What Change Will Obama Make?

Energy Policy

Next to tax policy, energy policy is critical to the economic well-being of the United Stares and its citizens. Thus far, gridlock in Washington has precluded the implementation of a sensible and effective policy which will provide for our energy needs and free us from an inordinate reliance on foreign sources of oil.

In this time of economic uncertainty, gasoline prices are currently falling to below $3.00 per gallon. But this may be just a temporary phenomenon. Certainly nobody wants an economic recession in order to force down gas prices. Once the economy rebounds, however, prices are likely to revert back to the $4.00 per gallon level experienced earlier in 2008. The cause: rising world demand, particularly from China and India, and a leveling off of oil production world-wide.

Political demagogues, looking for convenient scapegoats, abound during times of rising oil prices. Yet, not only is their analysis of the causes flawed, but their policy prescriptions would make the situation far worse. Let’s examine a few basic facts.

Energy Independence

Despite a lot of rhetoric on both sides of the political spectrum, true energy independence is not a reasonable expectation and should not drive our energy policy. The world has become irretrievably energy interdependent, and this interdependence will only increase as new supplies of fossil fuels, particularly oil, become more difficult to locate, or extract. Oil prices are determined by global markets, not oil companies, and the basic laws of supply and demand.

New and alternative sources of energy will make a relatively minor contribution to the total energy mix in the United States for a number of years. We will continue to draw upon every type of fossil fuel, including crude oil, natural gas, diesel fuel, gasoline, coal and uranium which are traded in the global markets. Yet, for the foreseeable future, the industrial world will be dependent on fossil fuels. Solar and wind power will supply only a small fraction of our energy needs for the next fifty years. To think otherwise, would lead to costly and counterproductive governmental policies with damaging economic consequences. Ramping up our oil, natural gas, and nuclear power production will be essential if we are to meet our energy needs for much of the current century.

Unfortunately, our current energy deficiencies are largely a consequence of the extreme elements that have taken control of the environmental movement, and, though them, the modern Democratic Party. Environmentalists oppose drilling offshore, in ANWR, and other places likely to produce significant quantities of oil. They oppose the use of coal and, for more than 30 years, have opposed the building of new nuclear power plants. The underlying rationale is ideological, a blinding opposition to the capitalist market system and our modern way of life. Many mainstream Democrats do not comprehend the forces which have taken over their party. And in recent years, the spector of global warming has become a cause du jour, designed to hasten the decline of our energy dependent civilization.

This is the basis of the “Peak Oil” movement which predicts a steep decline in global oil production and prays for the decline of modern civilization. They predict an apocalyptic world of economic collapse, subsistence farming, local economies, and dehydrated food reserves. To hasten the coming of this energy future, they oppose attempts to increase supplies of oil, natural gas, and nuclear power. The frontal assault on carbon-based fuels in the name of reducing so-called “greenhouse” gases” constitutes the gravest threat to our economic security.

The problem with the “Peak Oil” theorists is that their analysis does not adequately take into account that these challenges generate new solutions, as the late economist Julian Simon was fond of pointing out. Viewed from an energy rather than an oil perspective, the problem has a multi-faceted solution that will dramatically alter our energy future. Just as wood gave way to oil, oil will yield to natural gas, nuclear power, and other solutions of which we have not yet dreamed.

The Decarbonization of Energy

Media pundits and environmental alarmists alike have virtually ignored the most transformative phenomenon which has characterized the global energy story of the past 300 years: decarbonization. As energy expert Robert Bryce points out, the world has been moving gradually away from the use of carbon-based fuels to cleaner fuels. It is a trend that has continued inexorably, and without government interference or subsidies.

Consider these facts: From pre-history through the early 1800s, wood was the primary fuel, providing a carbon to hydrogen ratio of 10:1. As the world converted to the use of coal, that carbon to hydrogen ratio fell dramatically, to 2:1. Beginning in the late 19th century, we shifted gears again, this time to oil, with a 1:2 carbon to hydrogen ratio. Natural gas, on the other hand, which is now supplanting oil, has a 1:4 carbon to hydrogen ratio. Compared to wood, natural gas has 40 times as many hydrogen atoms.

When we examine market share, we find that carbon-based fuels had a 90% market share in 1800, but only a 50% market share in 1935. By 2100, according to Rockefeller University’s Jesse Ausubel, hydrogen will constitute a 90% share of the global energy market, largely due to the shift to natural gas. Significantly, concerns about “global warming”, to the extent that it is a concern at all, will be obliterated by completely natural and positive trends in our energy consumption.

This trend may not follow a consistently upward trajectory and there may be bumps along the way toward a less carbon-dependent future. For example, China and India are still building coal-fired electric plants; and new oil discoveries are still providing new supplies of that carbon-based fuel. There have also been trillions of dollars of investment in the existing energy infrastructure. But new gas discoveries are being made at a faster rate than oil discoveries, and in more countries. Thus, the long-term trend is indeed positive.

The re-birth of interest in nuclear power as well as construction of new plants has been fueled not only by the growing demand for energy, but by concerns about carbon dioxide emissions. Long opposed by environmentalists and pandering Democratic politicians, nuclear energy offers a significant source of clean and efficient energy far into the future.

Alternative Sources of Energy

While there is ample justification for growing our use of alternative sources of energy, their potential contribution to the global energy mix has been overstated. Between 1990 and 2005, output from various forms of renewable energy (primarily wind, solar, and geothermal) has grown by 152%. However, this combined total currently constitutes less than 1% of total global energy use as of 2005. With China building 1-2 new coal-fired plants per week, wind power will be hard-pressed to maintain its current contribution to the energy mix, let alone increase that contribution.

Nor has there been adequate consideration of the negative consequences of some of these technologies. Consider the wind farms being promoted by T. Boone Pickens. It would take 1,200 square miles of wind generators (placed five per square mile) to equal the output of 3 to 4 coal-fired or nuclear plants. These calculations reflect the fact that wind turbines generate electricity at only 30% of their theoretical capacity, as opposed to nuclear power plants which produce electricity at a rate of 92% of capacity. Moreover, most Americans have not fully grasped what our landscape will look like once it is blanketed with wind generators. It will not be pretty. It’s why Denmark, Japan, and Ireland have all refused to accept more wind energy. Denmark, which leads the world in wind generation, stopped building wind generators in 2007. If Pickens’ dream is realized, a motorist will be able to drive from North Dakota to Texas without losing sight of a wind generator.

Wind power also presents serious practical obstacles. Because electricity cannot be stored on a large scale, it must be consumed the moment it is generated. This creates enormous practical problems trying to match supply and demand, which must be kept within a range of 5% of each other. An electrical grid cannot tolerate more than a 20% contribution of wind energy due to its unreliability.

Generally speaking, alternative fuels, such as wind, water, solar, and biofuels, are characterized by their low densities in relation to fossil fuels. They are, in fact, 5 to 50 times more dilute than fossil fuels. The only way to compensate for their low densities is to consume large tracts of land in gathering their output. Ethanol, for example, now consumes one-quarter of our corn crop, but only replaces 4% of our oil. Its expansion in recent years, with the aid of federal subsidies, has already threatened food production and raised prices across the globe, with particularly dire results in the Third World.

A Sensible Energy Policy

A sensible energy policy for the United States should include the following key elements:

1. Expanded drilling operations, not only in the continental United States, but offshore and in the Arctic National Wildlife Refuge (ANWR). Offshore drilling should not be confined to areas more than 50 miles from shore, but close to shore where most of the oil exists and where technology is better able to extract it.

2. A dramatic shift toward the production of electricity using multiple sources of energy, including nuclear, petroleum, coal, solar, wind, and hydroelectric. This multi-sourced approach will provide the United States with a level of energy resiliency not susceptible to shortages in individual energy sources.

3. A “Manhattan Project” for nuclear energy which will remove the political, regulatory and legal roadblocks currently standing in the way of the construction of new nuclear power plants, with a goal of dramatically increasing electrical generating capacity within 20 years.

4. The conversion of a major portion of our transportation fleet to electricity. This will require a dramatic expansion in the production of electric and duel-fuel vehicles, substantial improvements in battery technology, and improvements in the capacity and reach of the electrical transmission infrastructure. Nuclear power will be a major ingredient in this gradual conversion from gasoline-powered to dual-fuel and, eventually, to electric vehicles.

5. Abandonment of ethanol subsidies and government mandates. In our haste to supplant a portion of our gasoline consumption with ethanol, we have embraced a “solution” with strong negative consequences. Ethanol has proved to be costly failure. Therefore, subsidies and government mandates should be eliminated.

6. Continued research and development of wind and solar technology, particularly in applications where kilowatt- hours are expensive and sunshine is abundant. The U.S. Department of Energy is striving to make solar electricity from photovoltaics cost-competitive with conventional forms of electricity from the utility grid by 2015.

The McCain Plan

The McCain energy plan—called the Lexington Project – is named for the town where Americans once asserted their independence from Great Britain. Its goal is to achieve “strategic independence” by 2025." It includes the following elements:

1. Expanding domestic oil and natural gas exploration and production. John McCain believes that the current federal moratorium on drilling in the Outer Continental Shelf stands in the way of energy exploration and production. He believes it is time for the federal government to lift these restrictions and to put our own reserves to use. This will allow us to keep more of our dollars here in the U.S., lessen our foreign dependency, increase our domestic supplies, and reduce our trade deficit - 41% of which is due to oil imports.

John McCain also believes in promoting and expanding the use of domestic supplies of natural gas, estimated to total 77 trillion cubic feet of recoverable natural gas on the Outer Continental Shelf.

2. Taking action to break our dependency on foreign oil by reforming our transportation sector. Senator McCain believes that we cannot reduce our dependence on foreign oil unless we change how we power our transportation sector.

John McCain's Clean Car Challenge. John McCain will issue a Clean Car Challenge to the automakers of America, in the form of a single and substantial tax credit for the consumer based on the reduction of carbon emissions. He will commit a $5,000 tax credit for each and every customer who buys a zero carbon emission car, encouraging automakers to be first on the market with these cars in order to capitalize on the consumer incentives. For other vehicles, a graduated tax credit will apply so that the lower the carbon emissions, the higher the tax credit.

3. John McCain will also propose a $300 million prize to improve battery technology for full commercial development of plug-in hybrid and fully electric automobiles. A $300 million prize should be awarded for the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars. That battery should deliver a power source at 30 percent of the current costs. At $300 million, the prize is one dollar for every man, woman and child in this country - and a small price to pay for breaking our dependence on oil.

4. John McCain supports flex-fuel vehicles (FFVs) and believes they should play a greater role in our transportation sector. American automakers have committed to make 50 percent of their cars FFVs by 2012.

5. John McCain believes alcohol-based fuels hold great promise as both an alternative to gasoline and as a means of expanding consumers’ choices. Some choices such as ethanol are on the market right now. The second generation of alcohol-based fuels like cellulosic ethanol, which won't compete with food crops, are showing great potential.

6. Today, isolationist tariffs and wasteful special interest subsidies are not moving us toward an energy solution. We need to level the playing field and eliminate mandates, subsidies, tariffs and price supports that focus exclusively on corn-based ethanol and prevent the development of market-based solutions which would provide us with better options for our fuel needs.

7. John McCain will effectively enforce existing CAFÉ standards. John McCain has long supported CAFE standards - the mileage requirements that automobile manufacturers' cars must meet. Some carmakers ignore these standards, pay a small financial penalty, and add it to the price of their cars. John McCain believes that the penalties for not following these standards must be effective enough to compel all carmakers to produce fuel-efficient vehicles.

8. Investing In Clean, Alternative Sources Of Energy. John McCain believes the U.S. must become a leader in the new international green economy. Green jobs and green technology will be vital to our economic future. There is no reason that the U.S. should not be a leader in developing and deploying these new technologies.

9. John McCain will commit $2 billion annually to advancing clean coal technologies. Coal produces the majority of our electricity today. John McCain believes we need to commit significant federal resources to the science, research and development that advance this critical technology. Once commercialized, the U.S. can then export these technologies to countries like China that are committed to using their coal - creating new American jobs and allowing the U.S. to play a greater role in the international green economy.

10. John McCain is committed to furthering the construction of 45 new nuclear power plants by 2030 with the ultimate goal of constructing 100 nuclear power plants. Nuclear power is a proven, zero-emission source of energy, and it is time we recommit to advancing our use of nuclear power. Currently, nuclear power produces 20% of our power, but the U.S. has not started construction on a new nuclear power plant in over 30 years. China, India and Russia have goals of building a combined total of over 100 new plants and we should be able to do the same. It is also critical that the U.S. be able to build the components for these plants and reactors within our country so that we are not dependent on foreign suppliers with long wait times to move forward with our nuclear plans.

11. John McCain will establish a permanent tax credit equal to 10% of wages spent on research and development. This reform will simplify the tax code, reward activity in the U.S., and make us more competitive with other countries. A permanent credit will provide an incentive to innovate and remove uncertainty. At a time when our companies need to be more competitive, we need to provide a permanent incentive to innovate, and remove the uncertainty now hanging over businesses as they make R&D investment decisions.

Promoting Energy Efficiency

12. John McCain will move the United States toward electricity grid and metering improvements to save energy. John McCain will work to reduce red tape to allow a serious investment to upgrade our national grid to meet the demands of the 21st century - which will include a capacity to charge the electric cars that will one day fill the roads and highways of America. And to save both money and electrical power for our people and businesses, we will also need to deploy SmartMeter technologies. These new meters give customers a more precise picture of their overall energy consumption, and over time will encourage a more cost-efficient use of power.

13. John McCain does not support a windfall oil profits tax. A windfall profits tax on the oil companies will ultimately result in increasing our dependence on foreign oil and hinder investment in domestic exploration. Jimmy Carter put a windfall profits tax in to place with little to no useful results.

The Obama Plan

The Obama plan, by contrast, is long on conservation and short on development of new energy sources. It may be characterized by its deference to environmental interests, and by its combination of gimmicks, payoffs (rebates), willful opposition to offshore drilling, and absurd claims about drilling on existing federal leased lands.

1. Immediately provide emergency energy rebate. Timed for the November election, Barack Obama has promised a $500 rebate for individuals and $1000 for families, with funds derived from a tax on the ”record breaking windfall profits” of oil companies. The proposal takes a page from Obama’s tax proposals by taxing the “rich” oil companies and spreading the wealth around. The problem with this proposal is that the oil companies’ profits are not record breaking by any reasonable measure, i.e. as a percentage of sales. The average net profit margin for the S&P Energy sector, according to figures from Thomson Baseline, is 9.7%. The average for the S&P 500 is 8.5%. By contrast, Google reported a profit margin of 25% in the most recent quarter. So, while energy companies are currently more profitable than other segments of the economy, they are not significantly so. What’s more, the oil companies earn about 10 cents per gallon, far less than the 18.4 cents the federal government imposes per gallon, or the average combined state and federal tax of 48.4 cents per gallon. We should be far more concerned about excess excise taxes on gasoline than oil company profits.

2. The Obama plan wants to create 5 million new jobs by “strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future.” This job projection has been pulled out of thin air and will be impossible to achieve if Obama’s tax plans come to fruition, particularly his proposed increase in capital gains taxes from 15% to 28%. The United Stares does not need government to “catalyze private efforts.” It just needs government to get out of the way.

3. Swap light and heavy crude, release oil from strategic petroleum reserve to cut prices. While employing politically appealing language about our reliance on foreign oil, and the transfer of wealth to oil producing countries, this proposal grossly overestimates the impact of tapping the strategic oil reserves. Moreover, the strategic oil reserve was designed to be tapped in case of national emergency, not to be used as a political tool in a vain attempt to affect oil prices.

4. Tackle climate change. The Obama campaign has naively bought into the myth of global warming as crisis as a justification for extreme measures guaranteed to torpedo economic growth. Global temperatures have risen slightly in the past thirty years, but there is no evidence that this is a result of rising carbon dioxide levels. The experience of the first 75 years of the 20th century directly contradicts this claim of a direct carbon dioxide-temperature relationship. In the first 40 years of the century, temperatures rose slightly, but carbon dioxide levels were significantly lower than they are today. And from 1940-1970, temperatures fell during a period of rising carbon dioxide levels. Only in the past 30 years has there been a correlation between rising temperatures and rising carbon dioxide levels. But correlation does not equal causation.

Also conveniently ignored is the fact that the mid-19th century was the coldest period in the last past 3,000 years, and that global temperatures have risen only eight-tenths of a degree Celsius from this temperature trough. Placed in historical perspective, the alleged global warming as crisis is an absurdity. While both candidates accept the global warming narrative, the Obama campaign and its socialist allies are far more fully committed to extreme government measures to combat this illusory threat because it more fully comports with their desire to increase government control over the economy. The cap and trade program is an elaborate regulatory scheme which will simultaneously destroy economic growth while ultimately making no impact on global temperatures.

5. The Obama plan makes no mention of drilling offshore, and certainly not in ANWR. While its web site says that “the U.S. cannot drill its way to energy security.” it acknowledges that “U.S. oil and gas production plays an important role in our domestic economy and remains critical to prevent global energy process from rising even higher.” Yet, its proposals would do little or nothing to increase domestic production. The Obama plan urges a “Use it or lose it” approach to existing leases. However, this position betrays a fundamental misunderstanding of oil and gas leases. According to oil geologists, Democratic legislation ignores the long-term realities of oil leasing, which takes years of studies to find and drill for reserves. Oil companies with federal leases are already operating under very defined time limits to produce oil or natural gas. If the companies do not produce on those leases within the time limit, they will lose their lease. Only some portions of leased land may hold accessible oil, while other portions do not, but companies must continue to lease the entire parcel. There is a misconception that every lease has oil, and has nothing to do with the geology of where oil is located.

The demand-supply imbalance and resulting higher oil prices which we have experienced in recent years have been exacerbated by the choke hold radical environmentalists have over the Democratic Party. This has had a profound impact on oil prices because the market perceives no short- or long-term relief in the form of governmental policies which can ramp up oil production. Barack Obama and Joe Biden are captives of this far-left environmental cabal. Obama’s track record in Chicago clearly demonstrates that he lacks the courage to challenge the political status quo.

6. Develop and Deploy Clean Coal Technology. According to the Obama web site “Obama has worked tirelessly to ensure that clean coal technology becomes commercialized.” One wonders where Obama found the time to do all this when he has spent most of his tenure in the U.S. Senate promoting his presidential candidacy. In fact, private sector investments in clean coal technology have been underway long before politicians like Obama expressed an interest in it. Clean coal technology offers enormous potential because of the enormous U.S. coal reserves. Opposition to the use of coal, clean or not, is opposed by the environmentalists who support his candidacy. Thus, it is highly dubious that clean coal technology will make sufficient inroads into our energy mix under an Obama administration.

7. Safe and Secure Nuclear Energy. Our energy and economic future are heavily dependent on the dramatic expansion of nuclear energy. It is highly unlikely that nuclear power will be pursued with any enthusiasm under an Obama administration. His web site spends more time discussing concerns about security of nuclear fuel and waste than it does the construction and development of nuclear power plants. The clue is in language which states: “before an expansion of nuclear power is considered, key issues must be addressed including: security of nuclear fuel and waste, waste storage, and proliferation.” Under an Obama administration, radical environmentalists will call the shots and little or no progress toward nuclear energy will be made. Furthermore, unless Congress adopts legislation to streamline the approval and construction process, environmentalists will continue to stymie the development of nuclear power. Obama’s statements are just a smokescreen to catch the gullible.

8. Energy efficiency improvements. There is no question that the United States can make significant improvements in overall energy efficiency. Those efforts did not begin in 2008, but have been ongoing since the last major oil crisis. However, keeping our tires inflated is not going to address our long-term need for energy.

In Conclusion

Increasing energy supplies must be pursued simultaneously with conservation. If we fail to address these supply issues, we can expect rising costs of gasoline, home heating oil, and natural gas, the combined effects of which will be devastating to the American household. The current economic downturn is just a temporary pause in a global energy environment which will return to high energy costs unless we take every opportunity to increase supplies and send positive signals to the energy markets that the adults, rather than the Democrats and environmentalists, are in charge.

More about Obama's energy plans:

Obama talks about bankrupting the coal industry (You Tube)
Discussion about Obama's coal comments (You Tube)
Obama's energy talk is eerily like President Carter's. (You Tube)