Weaning Off Oil

I’m positive that our country, and indeed the world, has a great deal to gain by reducing our dependence upon oil. So how can we make faster progress in that direction?

Heck if I know, but here is my plan nonetheless. Three parts:
1. Shift taxes to ensure that the cost of energy covers all externalities. Align our short-term interests with the long-term.
2. Fund more basic research into energy alternatives.
3. Strengthen the U.S. economy to make sure we have reserve strength to bear in any crisis.

In detail:

Reallocate tax sources. Economists use the term “externalities” to refer to side effects that have additional costs or benefits that are not included in the market price for an some item. For example, coal-fired power plants generate pollution, which cause health problems, which must be paid for. (The data is controversial, of course, but generally indicates that such pollution costs over 10,000 lives and millions of dollars in the U.S.) But the costs of those health problems are not borne by the power plants; instead it’s the poor schmucks who suffer the problems, as well as local taxpayers, who pay. My recommendation is to use taxation as a way of assigning the costs equitably. So figure out the real cost of purchasing a unit of a certain kind of energy, and tax it commensurately. Meanwhile, reduce other taxes (sales, income, whatever) so that the overall tax load remains constant.

The beauty of this approach is three-fold.
· It’s fair.
· It’s revenue neutral; maybe not in pure taxation terms, but in the overall cost to the economy.
· Most importantly for the big picture, representing the true cost of fossil fuels makes alternatives much more cost-effective.

Elaborating a little, I would either remove all subsidies for the oil industry or recoup those subsidies through a surcharge at the gas pump. The 300 billion dollars we’ve spent on Iraq – gas tax. Expenditures on homeland defense, required because our gas purchases fund Middle Eastern psychos – gas tax. I would go further in the transportation sector, and fund all public infrastructure for transportation (roads, parking lots, highway patrol, etc) from targeted taxes, either on gas, vehicles, or roads (i.e. tolls).

Note that I’m not saying that gas consumption is morally bad, or that we should all be carpooling, or we should tear down the suburbs. All I am saying is that if you want to drive a Hummer, then you should pay what it truly costs. We’re paying for these costs one way or the other – let’s make it explicit and equitable.

One of the key techniques to adopting alternate energy should be to utilize the power of the marketplace. I’m not sure the best way to do this, but increasing energy taxes is a big start. As conventional energy becomes more expensive, companies have more incentives to develop and utilize alternatives. I’m not as big into massive government subsidies; it seems like those often tend to turn into handouts for corporations. So I would want to use those carefully.

There are two sub-goals in getting the marketplace involved. The first is that currently, energy companies are heavily vested in the status quo. They have billions of dollars in current infrastructure, and tossing that for something new and maybe more expensive isn’t a good way to keep the stock prices up. So one sub-goal is to figure out how to realign energy companies so that their interests are the same as the country’s as a whole. The second goal is to strengthen the market power of the alternative energy industry. Once that happens, that industry will also grow in lobbying power, which will be critical to counterbalance the political influence of the massive energy companies. For example, Exxon recorded a profit of thirty-six billion dollars in 2005. That kind of money affords you enormous power in this country.

There are a lot of people suggesting higher energy taxes, and I think it’s an idea whose time has come. To put it another way, the goal here is to align our short-term policies with what’s best in our long-term interests.

Fund more basic research into energy alternatives.

Like I said, I’m not always that keen on massive government handouts, and prefer to let the market do its magic. But the free market isn’t good at everything. In particular, companies need to be able to confidently predict a decent return on investment before they will sink money into a project. In particular, private investment doesn’t always work well with basic science, where the paths to explore are unclear, the payout is unknown, and the risks are high. Secondly, there aren’t too many companies that can afford to sponsor major-league research projects (i.e. that run in the billions of dollars). So this is one area where the government is better suited to help.

Here are the areas where I’d like to see more government-funded research:
· Transportation. Right now, oil is far and away the best fuel we have for vehicles and airplanes. The most likely alternatives are hydrogen and electric power, both of which have issues that need to be worked out.
· Electricity generation. Wind technology is rapidly maturing, but solar still needs help. Nuclear doesn’t need as much help, but could still use it (in the areas of safety and waste disposal). Note: this item might sound off topic, since oil is not generally used to generate electricity. However, most electricity in the world is generated from natural gas and coal, both with their own issues, not least of which being that they are in finite supply. The large deposits of natural gas that we will need to tap in the future come from those same unstable countries whose oil we are trying to get away from now, and burning coal generates large amounts of pollution. Since we will need to replace the oil we use for transportation with electricity, our demand for electricity will increase greatly.
· Efficiency. Our current energy infrastructure wastes a huge proportion of energy. For an example of what I mean, the next time you pass by a power plant, check out the cooling towers. Those disperse extra heat created by the generation process, i.e. … wasted power. We waste power all throughout the energy “lifecycle”, from extraction to transformation to consumption. The marketplace should take care of some of this after energy prices are adjusted per my Step 1, but more basic research will be helpful.
· Futuristic stuff. Nuclear fusion. Space-based solutions. Geothermal. Ocean tides. Heck if I know, but let’s pay some scientists to figure out what makes sense.

I know what you’re thinking – this all sounds great, and why not throw in ponies for everybody while we’re at it. How to pay for all of this? Not sure. I would seriously consider repurposing some of NASA’s budget, if not most of NASA itself. Of course, if I were really king I would also be reconsidering the budget for the Iraq war. But really, I don’t know. We’re increasing the national deficit for everything else under the sun, might as well chuck in a few more billion in research that will get us out of a pickle one day. As to how much money to invest, again, I'm not sure, but I would think a few billion dollars would not be too much of an extra burden, and would pay real dividends.

Strengthen the U.S. economy to make sure we have reserve strength to bear in any crisis.

I’m on shakier ground here, as I’m no economist. But there are a number of long-term trends that I don’t like to see. A sizeable national debt, that’s growing rapidly. Personal debt at an all-time high, with bankruptcies on the rise to match. Health-care costs on the rise as our population ages. Increasing proportion of retirees, with a smaller proportion of workers to support them. A possible housing bubble.

Most of the apocalyptical out-of-energy scenarios involve a collapse in the American economy as it gets hit by one shock too many (generally by massive oil price increases), and the dominoes start collapsing. I don’t really buy into the apocalypse, but I don’t feel like our economy is in great shape either. I’d like it to be strong so that we can be confident that we’ll handle whatever comes along.

What to do here? I don’t know; I’m no economist. But it might help to honestly start having a real national debate on some of the issues mentioned above, and start working towards solutions that smarter people figure out.