Wednesday, February 13, 2008

Bush Thwarts His Own Energy Policy

President Bush has talked a lot about making the U.S. energy independent. But on Dec. 26, 2007, he signed into law a bill that would prevent development of a U.S. oil resource more than seven times larger than the oil reserves of Saudi Arabia. This is the U.S.'s 2 trillion barrels of shale oil. The U.S. has the world's largest known reserves of this oil, which is so abundant worldwide it could supply the world's energy needs for 40,000 years at the current rate of consumption.

Shale oil has been known for a long time, and it has been used for long time on a small scale by means of an old technology. Estonia has used it since 1916. China began using it in 1910. But it could not compete on a large scale with conventional petroleum resources while those resources were so cheap. When the Arab oil embargo in the 1970s boosted oil prices, Exxon, Shell and other oil companies invested heavily in developing technology for large scale production of shale oil. With conventional oil prices then in the range of $35 to $40 per barrel, the outlook was very promising. However, after the embargo ended, oil prices plunged unexpectedly, eventually going as low as $10 per barrel. As a result, Exxon on May 2, 1982 announced it was abandoning its shale oil mine near Rifle, Colorado. In 1985 three other big oil companies abandoned their shale oil investments, contributing to the $5billion lost on shale oil.

Shell, however, kept 16 shale oil wells and has spent “many tens of millions of dollars” in the last 30 years on field research and new development processes. It is not asking for any government subsidy. Other oil companies are ready to jump in, too, because analysts believe shale oil can be very competitive with conventional oil at around $70 per barrel. One small company with a new process claims it can be competitive at less than half that price.

The world's richest known source of oil shale is the Green River Formation, 16,500 square miles of deposits underlying parts of Colorado, Utah and Wyoming. The U.S. Dept. of Interior owns 80 percent of this land. The appropriations bill that President Bush signed on Dec. 26 prevents the government from leasing this land or preparing or publishing any final regulations for such leasing. Without such regulations, those lands cannot be used for shale oil exploration or development. The bill, which was a foot-tall stack of over 3,400 pages, was approved by the Senate and passed on to the president for his signature only one day after it was introduced in the Senate. In other words, no one had time to read it. Yet it contained over 11,000 earmarks by congressmen and senators for spending on pet projects within their districts to ingratiate themselves with the voters. But nothing for shale oil leasing.

Congress and presidents before Bush have also prevented other economically feasible energy resources from being developed. To appease the environmental lobby, Congress since 1981 has repeatedly passed an annual federal moratorium on oil and gas production on 85 percent of our Outer Continental Shelves. In addition to their very large oil deposits, our East and West Coast OCSs contain 406 trillion cubic feet of natural gas. To put this in perspective, total U.S. annual consumption is about 22 trillion cubic feet. Alaska also has 122 trillion cubic feet of natural gas, in addition to 25 billion barrels of oil that are off limits to production. That 25 BBO is larger than the known reserves in the other 49 states.

There has not been a new oil refinery constructed in the U.S. for 30 years. One company has been trying to get the permits to do so for 17 years.

A little over a year ago, the Wall Street Journal featured an article about an Indian billionaire who is building a gigantic oil refinery in India. It will employ an incredible 150,000 people. He expects the largest customer for the gasoline it will produce will be the United States. He believes the cost saving from not having to comply with U.S. regulations will far more than offset the cost of shipping the gasoline all the way from India. We continue to complain about our dependence on petroleum imports and jobs going abroad, but we don't eliminate the regulations that would allow more refineries to be built here.

What happened to the nuclear industry? Certainly the 1986 Chernobyl disaster in Russia and the Three Mile Island meltdown in the U.S. in 1979 adversely affected public attitude regarding nuclear power, but the problem began much earlier. (Incidentally, a World Health Organization investigation later stated Chernobyl caused no more than 75 deaths—not the “thousands” initially claimed. And the Three Mile Island meltdown neither killed nor injured anyone; in fact, no one was even exposed to radiation because of it.) “More than 200 nuclear power plants were operating, under construction, or under contract in the United States by the end of 1974,” according to Conrad M. Ladd in Mechanical Engineering magazine. But “In the late 1970s, the EPA and NRC regulatory requirements escalated sharply, resulting in costly permitting, construction delays, retrofits to construction in progress, and design changes. Mechanical engineers rose to the challenge, but were overwhelmed by these new changing regulatory requirements. Utilities canceled orders for about 100 nuclear generating units in the United States because of the difficulty in obtaining the necessary permits, and unpredictable capital costs or schedules to complete construction.

“The regulatory laws passed by Congress enabled nuclear power opponents to intervene in court in licensing proceedings for construction permits and for operating licenses. These interventions were successful in delaying nearly all projects after 1975—thus increasing capital costs substantially.

“The 1979 nuclear accident at Three Mile Island and the accompanying alarmist publicity made the public fearful of nuclear power, and the NRC regulatory response escalated the required changes to plants under construction. Nuclear plants completed and put into operation after 1980 had a capital cost of 1,000 to 2,000 percent of those completed by the early 1970s.”

There was a time when the U.S. was the only country with nuclear power plants. Now the rest of the world has more than three times as many as we do, the worldwide total now being 443, which operate with perfect safety. Today the U.S. has 104 nuclear plants, a number little changed in thirty years. During that same time, France, a far smaller country, built 58 nuclear plants. They produce 79 percent of France's electric power and have raised its energy independence from 30 % to 50 %.

During the last 30 years, while our government has been thwarting the production of oil, gas and nuclear power, it has been shoveling billions of dollars in federal subsidies to alternative energies such as wind, solar and ethanol. With what results? The U.S. has been subsidizing wind power since the U.S. Wind Energy Program of 1975, and far larger subsidies since then have gone to solar power. Yet a U.S. Dept. of Interior website, updated October 2, 2007 states: “Wind power currently supplies about 1 % of United States electricity needs...[and] solar power provides less that 1 percent.” That's what 30 years of taxpayer subsidies for wind and solar power have accomplished toward energy independence.

The situation is even worse with ethanol. Since 1980, $10 billion in federal subsidies has gone to a single ethanol producing company, Archer Daniels Midlands, with additional billions to others. And farmers have received far larger subsidies from the Dept. of Agriculture for growing the corn, from which the ethanol is made.
Ethanol takes more energy to produce than you can get from burning the ethanol. The most authoritative study, featured in the Encyclopedia of Physical Sciences and Technology, states: “29 percent more energy (derived from fossil fuels) is required to produce a gallon of corn ethanol than is contained in the ethanol.” This is disputed by the proponents of ethanol, primarily because of a study by Hosein Shapouri, an economist with the U.S. Dept. of Agriculture, which claims a net energy benefit from ethanol. An explanation of the differences between these two studies—and why the Shapouri is wrong—can be found at

Leaving aside the issue of whether ethanol is a net energy loser, calculations have been made of how much ethanol could replace petroleum usage in the U.S. Ted Lofstrom has shown that if the entire U.S. harvests of corn and soybeans were devoted exclusively to producing biofuels to replace petroleum, they could replace only 12 days of U.S. petroleum consumption.

Of course, it is impossible that our entire corn or soybean crop could be used for fuels since virtually the entire harvests are taken up by other uses, for which there are not readily available alternatives. Devoting all our corn to ethanol would mean not just the elimination of corn flakes, popcorn, and canned and frozen corn from the nation’s supermarkets. The Cocoa Cola Company makes 1.8 billion cases of Coke in the U.S. annually with high fructose corn syrup. That’s just for Coke; it doesn’t include all the other soft drink manufacturers, nor does it include other food producers who also use high fructose corn syrup in their products, such as baked goods. And we haven’t even mentioned what is by far the largest use of corn: livestock feed. What could possibly substitute for corn in feeding the nations’ 105 million head of cattle and 65 million hogs? And what do you think would happen to the prices of beef and bacon? Obviously, therefore, the most extensive production of ethanol and biodiesel (from soybeans) that could reasonably be expected cannot possibly provide anywhere close to even the 12 days of petroleum consumption cited above. It cannot possibly be in our interest to promote the substitution of these alternative fuels when their effect on imports is trivial and the cost will include a chain of distortions, higher prices, and shortages elsewhere in the economy. Here is just one more example of how government intervention in economic matters is less beneficial and more costly than the free-market alternative.

Also, Prof. Howard Hayden, a physics professor at the University of Connecticut for 32 years, uses Shapouri's own numbers to show how puny Shapouri's alleged energy gain of 24% from ethanol really is (if his numbers and assumptions are correct—which is questionable.) Hayden converts Shapouri's net energy gain to watts per square meter and shows that the net around-the-clock average power available from one acre of corn would be enough to continuously light one 60-watt light bulb. He concludes we would need “nearly seven times the land area of the U.S. devoted to ethanol production, using the most efficient methods on the planet, with no land set aside for cities or National Parks, to produce the energy used in the U.S. Maybe we can buy Russia, China, Canada, Brazil….”

“Energy independence” may be an attractive political slogan, but it is economic nonsense. It probably would not even be possible in the today's world of economic globalization. Nor is there any reason to pursue it when trade is more advantageous. Autarchy is national economic self-sufficiency. No country in modern times has ever achieved it, but even semi-autarchy has failed, the degree of failure being proportional to the degree of autarchy. Perhaps the most extensive example of pursuing autarchy was initiated by Juan Peron in Argentina. In the 1920s Argentina had a democratic government, a literacy rate of nearly 90 percent, an extensive system of universities, and was widely regarded as more promising than Canada or Australia. It was the 5th most productive nation in the world and had one of the world's highest credit ratings. A few decades later, it was the 70th most productive and had one of the world's largest debts. This change in fortune was the result of economic interventionism by consecutive governments “committed to pursuing an illusory industrial autarchy,” according to Venezuelan author Carlos Rangel. Protectionism, political favoritism, and crippling regulations that mandated economic inefficiencies destroyed the economy. Harvard economist Nick Eberstadt has called it “the most dramatic case of a country heading back from the First to the Third World.” Even Juan Peron himself eventually admitted Argentina had become a Third World country.

How did world trade come about? Because governments forced people to trade internationally? Of course not. It came about because of the actions of the market, because people over the centuries found it was to their advantage to trade more and more with people in other nations. They found they could obtain things they themselves did not produce or could not produce as well or as economically as others could. The current globalization is simply an extension of this trend made possible by developments in information technology, telecommunications, and transportation. A policy that foregos the benefits of international trade in pursuit of economic independence is one that acts against the history of progress. It condemns its people to uneconomic outcomes. It forces them to accept lesser values than are being offered by other countries and to pay higher prices.

Ethanol from corn costs $83 per barrel, compared to $45 per barrel from sugar cane. If there is a U.S. demand for ethanol, we should buy it from Brazil for $45 per barrel. Instead we pursue energy independence by trying to discourage Brazilian imports with a tariff of 54 cents per gallon to protect U.S. ethanol manufacturers, e.g., Archer Daniels Midlands, and high prices for corn farmers. Such protectionism is right in line with the Argentine model. Consumers have to spend more at the gas pump, and taxpayers pay for the agricultural subsidies to the farmers and the 51-cents per gallon federal subsidy to the ethanol producers. Energy independence implies that costs don't matter. But they do matter to those who have to pay them.

Energy independence is based on a grossly exaggerated fear of importing oil from unreliable foreign countries. Over 80 percent of our total consumption comes from North America. The U.S. itself is our largest source of petroleum, and Canada is by far our largest source of petroleum imports, followed by Mexico. Canada and Mexico are not “unreliable” sources. Saudi Arabia, the kingpin of Mid-East oil, provides less than seven percent of our imports, and the rest of the Middle East another 7 percent.

In 2006 two pipelines from Texas and Oklahoma that traditionally pumped oil to mid-America started carrying crude in the other direction. They had been extended into Canada and now carry crude from the Alberta tar sands to the world's largest cluster of petrochemical plants and refineries in southeast Texas, as well as to the giant pipeline hub in Oklahoma. Canada has plenty of oil, which they want to sell. We are a logical customer, geographically, economically, and politically. Should we not buy Canadian oil because we want energy independence?

Mexico, too, has oil for sale, and it is in her interest to sell to us. A TV news reporter interviewing some Mexicans trying to enter the U.S. asked why they were risking their lives crossing the desert. They replied that, like thousands of others, they knew the risk of dying but could not stay in Mexico because they had no money, no jobs, no food. With so many of its own people unemployed and lacking basic necessities, do you think the Mexican government is going to stop selling oil to the U.S.? Of course not. That would only make the plight of its own people even worse. The Mexican government cannot afford to stop selling oil to the U.S.

Less than a century ago, the people of Saudi Arabia were worse off than the people of Mexico are today. Now they are wealthy, have modern cities and a high standard of living, all because they sold oil. It is not in their interest to stop selling oil or to price it so high as to invite competition. After all, it is the high price of oil that made it profitable to develop the Canadian tar sands, which have larger reserves than the whole Middle East. High oil prices will also make possible the development of not only shale oil but of large deposits of heavy crudes elsewhere in the world, which are currently uneconomic.

Our goal should not be energy independence but removal of government obstacles to energy. If those obstacles were removed, energy independence would be a non issue. If nuclear power stations and oil refineries were allowed to be built, if oil drilling were allowed in our Outer Continental Shelves and in Alaska (at least in nonsensitive areas), no country would be able to hold us hostage to an energy shortage. International commerce in petroleum would be determined by the balance of supply and demand in the worldwide network, with buying, selling, and importing determined primarily by economic advantages to the participants, rather than political factors. Oil would no longer be a political weapon that could be targeted against the U.S. or any other major nation.