Thursday, September 25, 2008

Freedom From Foreign Oil (Part 2: How?)

In Part 1, I discussed how “energy independence” was not a desirable goal, because it would not deliver on any of its promises. Yet, it would be near impossible to find a politician out there that was against this concept. Since these politicians do think that “energy independence” holds promise, then the next question to ask them is “how will this goal be achieved?” The answer is that short of the invention of some sort of super-battery that can store all sorts of energy, the U.S. economy will be dependent on foreign oil for the foreseeable future.

Let’s assume that the U.S. decided they would become energy independent by just banning all imports and exports of oil. Since America produces only about roughly 25% of what it consumes, the huge decrease in supply would mean an unprecedented (and I’m guessing politically unpopular) rise in U.S. oil prices. So, this eliminates that route, unless some politician is looking to have a revolution on his hands.

This means that either the U.S. is going to have to make up for that missing 75% with either less demand for oil, more oil, and/or domestic alternative energy sources. Less demand for oil cannot really be forced about the population without dramatic costs. Oil is so widely used because it is cheap and forcing a shift to other means of energy must mean a rise in cost. This would accordingly create a rise in all prices of things that were no longer permitted to use oil as an input. Billions of tax dollars have been spent to encourage conservation of energy, but oil is cheap and improving technology makes using more oil even cheaper.

As for increasing the supply of oil to make the U.S. energy independent, there is quite a bit of oil to be unearthed in the U.S., but making up for the entire 75% gap probably is not in the realm of possibilities.

The reason that oil is still used so widely is that alternative energies are not cost-effective. If oil rose (or alternative energies fell) in price enough to make it rational to switch energy sources, then alternative energies could compete. If there ever truly becomes a shortage of oil in the world, then prices of oil would rise and alternative energies would be able to compete. Until then, even the massive subsidies to nuclear power, ethanol, etc. have not been enough to bring their prices down near oil’s price.

No matter what the alternative energy one chooses, it would be extremely difficult and expensive to try and replace oil. One example of the futility of investing heavily in corn ethanol as the “miracle drug” to get us off oil is the massive amounts of farmland required to make that a possibility. If we took all the corn farmed in 2005 and made ethanol out of it, then U.S. gasoline consumption would see a 12% decrease. Now, if politicians saw this as a promising step, they could devote all the cropland in the entire country to making corn ethanol, then allocate 20% more land in addition to that and voila! There would be enough ethanol to fully replace gasoline. Of course, this would just be gasoline and not all oil. And, there would be the huge increase on worldwide corn prices as food. Plus, there would then be cries of “food independence” now that all the cropland was devoted to non-food objectives, putting us at risk of being "starved to death" by unfriendly trading partners.

Politicians have put forth goals of reducing foreign oil consumption, but complete "energy independence" does not seem possible without devastating, distortional effects on the economy.


Zachary Piso said...

Oh god, you went there? Ethanol? It's just an absurd argument and you left out the most important point.

Ethanol requires slightly more than a gallon of gasoline to produce. It's not renewable, at least when produced from corn. The fuel it takes to produce fertilizers, which might as well be petroleum based when you consider the amount of energy it requires to make them, makes ethanol completely useless from an energy independence/environmental perspective.

You can make ethanol from switch grass, though the process is rudimentary (though actually exceeds the energy ratio of ethanol already, there just doesn't happen to by many switchgrass lobbyists in DC). Obvious benefits include no need for fertilizer, no competition with food supply, and greater conversion of biomass.

Really, solar/wind are the way to go, along with alternate techniques such as hydroelectric, tidal, and geothermal in areas where the previous two are less effective. These techniques hardly compete with respect to land use, and it'd be a nice world when every farmer builds a wind farm on his corn farm (or, if you know anything about corn, non-corn farm). The loss of cropland is minimal, while the energy supply would be significant. Capital costs would probably draw investors--Pickens, leading the way--and other than that the only barrier is politics.

Really, the issue is demand, and I don't think you dedicated enough focus to it. The barrier for demand is not better batteries, it is better public transportation, along with lighter vehicles. And I'm not talking about VW Beetles, I'm referring to superlighted alloys that have already been produced but (despite every crash test imagineable) are not passed through health and safety inspections. It is well-established in the energy conversation that these vehicles have been pushed under the carpet by petroleum lobbyists, and that available technology could already see an increase in mpg to well over 100 (commonly cited figure is 150 mpg). This is in the absence of lithium batteries, and if you assume the average car on the road gets 20 mpg, its a significant cut in demand.

So, yes, it is possible. But don't get locked up in whatever technique is currently in vogue. It's a good role of thumb to ignore any vehicle driven to the Oscars or any alternative energy endorsed by some overpriced Hummer model.

Tim Moreland said...

First, in my defense, by the time I got to ethanol and alternative energies, I tried to keep it brief because I felt the post was getting long-winded. So, yes I left out some of the other arguments about ethanol, but the one I used seemed to be a fair enough argument against it.

If solar/wind is the way to go, then why have we not gone that way? Why doesn't Pickens feel the need to invest in these alternative sources of energy unless the government is willing to subsidize it for him?

The point about my battery in the beginning, which was not real clear, was that even if we had windmills generating energy, it would be extremely difficult to harness and transport this energy without some sort of "battery" to store it. (There is more to that concept, but I am short on time at the moment).

As for cars, if these could be produced at 100mpg and be expected to be matched with consumer demand, then why haven't car companies put them on the road? If the answer is purely political, then I can support eliminating that and allowing the market to work. If the reason is that the market would not be robust for these cars, then why should the government subsidize them?

Yes, as I did mention, it would be "possible" to be energy independent (i.e. cut off all imports/exports of oil), but would this be a.) desirable and b.)doable WITHOUT massive costs to the economy? I discussed part a in my other post, and it is clear that forcing a shift to other energies and higher fuel-efficient cars without the decisions of the market would be a costly endeavor.

Tim Moreland said...

Here is a little more on why I thought that we would need a "battery" or some way to store energy from wind/solar:

Robert Bryce: "If we could get the efficiency of the photovoltaic panels high enough, solar, ultimately, has more applicability. There are a whole lot of rooftops in this country you could put them on. Researchers are having better luck at converting larger parts of the light spectrum into energy. One research group has been able to turn part of the infrared spectrum into electricity. That's a very positive development. But the problem with wind and solar is storing it. Because of their intermittency, they have to be backed up by traditional fossil fuels plants."

Pete Abbate said...

As far as your argument about a battery goes, what if we have one? I don't know about the specifics of this article but from the tone of this article, this whole debate could be rendered meaningless.

I'm not quite sure what your main point in this post was, Tim, but my guess is that it would be incredibly costly to switch to alternative forms of energy? If that is the case, you're absolutely right, and I don't have to to tell you that's why we haven't gone further in switching already.

Zachary Piso said...

The result of lack of strong electric or superlighted cars actually is political. Individuals who invent strong batteries and such can either sell their patent to an automobile industry or to a petroleum industry (this is a simplification, but for our purposes it works). The petroleum company offers millions of dollars more than any company planning on using the technology. Why? Well the incentives for a car company to make better cars actually aren't that high--as long as they sell their current models and are content with their role in the oligopolistic market, they don't need the patent. The petroleum company can therefore drive the price beyond the automobile company's willingness to pay, as a cut in demand of say, 50%, has severe ramifications for Exxon, etc. So while this is technically market forces at work, the benefit to the consumer is not maximized. Be careful not to confuse a "what is" with a "what should be", known as the naturalistic fallacy. The scarcity of strong alternative energies in a free market does not mean that market forces have resulted in that status; there is no reason to assume any phenomenon is not an exception to the rule, especially when you know their are exceptions. Pete, as a student of philosophy of science, I'm curious what you have to say about this.

Wind and solar are hypothetically intermittent, but are obvious complements to eachother if built in the same area. Also, subsidies to alternative energy look to equate their true social value with their market value, as fossil fuel sources contribute negative externalities. Consumers have demonstrated they'd prefer to pay a subsidy for health and environmental concerns (Kuznet's curve is a good example, but many other studies confirm this) as opposed to pay externally for the effects of pollution. When you add global warming to the equation, subsidizing green energy is a responsible act for a libertarian trying to realize true prices.

Tim Moreland said...

For the record, my point of these posts is not to argue for the correct pricing of energies, nor the combating of global warming. My only point thus far has been to show that "energy independence" defined as "non-reliance on energy imports" is neither desirable nor doable (without drastic costs to the economy through interference). While it may be beneficial to tax carbon emissions or there may be a more desirable mix for the energy market in terms of what is best for the climate, environmental concerns are not the focus of "energy independence" unless one believes that if energy sources were properly priced it would lead to "energy independence." It seems to me that it would be quite a stretch to believe so, seeing how reliant the U.S. economy is on oil.

Zachary Piso said...

I believe that true pricing of energy would lead to energy independence. And I'm not playing Devil's Advocate. Now, without using the Naturalistic Fallacy (because it isn't, it isn't, which is what you said in your last sentence) explain to me why it would not.

Tim Moreland said...

I'm not intimately familiar with the research in the area of environmental economics, so you may be able to point me to better evidence, but the problem seems to be who knows what the "true cost" of these resources are? One study in the Journal of Energy Literature called "Valuing the Environmental Impacts of Electricity Generation: A Critical Survey" summarizes the findings of the external cost estimates for coal, oil, gas, nuclear, hydro, wind, solar, and biomass energy. The range is very large for all of them and statistically, they could all be the same. So, determining the true cost seems to be impossible.

With that in mind, as of 1999, oil was the least subsidized (and I'm assuming the most taxed) fuel. Renewables were subsidized at 25.64% per unit, and oil was at 0.26% per unit. Nuclear was subsidized at 15.6% per unit.

Since oil is already being heavily disadvantaged in the marketplace, estimates of environmental impact are so wide, and the effects of global warming are slow-moving (a few degrees of increased temperature over the next century), "true cost" pricing does not seem as if it would be far off from the current pricing scheme. Thus, even if solar/wind deserve a little more advantage over oil, it still has to make up for the 75% gap in production-consumption of oil I mentioned earlier. This seems impossible unless you take the most extreme high estimate on oil's environmental impact and the extreme low on all other fuels (and then who knows if even that would be enough? And it most certainly would not be desirable from an economic viewpoint.)