Guest Post: Here's How We Get to Energy Independence

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Submitted by Brad Schaeffer

Here's How We Get to Energy Independence

Respected columnist and author Thomas Friedman has been among the most audible voices in warning the USA about our dependency on foreign oil and our need to end our addiction to this commodity post haste. But his latest call for a $1.00 per gallon gasoline tax to curtail our fuel consumption, the proceeds of which would go towards deficit reduction, misses the mark.

First of all, where Mr. Friedman is absolutely correct is his concern itself which is well founded. Consider: in 1970 the USA imported 30 percent of its crude oil. That figure has effectively doubled in the last thirty years to just shy of 60 percent.

Not since the ill-fated Axis powers of World War II has such a powerful nation so relied on foreign entities to supply its daily energy needs. This is a potential national security nightmare. (Indeed, as much as losses in the field, Germany and Japan were brought to their knees by choking off their energy supplies and causing their military machines to grind to a halt.)

However, Mr. Friedman’s proposal of imposing altered behavior on consumers via a $1.00 gallon gas tax, even one phased in over time, will unduly penalize many lower and middle class workers who have little choice at this time but to commute (this is not like a voluntary consumption tax on soda) and for whom their annual fixed costs would increase anywhere between $500-$1,000 depending on the location and vehicle gas mileage.

Moreover, his idea places inordinate faith in the federal government to properly spend any new tax revenues they do receive with any modicum of discipline needed to pay down the deficit.

Imposing a draconian gas tax at this time, with 15 million already unemployed, with the economy in a precarious position, is not quite the medicine needed at the moment. In fact, it could make matters much worse. I don’t think it takes an economics guru to conclude that $1.00/gallon on top of an already high $3.18 national average could negatively impact consumption in other areas (and we are still very a much a consumption-based economy).

In just one example, an interesting study done by the Center For Business And Economic Research at Ball State University simulated the impact of a $1.00 price increase from a benchmark of $3.00 gallon (not via taxes, just a market rise) on the economy of Indiana. It concluded that the economic activity in that state would be lower by almost -2% and employment by roughly -1.3 percent.

It also offered that tax revenues would decline by -.5 percent. When economic activity falls, tax revenues do as well. Human behavior is unpredictable and it is not a given that $1.00 tax on gasoline will translate into a $1.00 net increase in revenues to Uncle Sam. There is the law of unintended consequences to consider.

I admit that this is just one report in one state, but I suspect similar studies will show the same. Even though numbers can be tortured to say anything to support a policy initiative, common sense dictates that a dollar steered towards higher commuting costs will have a negative impact on the rest of consumption and thus the overall economy all else being equal.

The most far-fetched component of Mr. Freidman’s “one little gasoline tax” proposal is that the extra revenues (should they materialize) will be diverted towards “paying down the deficit.” A noble idea, but if Mr. Friedman honestly believes that Congress will take this windfall and actually use it to for its intended purpose rather than employ clever accounting tricks to steer the cash to their favorite pet projects, well, I have a Social Security “lock box” stuffed with IOUs I’d like to sell him.

Still, if there was no other alternative to Mr. Friedman’s proposal, then I would give it serious consideration. But the fact is, we do have alternatives, both to give us some short-term relief and long-term stability.

As of yesterday we need to immediately open up ANWR and the shallow off-shore regions to exploration and drilling. I love caribou as much as the next person, but this must be done. Even the most conservative estimates tell us that by 2018 if development were green-lighted today, ANWR could be producing as much as 780,000 and then slowing to 710,000 barrels a day by 2030. Also it is estimated that 18 billion barrels of crude oil are contained in areas currently off-limits to drilling for environmental reasons. No nation has denied itself so much abundance of its own domestic natural resources as has the USA.

To be sure, there are environmental risks to an aggressive drilling policy. But environmentalists need to consider the consequences of the USA being cut off from 2/3 of its energy needs...unrealistic given that friendly Canada is our single largest outside supplier, but not impossible. There is no greater killer than the effects of poverty resulting from a collapsed economy.

Rationing the transportation of goods due to lack of petrol means limited delivery of food to our cities, medicines to rural areas, heating oil for homes and businesses in the northeast during the winter, etc. The humanitarian and health consequences would soon be apparent to even the most ardent of green advocates.

Beyond “drill baby drill” our real pathway to true energy independence lies in resurrecting the Synthetic Liquid Fuels Program. This program which began with such fanfare under Jimmy Carter was cancelled under the Reagan administration.

The reasons were ostensibly that it was against free-market principles but the real factor was that oil prices had collapsed and the immediate economic peril had passed. Reagan’s vision was myopic and based on the false premise that arose from the oil glut of the 1980s that oil would be inexpensive well into the next century. But now with turmoil all across the Mideast before us, global demand expanding, and oil trading at $100bbl and climbing, we find ourselves in the position of pouring literally trillions of dollars into the coffers of some potentially hostile regimes with whom we are in an economic and military death embrace.

Although I harbor a conservative’s mistrust of government in my DNA, I do know that government does have its role. Those F-15s that give us top cover while we drive on our interstate highway system demonstrate that. Of course what do these examples have in common? They fall under the auspices of national security. And energy independence must be treated as a national security matter and at least partially funded with tax dollars as we fund our armed forces.

Consider: the USA has more coal than the Middle East has oil. Furthermore, the Defense Advanced Research Projects Agency (DARPA), an agency of the Dept. of Defense (DoD) has estimated the cost of a 100,000 barrel per day 21st Century Coal-to-Liquids (CTL) synthetic fuels plant will be about $6 billion.

Other private sector estimates place the figure higher at $10 billion. Even that higher figure is about the cost of one and a half months of the Iraq war. (A war we are waging primarily because there is oil there remember.) So for the price of the Wall Street bailout—$700 Billion—the DoD could have been on its way to building between 70 and 100 new CTL plants, which would produce up to ten million barrels of synthetic CTL fuel per day.

That is still a high price tag for initial investment. And like many national security initiatives, there is little profit to be made from being the first mover of the technology. (Although in this case the technology goes back almost a century, but it would be a new implementation in this country on a mass scale).

Thus relying solely on the private sector to innovate and invest our way out of this energy dependence problem is problematic for now. That is, unless the government subsidizes the initiative through direct investment. This could even be a profitable venture. Estimates vary as to the profitability break-even cost of CTL, natural gas to liquid (NGL) or biomass refining. Some firms show the profit point to be $45 per barrel. Other estimates vary above and below this level by roughly $10bbl.

Carbon capture technology for cleaner conversion that might be part of any legislation pushes that level even higher.

Still, unlike in the 1980s, clearly we are now above the break-even threshold and thus are the conditions ripe for a hybrid semi-public entity model that could be subsidized by the feds to make up the shortfall should the price of oil dip below that $45bbl level.

Most analysts see this as most unlikely unless the oil producing nations purposefully flood the markets to kill such initiatives to protect their franchise. But they have their own problems in their streets at the moment. If anything, as Mr. Friedman also points out, the price of crude oil will continue to rise.

The current administration is so focused on touting the merits of a ‘new green economy’ that it is missing the potential of an old fashioned synfuels economy already within our grasp. The construction and plant employment opportunities, the increase in economic activity as a new industry emerges from the ashes of our industrial blight, as well as the incredible potential windfall of a ‘mid-east oil independence dividend’ down the road by no longer maintaining a military presence in the regions from which so much of our current energy needs flow is self-evident.

Every month $20 billion of our treasury goes just to maintain our low intensity combat operations in Iraq and Afghanistan, not to mention the staggering financial drain of supporting bases on the periphery.

And there is no end in sight to our involvement in the Mideast without first eradicating our reason for even caring what goes on there…which means an addiction to the commodity we import from the region. Unlike many other ‘shovel ready’ projects that were anything but, synfuels development presents a very real and beneficial investment on many levels.

There is historical precedent that shows the viability of a synfuels program.

But for Allied bombings, Germany was on its way to producing 60 million bbls of synfuels annually into 1946. (A small amount relative to today’s consumption, but scalability is there). Again, when South Africa was the target of punitive sanctions because of Apartheid, they implemented via Sasol a massive synfuels program out of necessity…proving that where there’s a will there’s a way.

And we need not replace all imported oil of course. We currently import a little over 3 million bbls a day from nations in the Mideast and Africa. This amount is quite replaceable by synfuels. I do not mind importing from such stable and friendly nations as Canada for example.

Rather than trust it with a satchel of new gasoline taxes, the federal government could be better utilized through the DoD. In fact, the military is already making strides in synfuels development. The Air Force has already run successful synfuels tests on converted B-52s and have put forth an aggressive goal to have 70 percent of its aviation fuel coming from coal-based sources by the year 2025. They get it. Thomas Friedman does too…even if his solution is off-sides.

Today, there are currently 700 automobiles for every 1,000 Americans; 500 for every 1,000 Europeans. There are only 30 for every 1,000 Chinese. But that figure is expected to balloon to 240 per 1,000 by the year 2035. The world’s thirst for oil is only going to increase, and with it the price. $100 crude is not an anomaly.

It is a harbinger of things to come. Increased exploration of our abundant proven reserves, combined with a sweeping synfuels program to utilize other energy resources within our borders are our surest bets to achieving attainable energy independence.

Certainly more so than a whimsical $1.00/gallon tax (a number the very roundness of which implies to me that it’s the result of whimsical caprice rather than any serious analysis) that would hamper if not kill an already teetering recovery while diverting yet more capital away from the private sector and into the black hole of “deficit relief.”

Like Thomas Friedman, I wonder if history has ever seen such a time where so much of a nation’s own capital was handed over to its enemies for them to use against it—in order to import a product it already has plenty of at home.

Taxes should not be used to change our collective behavior by weaning us off the candy through making it prohibitively expensive; this ignores just how vital oil is to our daily lives. With a more realistic viewpoint that our 19 million bbl per day appetite for oil cannot be just taxed away, I propose we simply take an existing, available and proven century-old technology and ramp it up to make the candy ourselves. More drilling and synfuels may not be sexy or hip solutions.

But they are real and, most important, a part of the here and now. Not the distant future…a future over which we will have little control should the status quo remain unaltered.

Bradley P. Schaeffer is C.E.O./Principal of INFA Energy Brokers, LLC