Energy, The Environment and the Economy --

<a href=www.energypulse.net>Energy Pulse. F. Mack Shelor, Senior Vice President, Advanced Thermal Systems

INTRODUCTION:

A good energy policy is one that looks at both supply and demand issues. Because energy policy is likely to have a strong influence on the environment, a good energy policy is also one that looks carefully at the impact of new energy sources on the environment. The goal of the energy policy should be to reduce the U.S.’s environmental impact on itself and the rest of the world without crippling the economy. A third important policy support consideration for a good energy policy is that it should create a significant stimulus for the U.S. economy. With the economy, hopefully, in the early stages of a recovery from a slump, this third support point becomes increasingly important.

In light of recent events, it is clear that energy policy should also examine both the reliability and stability of the energy systems as well as the security of the energy supply.

Most discussions relating to the use of and supply of energy are perceived as being anti-environment. The purpose of this discussion is to explain and amplify the inter-relationships that may exist between the appropriate use of energy, the associated potential reductions in the environmental impact and the potential related major boost associated with energy production in the U.S. economy.

The following initiatives are discussed herein:

1. Expanded use of biodiesel and ethanol fuel sources.
2. Increased domestic oil supplies created by drilling in Alaska, The Gulf of Mexico and other offshore locations.
3. Expanded use of geothermal and other natural resources.
4. Increased average mileage standards for automobiles through increased emphasis on hybrid vehicle development.
5. Reduced reliability on middle-eastern oil with increased emphasis on hemispherical supplies.

THE INTER-RELATIONSHIP BETWEEN INFRASTRUCTURE AND PRODUCTIVITY:

Over the past several hundred years the U.S. economy has expanded more rapidly than any other nation or group of nations in the world. Why this has happened is a question that is central to this discussion.

For an economy to expanded and improve rapidly it must have several attributes: First, it must operate on a free market basis. The less interference or central planning that it has to endure the better the opportunities for expansion. The free market is the engine for expansion and allows people to enter and leave at will. Second, it must have a strong central bank that can control the rate of expansion through the manipulation of interest rates. The central bank is the accelerator for the system. It can speed up or slow down the rate of expansion by controlling interest rates. Third, it must have an infrastructure that provides for improving productivity. Infrastructure is the fuel that provides energy to expand the economy.

Some examples of infrastructure may serve to clarify this concept:

1. The creation of the public utility system provided for the rapid expansion of industry.
2. The interstate highway system linked the nation and provided for the expansion of cities and the rapid expansion of the automotive industry.
3. Public education provided a workforce that could support industrial growth.
4. The Internet increased the amount of work that could be done by a single individual.
5. The expansion of the airport system through Federal support improved the speed of commerce.

This list could be expanded considerably but the point is very clear, infrastructure is the fuel in the productivity tank. If the economy is going to remain strong then it is imperative that some fuel remains in our economic tank.

The programs that are spelled out in this document create economic fuel for the future.

THE RELATIONSHIP BETWEEN OIL IMPORTS AND DOMESTIC OIL PRODUCTION:

The U.S. is currently importing nearly 60% of its oil needs. This is the largest single “balance of trade” deficit that impacts the U.S. economy. Reducing the percentage of imported oil to below 30% of the total oil requirements would have a very positive and dramatic effect on the U.S. economy. At the same time, reducing oil imports would dramatically effect the influence currently exerted on the U.S. economy by outside political forces that are difficult to predict and impossible to fully control. A reduction in oil demand should also significantly reduce oil price to more acceptable levels. To accomplish this would require a reduction in oil imports by at least 50%.

If this 50% level of oil import reduction was matched with a similar increase in domestic fuel production the total impact on the U.S. economy would be dramatic.

There are more than 215,000 MW of new natural gas fired generating systems being developed in the U.S. These systems will increase the demand for natural gas by over 7.5 trillion cubic feet each year. The current production of natural gas is approximately 19 trillion cubic feet each year with the current demand at nearly 22.3 trillion cubic feet each year. Installation of over 200,000 MW of new natural gas generation will make the US a very large importer of natural gas.

In the past, most of the impact of imported oil is based on industrial and transportation uses. The addition of significant natural gas using systems will place the power industry back into the fuel importing category. Clearly, importing significant amounts of natural gas will not help the U.S. economy.

To accomplish this very large decrease in oil and gas imports will require the following:

1. Development of biodiesel and ethanol as a fuel: If 10% of the truck and railroad fuel was displaced with domestically produced biodiesel, imported oil requirements would be reduced by 5 billion gallons each year. The overall effect would be a positive domestic product alteration of over $15 billion dollars each year.

If 5% of the gasoline market were displaced with domestically produced ethanol the total impact on the economy would be $15 billion dollars each year in favorable domestic product.

These two initiatives would decrease oil imports by 238 million barrels/year. The average cost of this oil is $28/bbl creating a change in trade balance of $6.7 billion dollars each year.

The impact of this change is dramatic since it replaces money that leaves the U.S. never to return with money spent domestically that continues to circulate.

2. Development of additional oil and natural gas potential: The goal for new fossil fuel development should be similar to that indicated above. If an additional 476 million barrels/year of oil can be developed it would have the impact of reducing imported oil by 20%.

The result of this would be to reduce the trade imbalance by an additional $13.3 billion dollars/year and increase domestic product by the same amount. The total impact would be an additional $26 billion dollar difference in the economic strength of the U.S.

3. Development of the hybrid automobile: The development of Hybrid vehicles by the major automobile manufacturers to replace standard automobiles, light trucks and SUVs with more efficient equipment should be a major part of any national energy policy. It has been demonstrated with smaller automobiles that it is possible to increase mileage for vehicles using the hybrid technology, but the practicality of this approach has not been demonstrated on larger vehicles.

It is clear that using either a gasoline or diesel electric system with constant speed reciprocating engines improves the overall efficiency of the vehicle. When this is coupled with direct electric drives at the wheels along with reactive breaking systems the overall energy conversion efficiency of the vehicle is significantly increased.

The result of combining all of these innovative improvements is an increase in overall mileage of over 25%. Obviously this reduction in fuel demand would take several years, but the impact would be permanent.

For normal automobiles that are currently subject to the automobile standards this would increase the average mileage required to 30 miles/gallon of fuel.

Since this technology would also be applicable to both light trucks and SUVs, it could increase their mileage by 25% as well.

To have this conversion take place rapidly it will be necessary for the Federal Government to provide both incentives to industry to produce the vehicles and to the general population to purchase them.

The incentives to industry can be of the carrot and stick variety:

1. Provide a deadline for increasing mileage standards by 25% for automobiles, light trucks and SUVs. I would suggest that all new vehicles would be required to have an average mileage increase of 25% within six years.
2. Provide federal investment tax credit to industries to convert existing plants that would need to re-tool to produce these new power trains.
3. Provide tax credits to purchasers of these vehicles for the first five years of production. This tax credit should be sufficient to encourage a rapid conversion from standard vehicles to the new, more efficient, class of vehicles. I would suggest a $3,000 tax credit for each car up to two cars purchased by the same individual or up to three cars purchased by the same family.

This type of program would provide a major boost to the automobile industry and would have a significant impact on both oil imports and the environment.

4. Increased financial incentives for Combined Heat and Power (CHP) projects:

With the economy currently moving at a slow pace the need for some form of stimulation may be more pressing. It has been demonstrated that as the market price of electricity increases the number of economic opportunities for CHP systems increases. To accelerate this trend the following program could be created.

CHP opportunities that were able to demonstrate at least a 65% overall thermal efficiency could take advantage of a 10% investment tax credit along with a five year Accelerated Depreciation Rate. This five-year program would be based on a declining balance depreciation formula. This program should have a sunset provision for starting projects of five years from the beginning of the program.

The result of this tax treatment would be a rapid increase in new projects and a rapid reduction in emissions.

5. Expanded use of geothermal energy and other renewable resources:

As electricity rates have increased the break-even point for development of most renewable resources has become more achievable. As an example, new technology in medium temperature geothermal technology has reduced the break-even point for construction by as much as 25% when compared to currently installed equipment.

From an energy policy prospective geothermal energy, along with other renewable resources should be very desirable since it uses domestically available resources, has low to no fuel cost, has no negative environmental impact, produces both construction and long term job opportunities, reduces the demand for imported oil and natural gas and provides a significant stimulus to the domestic economy.

The Federal Government previously qualified these projects for a 10% Energy tax credit and a 5-year Accelerated Depreciation Rate based on a declining balance formula, this has moved the break-even point for these projects forward and tends to stimulate significant development.

The new Energy Bill that is currently under consideration has a $0.018/kwh Production Tax Credit in it. This is a step improvement that would have a dramatic impact on the net cost for geothermal energy. This would make geothermal energy the least expensive base load energy source in the nation.

It could provide billions of dollars of economic development in the western states, provide thousands of new jobs, reduce the environmental impact associated with power generation and reduce the general cost of power in the west.

6. Provide economic incentives for high reliability power requirement customers:

The emergence of new technology companies that need very high reliability in their electricity supplies has created some additional opportunities for distributed electricity generation. These customers demand a reliability and availability level of 99.999%.

In the past, these customers have been forced to install stand-by capacity that was not interconnected with the electricity grid. It is now possible in many areas for these customers to be interconnected with the grid so that their equipment can serve multiple needs. These “reliability” focused projects could reduce the need for new power projects as well as create a more efficient transmission and distribution system for the electricity market.

7. Increased purchases of oil supplies that originate in areas other than the Middle East with particular emphasis on supplies within the Western Hemisphere:

It is obvious that the middle-eastern oil supplies remain at some risk. These supplies may either be denied to the U.S. for political reasons or become destroyed through internal conflicts. Reduction of imported oil supplies will reduce the potential impact of interruptions but it will not eliminate the problem.

The recent conflict in Iraq may provide a mechanism for keeping oil prices at reasonable levels for some period of time. The U.S. is now in a stronger position to influence oil supplies and therefore control oil prices. This does not reduce the overall risk situation in the region and does not reduce the need to reduce the negative balance of trade associated with oil purchases.

By negotiating supply agreements with Mexico, Venezuela, Columbia, Brazil and other potential energy suppliers in the Americas it would be possible to accomplish multiple objectives:

• Shifting energy purchases, even with reduced demands, to the Americas will strengthen the economies of the countries affected. These countries are our allies and potentially our strongest trading partners. In some cases, increasing purchases from certain countries may have other societal benefits such as reducing drug trafficking.
• Shifting energy purchases to the Americas will provide the U.S. with greater energy security. Unfortunately, recent unrest in Venezuela demonstrates the potential impact that western trading partners can have on U.S. supplies.
• Shifting energy purchases may create stronger allies and lead towards greater cooperation in trade and finance with our partners in this hemisphere.

CONCLUSIONS:

The programs indicated in this paper effect every State in the U.S. by creating construction jobs and permanent jobs. In addition, all of the agricultural States would benefit significantly from the development of the agri-business related fuel products.

The major manufacturing States would be stimulated by the development and production of hybrid vehicles with sales of those vehicles stimulated by tax and depreciation advantages.

All areas in the U.S. would be affected by the development of reliability and CHP initiatives with the western States affected more directly by the increased use of geothermal and other renewable products.

The energy program will reduce the U.S. trade imbalance in favor of a significant boost to the domestic economy. This program will provide energy security and long-term stabilization of energy costs at lower levels than those currently available.

Do you agree or disagree with this article? If you disagree, send in a rebuttal piece.

Readers Comments Date Comment Stephen Heins 6.5.03 Mr. Shelor,

While much of your article's discussion have political and policy implications, I cannot help but notice that demand, demand-side management and energy efficiency are absent. A balanced approach to "Energy, The Environment and the Economy" must include the practical environmentalism of reduced consumption and the accompanying displaced capacity. Without such a discussion, your article looks like another example of solving our energy problems with more holes in the ground, more poles with blades in the sky, and more corn stalks on late August days in Iowa. Lacking attention to efficiencies, your article could easily be considered just another "supply is the only answer" treatise by a supplier.

Stephen Heins

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