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An Unfriendly Profile of Schemes for US Energy Independence

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
October 21st, 2008

There are occasions when economic knowledge appears to be a scarce good. This regrettable deficiency is partially a result of the abysmal teaching of economic theory that takes place in many faculties of economics, as well as the non-stop spreading of bogus economic knowledge by the media.

A particularly noxious example of bad teaching (in combination with spurious economic science) can be found in energy economics, although hopefully this will soon change, since both presidential candidates in the 2008 US election stressed that energy independence is very high on their ‘to do’ lists. The Democratic candidate, for example, called for no less than a “transformation” of the US economy in order to make that country independent of imported energy – particularly from the Middle East. This transformation – if that is the correct term – might eventually include a more widespread tolerance of nuclear energy, but primarily there is supposed to be as large a dose of renewables as is economically optimal. A change in attitude toward the offshore drilling for oil has also been advertised.

How much nuclear and how much offshore drilling, in case these alternatives become relevant? I’m afraid that I don’t have the slightest idea, but perhaps it doesn’t make a great deal of difference, since neither does Senator Obama nor his advisors. However, since 30 new plants are reputedly on the drawing boards, it is unnecessary to uncover the exact figure. Moreover, by 2030 the Republican candidate wants 45 reactors added to the 104 already deployed, and an additional ten over the following ten years. What size should these installations be? Neither Senator McCain has nor anyone else has provided the electorate with any information in this matter, but I lean toward facilities in the 1500-2000 megawatt (MW) class since – according to my humble calculations – nuclear is both the most inexpensive and the most flexible source of energy, given present and future technical, economic and political constraints. It might also be a good idea to delay constructing the last increments of this nuclear ‘package’ until the so-called ‘fourth generation’ of nuclear technologies can play a role.

As for offshore drilling, the Republican vice-presidential candidate is perhaps a more fervent believer in energy independence than the two presidential candidates, and she not only wants to drill in the Alaskan National Wildlife Refuge (ANWR), but also wants to see the construction of a large pipeline to transport Alaskan gas from all sources to the middle of the ‘lower 48’ (of the 50 US states). ‘Big Gas’ has called this proposal politically astute but economically dumb, however I am not sure. If we are talking about an improvement in the natural gas situation facing the United States, it may provide a worthwhile supplement, although as far as I can tell it is far from sufficient to turn the US from a gas deficit to a gas independent country. In addition, it is easy to understand the displeasure of Big Gas, because the seasoned profit maximisers in their executive suites almost certainly want to see this resource put on ships in the form of liquefied natural gas (LNG) and carried to e.g. Asia, where today it is selling for about twice as much as pipeline gas in the US.

With all due respect to politicians and their advisors, I have a very strong feeling that the mere idea of energy independence is to a certain extent illogical, because as generally outlined there is an inadequate reference to cost. During the Second World War many countries were forced into an independence mode, particularly where raw materials were concerned, and for the most part they abandoned this posture as soon after possible after the shooting stopped. Sweden is a good example here, because unlike the US it was necessary to replace almost all oil-based motor fuel. The main replacement was ‘wood-gas’ (or gengas), which was used in both civilian and military vehicles, and a small amount of gengas production takes place today. As for its general desirability, I have never heard anyone claim that a large-scale resort to this expedient would be capable of outweighing its disadvantages, although contemporary technology may now be capable of upsetting that judgement.

This might also be the place to mention that Len Gould once pointed out in the important forum EnergyPulse (www.energypulse.net) that voters in oil importing countries might prefer war to foregoing the large quantities of motor fuel that they believe they deserve. I have no reason to doubt this, because if voters in the US (and elsewhere) were really interested in accepting the concept of energy independence, and thought it ‘doable’, their purchases of energy intensive goods and services would be of a very different magnitude from those we witnessed before the onset of the recent macroeconomic and financial market unpleasantness. Unless I am badly mistaken, the cost of energy independence in the short to medium run – assuming that it was made known – would be unacceptable to a majority of American voters, although in the long run a ‘transformation’ of one sort or another should be tolerable. It might even be necessary, although it is too early to take a position on this very complex topic.

SOME ASPECTS OF RATIONALITY AND PROCEDURE

The mention of voters preferring war to abstention from motoring immediately brings up the question of how community leaders receive their instructions from the electorate.

As Kenneth Arrow suggests in his brilliant book ‘Social Choice and Individual Values’ (1951), in a capitalist democracy there are ideally two avenues by which social choices are made. These are voting – which means voting for certain programs advanced by candidates for public office – and the market mechanism. The problem of course is that voters/consumers as well as their political masters may lack the knowledge to appraise and rank choices that are critical for satisfying both their present and future energy preferences. Without this knowledge, the kind of rationality that is indispensible in certain situations might be impossible, because as Kurt Rothschild noted (1946), “Unless economic units act in conformity with some rational pattern, no general theory about what would follow from certain premises would be possible.” Professor Arrow evidently found it difficult to accept this proposition, however I can understand his reluctance, because his book was written during those wonderful post-war days in which there was growing prosperity and overwhelming optimism in the US, and when it was less important than at the present time whether voters and politicians really understood what they were doing or what was going on around them.

If there were a better understanding of economic theory, energy independence might be an unwelcome prospect. This is because assuming a burden of this nature would probably require a modus operand whose configuration is unacceptable in a time of peace. But even so, given the possible shortages of energy that could take place in the not too distant future if the supply and demand trends of the past few years persist, a comprehensive energy policy will almost certainly have to be crafted by the US government, even if total implementation can be delayed. Although not broaching the question of energy independence, Lisa Raffin (2008) seems to believe that the way ahead in matters of this nature is the one suggested by Sheila Sheridan of the US Green Building Council: “Doing a little at a time, and eventually making a difference”.

I don’t see how this philosophy can be rejected, if only because it concurs with my way of appraising the various difficulties that are certain to be encountered if there is an ambitious attempt in the US or elsewhere to install a full-fledged state of energy independence. What is needed here is a ‘Cold’ rather than a ‘Hot War’ approach, more or less in tune with the rhythms I was exposed to during my undistinguished but very enjoyable holiday in the United States Army, and which I later assessed in conjunction with some useful advice put into circulation by Chairman Mao (of the Peoples Republic of China): “…ten percent fighting, ten percent waiting, and eighty percent self-improvement.”

In the scientific community, systematic thinking on the energy future (and not necessarily on energy independence) seems to focus on diversity. (Note the word ‘seems’, because the general public is not particularly interested in the opinions of nerds, geeks, wonks and ‘perfessers’). In some situations diversity has a great deal to offer, if only because of the annoying technical or political shortcomings that characterize the entire roster of energy sources. To be explicit, I favour an energy structure that features an optimal nuclear base supporting a heterogeneous structure of renewables, because I not only regard nuclear as comparatively inexpensive and reliable, but it possesses the largest capacity for further development among ‘base-load’ facilities.

As I was recently informed, my work on the present topic says little or nothing about natural gas and coal, however this is intentional. I am preparing a long survey of natural gas (2008), in which I claim that there is much less of this resource in the crust of the earth than often believed. I have been informed on several occasions though that there is not only enough natural gas in the US to eventually offset the US gas deficit, but to make that country a sizable exporter. Rather than examining that strange perspective in the present contribution, I suggest that readers should peruse my survey, or perhaps better the superb articles and comments on this topic in EnergyPulse and the very important site ‘321 Energy’. As for coal, the stance I take in the (forthcoming) new printing of my energy economics textbook (2008) is that a great deal more coal is going to be used in both the US and China than many persons suspect or believe or desire, regardless of whether the issue is energy independence or something very different. At the same time I recognize that in an era of ‘carbon footprints’ and ‘carbon constraints’, this is something that cannot be discussed at great length without, sometimes, arousing a vociferous difference of opinions.

COMING TO TERMS WITH COAL

In a recent article in EnergyPulse (2008), Mark Gabriel points out that many observers have the wrong idea about the future of coal on the US energy scene. Someone else who had a few words to say on that issue several years ago was the influential billionaire Mr T. Boone Pickens, who claimed that the oil market situation did not look promising for vehicle owners in the US, and as a result they should encourage their political masters to pay more attention to turning large amounts of coal into motor fuel. The background to this recommendation as well as the observation by Mark Gabriel is the copious quantities of high quality coal that is available for exploitation in the US.

Thus, when the talk turns to ‘dumping’ coal, few observers realize how much of that resource is being used, nor how irreplaceable it is in the short-run. According to the Energy Information Agency (EIA) of the US Department of Energy, 40 percent of the global production of electricity is coal based, as compared to 20 percent for gas, 5 percent for oil, and 33 percent for hydro, nuclear, biomass and wind. These figures however do not capture the dependence of e.g. the US and China on coal. Furthermore, coal’s place in the global electric scene is forecast by the EIA to greatly expand between now and 2030. Of course, the same is true for gas, although I find myself wondering if the availability of that resource has been correctly evaluated.

Regardless of how much coal is or might be used, the problem is that many people do not want to burn coal. What they want is to solve the energy problems of the world with renewables, perhaps natural gas, and nutty concepts like emissions trading. ‘Clean coal’ might be acceptable, but there are important questions here that have not been satisfactorily posed or answered. They mostly concern the cost of attaining the large scale commercial viability of this departure.

As reported by Professor James Hamilton (2008), Frank Wolak recently gave a talk at the economics roundtable of the University of California at San Diego in which he reviewed the outlook for wind. As far as I could tell, he wasn’t very optimistic, although it wouldn’t have made any difference to me if he was ecstatic with enthusiasm: wind is not going to be able to provide the electric energy that many concerned energy consumers have been led to expect. For a state like California, solar may make considerable sense, however in the interest of realism Professor Wolak suggested that greater attention should be paid to nuclear and clean coal, where the latter is sometimes referred to as CCS (or carbon capture and storage),.

CCS is receiving a great deal of attention in Germany, which is largely due to the efforts of Lars Josefsson, the CEO of the Swedish utility Vattenfall, who is also an energy advisor to the German government. Vattenfall is of particular interest to me, because that enterprise did not oppose the scam known as deregulation/restructuring, nor did it visibly protest the ridiculous decision of the Swedish government to begin a nuclear retreat. The reason of course is because these two economic distortions increased the remuneration of the top executives of that firm by a large amount, and perhaps even better enabled them to transfer a large part of their professional and social activities from Sweden to Germany. As for Mr Josefsson’s theories about clean coal, they belong in the same category as Mr T. Boone Pickens’ theories about a “wind energy corridor” from the Mexican border in the south to the Canadian border in the north, and which at the present time has about as much economic justification as the proposed colonizing of Mars or Pluto by bright-eyed space pioneers.

Josefsson supposedly aims for CCS technology to be “fully commercialized by 2020”, and claims that CCS is the way to ‘carbon-freedom’ for Europe’s electricity industry by 2050. He also wants to reduce the CCS cost from 50 euros/tonne to 20, but in terms of orthodox economics, all this is half-baked bunkum, or hypocrisy. Moreover, if this verdict fits what is proposed for Germany, it is equivalent to the same thing for the US and the propositions for energy independence now filling that country’s blogosphere. See for example some observations of Jeffrey Michel (http:/www.energyconversion.org/), who is the leading commentator on this subject where Germany is concerned.

A MODEST CONCLUSION

When the global macro-economy gets back on the rails, and incomes begin to rise all over the world, the price of energy – and particularly oil and gas – will move in such a way that the reluctance to use coal will gradually lose much of its urgency. Given the aversion to nuclear, energy independence for the US can only mean a greatly increased, and probably sub-optimal consumption of coal – some clean, and some dirty, but in any case an outcome (i.e. increase) to avoid if other options are feasible, to include a less adversarial attitude toward foreign energy exporters and nuclear proponents.

REFERENCES

Arrow,Kenneth (1951). Social Choice and Individual Values. New York: John Wiley.

Banks,Ferdinand E. (2008). The Political Economy of World Energy: An Introductory Textbook. New York, London and Singapore: World Scientific.

_____.‘A long introduction to economic theory and natural gas’. Forthcoming.

Gabriel, Mark (2008). ‘Another inconvenient truth: the need for coal’. EnergyPulse.

Hamilton, James (2008). ‘Balancing California’s energy needs and its environmental Goals’. Seeking Alpha (10/17/08).

Raffin, Lisa (2008). ‘Greening commercial facilities’. EnergyPulse (10/14/08)

Rothschild, K. (1946). The meaning of rationality. Review of Economic Studies (Vol 14).

Professor Ferdinand E. Banks
ferdinand.banks@telia.com