saddam's invasion of Kuwait and the ever present threat of Iran against oil traffic through the Strait of Hormuz was and is a threat aimed more at the energy jugular of European and Asian allies.

The problem is that if Europe and Japan were ever denied access to that Persian Gulf oil, they'd turn around and bid up the price of oil worldwide. Then Canada and Mexico may be selling to Europe and Japan instead of the United States. What this demonstrates is that U.S. national security depends on the reliable access of its allies and trading partners to energy, too. A national defense energy strategy must be integrated with similar strategies of allies and trading partners.

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The Japanese have made significant progress in energy efficiency since the 1970s. The United States should learn from them, particularly in the manufacturing of energy-efficient personal vehicles. Europeans likewise have taken the lead in certain fields. For example, German automakers in the last couple of years have come out with fuel-efficient and clean burning diesels, which actually are as good as if not better than hybrids in many respects. And they are now even experimenting with biodiesel hybrids that promise amazing fuel efficiencies and mileage with less pollution than even today's gasoline hybrids.

The United States should be helping the Europeans and the Japanese to reduce their energy dependence on the Middle East--it's simply too risky a region, and oil tankers have to pass through the Suez Canal, go round the Cape, or navigate the pirate-infested Straits of Malacca, in addition to steaming past Iranian Silkworm missiles and Revolutionary Guard attack boats waiting for them at Hormuz.

The European Union and Japan would do better moving more quickly not just to hybrid vehicles, wind and solar, but also building up their nuclear power industries. France and its nuclear energy program is the example to follow, not the German fear-based move away from nuclear and into "cleaner" natural gas that has made Germany especially vulnerable to energy blackmail by re-emergent Russian imperialism. In fact, the German example shows that environmental and national security priorities sometimes can be diametrically opposed.

It seems counterintuitive that a national defense energy strategy should include sharing our own energy resources with allies. Hoarding energy for ourselves is not the best way to make the United States or the world safer.

A case in point is Japan. Alaska already exports coal to Asia. Under the North Slope, there are 3 trillion tons of bituminous coal. Those reserves should be exploited not just for the United States, but also for Japan. Through new "clean coal" and coal-to-liquid technologies, the U.S. West Coast could see plentiful jet fuel as well as cheaper electricity. With the same technologies, Japan could shift some of its demand from Arab oil to Alaskan coal. And although the United States would be sending valuable energy resources abroad, by reducing Japan's vulnerability to an interruption of energy supply from the Middle East, the nation also would be reducing the likelihood of the military having to fight a third Gulf War.

Last but not least, diversification of energy sources and technologies, both old and new, is the third leg of the national defense energy strategy.

The problem is not that the United States is dependent on foreign oil, but that it is still uncomfortably dependent on oil from regions that are unstable and present risks.

To some extent, the United States has addressed supplier dependence in the last 30 years. While OPEC members today still supply about 50 percent of the U.S. imported oil, no single country, whether OPEC or not, supplies more than 15 percent of all the U.S. imported oil. That's one reason why in the summer of 2008 with oil at $147 and gasoline at $4 there were no shortages at the pump. The shortages this fall in the South, after Hurricane Ike, were more panic induced than anything else.

Bottom line, the United States and its allies need to not only demand a shift at home and abroad, but also diversify.

John M. Manoyan is a chemical engineer, nuclear physicist and is now an investment advisor in San Francisco, Michael G. Frodl is a tax attorney and co-founder of the Forum for Environmental Law, Science, Engineering and Finance. Their personal views do not represent those of FELSEF. Manoyan can be reached at jmanoyan@snet.net and Frodl at mgfrodl@tidalwave.net.
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Title Annotation:COMMENTARY
Comment:Market swings: global economy plays major role in U.S. energy strategy.(COMMENTARY)
Author:Frodl, Michael G.; Manoyan, John M.
Publication:National Defense
Article Type:Industry overview
Date:Dec 1, 2008
Words:2315
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