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Policies of Scale: Efficient Global Policy

Being Smart: A New Energy Plan for A New America

There is an idea being floated right now that deserves every American’s support. It is one of those rare policy ideas that, no joke, benefits Americans across every demographic and sector, and its logic is as beautiful as its promise. The idea is to produce more oil and natural gas domestically and spend a portion of the resulting increase in government revenues on developing alternative and renewable energy through an “Energy Security Trust Fund.” The benefits are myriad: increasing domestic energy production means more domestic jobs and economic growth, greater flexibility in foreign and domestic policy-making, more stable business and economic environments for private and public sector planning, and a much healthier outlook for our future energy needs.

 

The plan is straightforward: a portion of government revenues from domestic oil and gas production should be used to fund research and development of non-fossil fuel energy. President Obama has proposed this idea based on currently approved on and off-shore production while Senator Lisa Murkowski has proposed the same concept, but with the opening of federal lands to additional exploration and production. Securing America’s Future Energy (SAFE), who Obama referenced in this year’s State of the Union, has detailed a plan similar to Murkowski’s.

 

The concept is one worth pursuing, whether it is Obama’s more limited option or Murkowski/SAFE’s more expansive one. However, given the economic boom of opening federal lands to energy exploration and production, the size of the challenge faced by alternative and renewable energy and the absolute long-term importance of getting America off its oil addition, the more expansive one that includes federal lands is merited.

 

By opening up more domestic oil and natural gas production opportunities, more state and federal revenues will be generated. The types of revenues generated include three varieties: those from land leases, royalties, and bonus bids. The potential for revenue generation from all federal lands through these three revenue sources could be as high as $2.7 trillion to the federal government and $1.1 trillion to state and local governments through 2050 according to a study by the Institute for Energy Research (IER).  Though the nature of predicting energy trends is quite challenging, there is ample evidence that the government stands to earn a lot of revenue from increasing domestic oil and gas production. Some portion of that revenue (SAFE suggests 50% of the federal share while Mukawski’s Energy 20/20 does not provide a percentage) would be directed to a fund that is used to support crucial research and development into alternative and renewable energy that the private sector has shown no interest in pursuing on a meaningful scale.

 

In order to recognize the beauty of this arrangement, a few realities must be acknowledged. The first is that we have an abundance of oil and natural gas in the US, and our North American neighbors do as well. With the new technologies that came online recently we could be self-sufficient by 2035, leading many to predict that our future as an energy producer puts us in the top-3 in the world of biofuels and the “largest global oil producer in the world before 2020.”

 

The economic boon awaiting further domestic production is massive, and given our anemic economic growth, the timing could not be better. Opening up federal lands to energy exploration and production could add as much as $127 billion annually to our gross domestic product for the next seven years with a cumulative total of $14.4 trillion over the next thirty years. Further, energy is an employment multiplier, and could add nearly two million jobs to the economy by 2045 if federal lands are unlocked (IER). As a bonus, energy jobs tend to pay better than the national median income. We are literally sitting on a massive economic stimulus that with proper and responsible regulation and long-term planning will last for decades.

 

The second reality is that despite our vast amounts of natural resources, they will run out, extracting them will remain quite costly, and we will need new sources to meet our mind-boggling energy needs – even as efficiency improves, aggregate energy demand continued to increase by 10% over the last 10 years while all sectors are projected to demand increasing amounts of energy through 2040 in the EIA’s projections, including the oil-thirsty transportation and industrial sectors. As much as we have become accustomed to fossil fuels (and we have – the US has spent somewhere between 2.6 And 8.5% of GDP annuallyon oil over the last four decades; 2011 was a record year with 8.2% of median household income spent on oil), maintaining this reliance to the end is suicide.

 

The price for an American future dominated by domestic oil, despite its rewards, is high. The discovery of America’s abundance of shale oil and gas is exciting, and the development of technology to extract it even more so, but production costs require high energy prices for consumers. The bounty of oil and gas then comes at a cost to the US consumer and economy – nothing we are not experiencing now, but nonetheless requiring energy prices that disadvantage the non-energy sector of our country (roughly 93% of GDP, meaning the vast majority of Americans). Thus, continued and/or expanded production requires consistently high prices that drag on economic growth. This makes disconnecting the American economy from its reliance on oil an important long-term goal. The negative externalities of an economy based on oil, as ours is, will only diminish in meaningful ways when our use of oil, domestic or internationally sourced, diminishes in meaningful ways as well.

 

The third reality is that our reliance on fossil fuel means unavoidably limited options for our foreign policy decision-makers, but more domestic production could mean more flexibility. The bad news is that we will never be able to fully withdraw from the Middle East or Africa no matter how much of our energy demand is met by domestic production so long as the global economy runs on oil. The US relies on the global economy, and the global economy relies on Middle Eastern and African oil. As the US is the only country able to ensure safe passage of oil from these regions, it would be economic suicide for us to pull out of the security and stability business that our military performs so well. However, the less we rely on foreign oil imports, the more flexible we are in our foreign policy. Further, as domestic oil and gas production increases, expanding exportation becomes a more serious discussion, and safe global passage of our energy exports will add to the imparity of the role we play in ensuring that passage.

 

The role energy plays in literally every sector through multiple degrees of direct and indirect association means our reliance on a product beholden to global factors necessarily lessens the amount of control we have over decisions we make about life, whether it is public or private decision-making. In just one example, the increase in spending on gas by the average household between 2001 and 2008 effectively offset the income tax reductions over the same period. No amount of domestic production will unhook domestic pump prices from global prices, but more domestic production does increase our ability to moderate price volatility while keeping more of the dollars paid at the pump in domestic savings and investments.

 

The forth reality is that the government has a crucial role to play in developing our next generation of non-fossil fuel energy that the private sector alone simply will not perform, even if it could. One discouraging trend has been the long-term decline in privately funded R&D; private spending on energy R&D peaked thirty years ago, and now amounts to half the amount of that peak. Further, the energy industry tends to focus its R&D efforts on fossil fuels because its return on investment occurs more quickly. Over the last thirty years, fossil fuel R&D represented more than half of the cumulative private sector investment, perhaps as much as three-quarters. More to the point, the kind of projects that receive private funding are heavily skewed towards later staged companies, and the amount of funding going towards earlier stage, higher risk technologies, has declined. The International Energy Agency estimated that between 2010 and 2050 the world will have to invest $45 trillion (three times US GDP) in energy based on population predictions.

 

This is the key reality because a good chunk of Congress, and a fair amount of Americans, are ideologically transfixed on the notion that government’s impact ranges from mildly to extremely negative because it is too big. The last few years have seen a dramatic reduction in government overhead and spending (if you don’t believe me, look at the trends in public sector employment and government spending per capita (and here)), leaving much of the private sector with greater autonomy. Further, small business, which both parties herald as drivers of job growth, are more than twice as concerned about weak demand than anything else, including government regulation and taxes. Yet, ironically, the country’s economic performance has been less than stellar while corporate profits have skyrocketed since the recession while investment has lagged. The fact is that over a long period of deregulation in telecom, energy, and banking and finance, and historically low effective corporate tax rates, a greater share of profits have been diverted away from investment to low-growth multiplier destinations like dividends and corporate accounts. And even though private sector is indeed borrowing, it is not investing. Hence, crucial industries like renewable and alternative energy have been unable to attract private funding given their high risk and long-term ROI.

 

Yet the reality is that the nation needs this industry’s products, just like the country has needed other products requiring federally funded research and development, like the Internet and biomedical technology. We can focus on an imperfect record, but it is an unavoidable fact that the government has provided R&D funding for incredibly important advances in science and technology that private industry not only is unwilling and unable to provide itself, but also reliant upon for its own viability and profitability. As Murkowski’s Energy 20/20 states, “Initially, expenditures by federal and/or state government agencies are often required for successful collaborative [research and development] efforts [between the public and private sectors]” (page 74).

 

Bad examples like Solindra do exist, but the process is a numbers game, and one success often makes up for multiple “incompletes.” Further, the very nature of R&D is that it tends to be helpful even when it fails to produce its intended goal because the knowledge gained by the effort itself informs other efforts and ideas with knowledge that would not have been otherwise gained. As Energy 20/20 points out, “[a] collaborative effort between industry, academia, national labors, other R&D institutions, and federal and state agencies has often proven effective in the past” (page 74), and “[it] is prudent to use public resources to support clean energy development” (page 80). The notion that the government should not fund R&D is detrimental to the best interests of every American, and the stipulations for funding this kind of project outlined in Energy 20/20 on pages 78, 79 and 80 provide a great initial set of guidelines to enable government revenues spent on the fund produce the kind of results needed.

 

Therefore, the challenge we face is boosting the amount of funding the government provides while improving the process to generate high rates of success. R&D funded from the Trust Fund should be focused on technologies that are at the intersection of basic research and commercialization, including advanced combustion technologies, vehicle efficiency, electric drivetrains, high capacity electrode materials, compressed natural gas, and advanced batteries. Such a funding route and focus puts R&D on the most direct track towards the private sector who can plug the solutions into products demanded by consumers. Such an approach would be an improvement on the current policies that focus federal dollars on federal R&D by expanding the focus to include technology transfers from the R&D institutions to the private sector.

 

We can and absolutely should take every responsible advantage we can from our abundance of natural resources. Doing so will put more people to work in an industry that touches every sector of our economy. The employment and wealth boost from domestically sourced energy will mean greater long-term economic stability and a better environment for public and private planning and decision-making, while our national energy security improves dramatically and our foreign policy gains more flexibility. Meanwhile, revenues from this production will lay the building blocks for the country’s future energy needs, providing another source of employment and economic activity. We have a foundational good idea, and we have high profile, powerful members of both parties who recognize it. This is kind of thing that moves America forward, and we ought to pursue it with full vigor.

2 Responses to “Being Smart: A New Energy Plan for A New America”

benleetFebruary 20th, 2013 at 6:38 pm

Obama stated in the recent State of the Union speech, 12 of the hottest years on record occurred during the last 15 years. Photosynthesis stops at temps above 104 F. Los Angeles recorded 119, its record high, 9.27.2010. This is a well written article with excellent ideas, but it omits the looming problem of CO2 emission build-up and global climate warming. Lester Brown might have some interesting comments on this article, such as we have already exceeded the earth's sustainable yields by 50%, and the time to introduce conservation and reduce pollutants is long overdue.

benleetFebruary 21st, 2013 at 8:39 pm

A friend forwarded me an article about mega-droughts, "The Worst Drought in 1,000 Years Could begin in Eight Years", by Bruce Melton who has more articles at Truth-out. A reader who enjoys scientific argument will enjoy the article. http://truth-out.org/index.php?option=com_k2&… — A scientist/author at Columbia University says: "For Texas, the models predict that precipitation will decrease and evaporation rates will also go down in spring and summer, but only because "there is no moisture to evaporate."

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