Adamant: Hardest metal

Energy, The Environment and the Economy --

Energy Pulse. F. Mack Shelor, Senior Vice President, Advanced Thermal Systems


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.


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 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.


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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UBS Warburg Hosts Global Energy Conference

NEW YORK, May 20 /PRNewswire-FirstCall/ -- The UBS Warburg Global Energy Conference begins today at the Phoenician in Scottsdale, Arizona and runs through Thursday, May 22.  The Conference will feature presentations by 48 senior executives from a comprehensive group of integrated oil, oilfield services and equipment companies and oil and gas exploration and production companies.  

The past 12 months have been particularly eventful for the global oil and gas industry.  Tax changes in the UK, political tensions in Venezuela and Nigeria, a normal winter in the Northern Hemisphere, and war in the Middle East have all had a significant impact on oil and gas prices and energy companies.  As a result of these forces, average oil and gas prices have generally been higher than expected, yielding stronger earnings and cash flows for producers and generating optimism among oilfield service companies. Another result of these forces has been rising investor interest in the sector over the past two months.  

A keynote presentation will be made by Dr. Juan Jose Suarez Coppel, chief financial officer, PEMEX. During this presentation, Dr. Suarez Coppel will discuss the growing levels of energy investment underway in Mexico.  Pemex hassignificantly increased its investment in the industry, as the company seeksto grow its oil production capacity as well as increase its production of natural gas to meet rising domestic demand.  

The Global Energy Conference underscores UBS Warburg's universal and comprehensive approach to covering the vast energy industries, with 100 energy companies covered by more than 25 research professionals.  This coverage extends to 12 countries, enabling cross-border and cross sector comparisons.  

To access audio transmissions and conference agenda please go to the home page.  Find the conference link on the lower right hand side of the page and click on the link.  Audio transmissions of company presentations will be available live and by replay.  Replays will begin three hours after the actual presentation time and will be available on the site for a period of four weeks.  

UBS Warburg is a business group of UBS AG (NYSE: UBS), one of the largest financial services firms in the world with more than 69,000 employees in 50 countries.  UBS Warburg is a leader in equities, corporate finance, M&A advisory and financing, financial structuring, fixed income issuance and trading, foreign exchange, derivatives and risk management.  UBS Warburg is one of four business groups of UBS AG along with UBS PaineWebber, UBS Global Asset Management and UBS Wealth Management & Business Banking.

Summer electric bills may shock you

By Tom Bower
San Antonio Express-News
Web Posted : 05/14/2003 12:00 AM

As temperatures go up this summer, San Antonio residents can expect to see a bigger-than-expected jump in their utility bills.

Higher natural gas prices and less power from the South Texas Project nuclear plant mean the average electric bill could go up 33 percent this summer compared to last year, City Public Service officials said Tuesday.

Average monthly residential electric bills for June through September are projected to average $158.62, compared to last year's $118.89.

"We normally do this (summer projections) in late May, but we wanted to get this information to the news media and the public earlier this year so they can take action today to minimize the impact of these factors on their utility bills," said Steve Bartley, CPS director of regulatory relations.

The public wasn't amused.

"Somebody's gouging us," said a city employee who asked that his name not be used. "My salary doesn't go up one-third, how come my utility bill goes up one-third?"

The 66-year-old man, who lives in an apartment, noted there's not much that can be done about it, however.

"You can (complain) and scream, but you can't plug in anywhere else," he said.

Some residents worried whether seniors on fixed incomes will be able to afford the increases, while others said they'll have to curtail other expenses to make ends meet.

Cathy Gordon, 40, said her family already got rid of a waterbed because it was getting too expensive to keep heated. She'll have to take other measures to pay the higher bills, she said.

"I was a little dismayed, but it wasn't unexpected," said the single mother of two. "Emotionally, I can handle it. Financially, that's another story."

Last summer's bills were lower than expected because of heavy rains, Bartley said. He added that the National Weather Service Climate Prediction Center is forecasting temperatures to be normal this summer, which would be warmer and more humid than last year.

The city-owned utility contributes 14 percent of its gross revenues to the city's general fund.

While the rate charges for electricity have not changed since 1991, CPS can pass along to customers cost increases for producing power, known as a "fuel adjustment charge."

Bartley said the higher monthly bills are the result of two things: customers using more electricity to run their air conditioners, and power becoming more costly to produce, mainly because of higher natural gas prices.

Although natural gas prices have dropped from a high of $20 per thousand cubic feet in February, Bartley said the utility is projecting it will pay an average market price of $5.75 this summer. That's 60 percent higher than the $3.50 paid last summer.

Throughout the year, CPS generates about 15 percent of its electricity with natural gas, 46 percent with coal and 27 percent with nuclear power. Another 12 percent comes from purchased power and wind-generated. However, more natural gas is used in the summer to help CPS fire up backup generators to meet peak demands.

Another factor, Bartley said, is that CPS will be getting only about half the electricity the utility normally does out of its 28 percent ownership of the nuclear power plant in Bay City.

Last April, a routine inspection revealed signs of a leak from the Unit 1 reactor's coolant system. The reactor was shut down; it's unknown when it will return to service.

Bartley said other factors also affect the price of natural gas, including a shortage of gas in storage, economic reverberations from Gulf War II and the oil industry strike in Venezuela.

The agency's monthly newsletter includes rates charged per 1,000 kilowatt-hours, and CPS regularly is among the cheapest. In March, for example, the most recent month available, Central Power & Light charged $110.33 per 1,000 kilowatt-hours in Corpus Christi, and El Paso Electric charged $104.97, while Houston's Reliant Energy charged $95.81.

By comparison, CPS charged $65.95 that month.

Marcos Espinoza, 48, pointed out that difference, noting San Antonio residents are lucky to pay rates lower than in other cities, but said he expects that advantage to end sometime.

"Sooner or later it's going to catch up to us," the construction worker said.
Staff Writer Karen Adler contributed to this report.

Providing for Default Service in Retail Natural Gas and Electricity Markets

Energy pulse 5.14.03 Ronald Sutherland, Consulting Economist and Adjunct Professor of Law, George Mason University, School of Law

A crucial issue facing states that are in process of deregulating retail markets for electricity and natural gas is how to provide default service to customers who may be abandoned by suppliers, or who otherwise may be unable to obtain service. The approaches to this issue involve light handed regulation and reliance on market forces, and heavy handed regulation that ignores market incentives. The former approach is certainly preferable, but many states appear to apply the latter approach. The light handed approach involves developing a competitive market with incentives to service to all customers. The heavy handed regulatory approach involves promulgating regulations that encourage suppliers to exit the market, and then additional regulations that require a provider of last resort (POLR). Understandably, states that follow the regulatory approach find it particularly challenging. The website material from the Texas Public Service Commission indicates the substantial effort required to establish a POLR.

This article explains that the key to providing default service is a robust wholesale market with transparent and floating prices. The best way to provide for default service is to develop a competitive market where providers have an incentive to serve customers. Competitive retail markets require a wholesale market with price adjustments that equate supply and demand. Given a robust wholesale market with floating prices, commodity will be available at a price and there is unlikely to be a need for default service. However, utility commissioners and state legislators will require the security of a designated POLR. Establishing such a POLR should be relatively simple, when such services are unlikely to be required and are easily met by spot transactions.

Default service has two commonly accepted definitions. In the transition to a competitive market, some customers choose to remain with their current service provider, instead of choosing an alternative provider. In this use of the term, the current service provider is the default choice. Default service is also viewed as a backup service provided to customers who are abandoned or refused service. In this definition, a default service provider is a provider of last resort (POLR).

In regulated electricity and gas markets, the utility has an obligation to serve customers. In competitive markets, customers are ensured service by having a choice between numerous service providers. In the transition from regulation to competition, there may be no obligation to serve, nor a well developed market that ensures service. The uncertainties of this transition, plus the need to serve all customers, apparently require a provider of last resort. This argument, although advanced frequently, is actually quite weak because several markets are deregulated without the need for a POLR.

If state legislators and utility commissioners are to deregulate these markets, they must have assurances against failures in the form of abandoned customers. The need to obtain support from these public officials requires some light handed regulation that ensures a POLR, in addition to reliance on market forces.

In some states, marketers have exited the retail market, raising the serious issue of ensuring service to their former customers. The most frequent need for a POLR results from a regulatory distortion, such as a price cap, that discourages marketers and utilities from serving customers. Given that default customers arise from a regulatory failure, the heavy handed regulatory approach imposes even more regulations in an effort to reverse the effects of the initial regulatory change.

States have adopted different approaches to providing for default service. States that allow the local utilities to retain their merchant function typically require the utility to be the provider of last resort. In states where the utility exits the merchant function, an alternative provider becomes the POLR. The risk of abandoned customers appears greatest where the local utility exits the market, however the risk is actually greatest where regulatory failures encourage suppliers to exit the market and leave customers without service.

The key to ensuring service to all customers is a robust wholesale market with continuously adjusting prices. Such prices are referred to as floating prices, real time prices, and current spot prices. Continuously adjusting wholesale prices bring supply and demand into balance. The critical feature of floating prices is its assurance of supply at a price, as opposed to supply rationing. In such a robust wholesale market, a merchant can purchase gas or electricity at spot and provide retail service to customers at spot plus a service charge. In such a market, suppliers have every incentive to provide service and customers are unlikely to be abandoned. If marketers leave the market, customers can readily obtain service from another service provider. When a market has incentives to serve customers, POLR service is unlikely to be required. Designating an official POLR is relatively simple under these conditions.

Some gas and electricity markets have long-term fixed-price contracts in the wholesale market, and price caps in the retail market, or other supply constraints that discourage reliable supply. With these regulatory failures, customers are abandoned, and such customers may be unable to find an alternative supplier at a current market price. These conditions require a provider of last resort (POLR). However, the POLR task now becomes complicated because the POLR may have difficulty in obtaining the commodity in a supply constrained market. For instance, most states that are deregulating their gas and electricity markets are imposing price caps as part of a standard offer service. When wholesale fuel prices increase and price caps become binding, there is both an increasing need for POLR service, and a difficulty in providing it. Heavy handed regulation is an apparent necessity when previous regulatory failures contribute to customers being abandoned. The preferable solution is not new regulations for POLR service, but allowing efficient wholesale to provide reliable retail service.

Providing the best value to customers requires the development of a wholesale market that reveals floating prices. Providing service for abandon customers is almost trivial when such customers can readily obtain service on their own. Service providers – the utility or marketers – will readily provide service if they can buy at spot and sell at spot plus a service charge. Providing for service for abandon customers is a serious challenge only when regulatory failures preclude service providers from obtaining the commodity in the wholesale market.

Empirical evidence confirms the critical nature of the wholesale market with floating prices. Imagine an energy market with a small number of suppliers where one or more supplier may leave the market abruptly. Suppose further a robust wholesale market characterized by floating prices. At issue is how to ensure reliable service to those customers who may be abandoned by their service provider. Given these assumptions, including a robust wholesale market, the answer is that no special provision is required for default service.

World oil markets are characterized by a small number of influential suppliers, termed OPEC, and in early 2003 there was serious concern over supply disruptions. The threat came from Iraq, other regional suppliers, and from Venezuela, which was experiencing different issues. There was no concern for a POLR; I do not recall the issue even being raised. If large producers exited the market, the world oil price would increase to again equate supply and demand. There is no need for a POLR, because a robust wholesale market ensures that commodity will be available at a market clearing price.

If marketers or other suppliers of electricity and natural gas abruptly exit the retail market, will customers immediately be able to obtain service, in the absence of a POLR? If the wholesale market is robust with floating prices, all customers should be able to obtain service at these floating prices. However, if the wholesale market does not have market clearing prices, and is instead characterized by shortages, customers could also experience shortages and lack of service provider. States that are encouraging retail competition can ensure service reliability by encouraging the development of a well functioning wholesale market, where designating a POLR is not a regulatory challenge.

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

Readers Comments

Bill Mueller
5.14.03 Dr. Sutherland describes many of the aspects of a functioning market. The description can apply very well to large consumers: businesses and industrials. The large customers have enough at stake to actually pay attention to the problem of getting the best price. They can afford the five or ten (or more) hours a year required to manage the problem.

Small consumers aren't very active because it is too expensive to care. If they get involved with their electric purchases, they will save perhaps $50 per year (assuming they save a full cent per kWh and use 500 kWhs per month). So a good market system needs to give them a choice that provides $5 per month. Anything less than that isn't worth the time and mental energy to learn about and decide.

Keep in mind that almost half of all consumers use less than 500 kWhs per month. They’ll never save enough to take on the decision hassle of choosing hassle. If you’ve ever tried to correct a billing error by phone – one incident can offset any small monthly savings.

And keep in mind that most alternative prices don't provide a full cent of price choice. The electricity markets have very thin margins, on the order of 1/3rd of a cent. Suppliers exit the market because the margins are thin – there’s not a lot of money in the business. The commodity is undifferentiated, after all if the products were differentiated, the market would be less efficient. The price pressures results from a short term market structure, marginal pricing, and long-term investments and mortgages to be paid. It’s unlikely that the markets will ever be inefficient enough to support price differentials over 1 cent per kWh, large enough to provide consumers enough value to worry about choosing suppliers.

And even $5 per month is "below the radar screen" of many consumers. (Have you saved your $5 by installing compact fluorescents?)

Our dilemma is that the political definition of a successful deregulation tacitly involves the active participation of many consumers, especially voters. It is unlikely that any deregulated market will ever have enough consumer participation to eliminate “heavy-handed” regulation. It is unlikely that there will ever be enough participants to fund an active market of many suppliers competing for business of active consumers who revisit their electricity choice annually.

Bill Mueller Principal Number Four Associates Cambridge, MA

The fraud of energy independence

By Steve Chapman
Originally published May 13, 2003
The Baltimore Sun

CHICAGO - Presidential candidates sometimes do surprising things, and Joseph I. Lieberman, who made his name as a "new Democrat," is not one to slavishly follow his party's traditional prescriptions. But who would have thought he'd be borrowing themes from Richard Nixon?

In a major policy speech in Washington on Wednesday, the Connecticut senator proposed "a Declaration of Energy Independence" to "put us on a path to the day when we won't have to use one drop of foreign oil." He intends to reduce our dependence on foreign oil by two-thirds within 10 years and end it completely within 20.

Where have we heard that before? In Mr. Nixon's Project Independence, announced during the energy crisis of 1973. He explained it in language that sounds eerily like Mr. Lieberman's. "Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving."

Maybe this is just proof that in politics, there are no new ideas - just ideas so old that everyone's forgotten what was wrong with them the first time. Energy independence didn't make sense in 1973, when oil prices were skyrocketing, inflation was raging and we lived in fear of Arab oil-producing nations. And it doesn't make sense in 2003, when oil prices are dropping, deflation looms and Arab oil-producing nations live in fear of us.

The notion of national self-sufficiency conflicts with the most unassailable proposition of international economics: Nations don't lose from importing goods; they gain. That's why they do it. We import oil because other countries can find and extract it cheaper than we can. For Americans to insist on producing, at high cost, something we could buy from abroad at low cost is not a recipe for prosperity.

But oil is different from other goods, we are told. "For too long," says Mr. Lieberman, "our economy and our security have been at the mercy of foreign producers. ... I'm not going to let foreign countries blow our families' budgets by running up your heating bills and what you pay at the pump."

Even if we produced 100 percent of the oil we consume, though, foreign countries would still be able to run up our energy bills and hurt our economy. If a supply disruption occurs in Saudi Arabia or Venezuela, world oil prices will shoot up - and so will U.S. oil prices. Why? Because American producers will sell to the highest bidders, whether they're at home or abroad.

Mr. Lieberman hopes to achieve self-reliance by spending lots of money subsidizing the use of coal, which we have in abundance. He wants to spend $15 billion on schemes to convert coal into hydrogen, "the cleanest fuel in the universe." Another $6.5 billion would go to research and development on "fuel cells and other innovative technologies to wean us off oil."

That approach makes the same mistake made by President Jimmy Carter, who burned up large sums on harebrained schemes to extract oil and gas from coal. It assumes federal employees are better able than energy companies to figure out the most efficient sources of energy. They aren't. But they are good at using tax dollars to satisfy political constituencies. The chief virtue of Mr. Lieberman's plan is that it would make him friends in coal states that the Democrats need to win next year.

He also proposes a sharp increase in fuel economy standards for automakers. But while it may make sense to cut our overall fuel consumption to combat global warming, slapping mileage standards on cars and trucks is the clumsiest method you could find. Every energy economist will attest that the cheapest and surest way to do it is to put heavier taxes on oil and gasoline.

Mr. Lieberman, like presidents before him, pretends to put the burden on the auto industry instead of consumers. In fact, motorists will pay higher prices for their vehicles, or they'll pay more at the pump. But if the sticker price of a car rises, every politician knows, citizens will blame car makers, not Congress.

Mr. Lieberman wants us to think we can 1) have energy independence and 2) require no sacrifice from ordinary Americans. He's wrong on both counts. Thirty years ago, a lot of people thought energy independence was an idea whose time had come. In reality, it was an idea whose time hadn't come, and never will.

Steve Chapman is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. His column appears Tuesdays and Fridays in The Sun.

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