The Interests -- Energy Policy

This will be my third and final installment for "The Interests" series. Some readers may ask why am I not going to discuss healthcare, and the reason is because I'm still early on in the learning process. I do not yet feel competent enough to write on how to fix a problem I barely understand and it will probably take nearly eight years before I do feel competent enough -- it took me eight years to feel confident about Economics, Foreign Policy, and Terrorism. And one thing I do know about healthcare is that, believe it or not, it is far more complicated than anyone seems willing to admit. It makes the subprime mortgage crisis look like a game of tic-tac-toe. So I will defer healthcare for a later date -- certainly post-election and post-inauguration. If anyone is kind enough to give me some fundamentals, I'd be grateful.

Energy
Well, I have saved the best for last...because this is the key to American prosperity and hegemony for the next decade and, quite likely, the remainder of this century. As with many complicated issues of public policy, history is the best consultant. I believe it was Mark Twain who said: "History doesn't repeat itself, but it does rhyme." And since we like to consult history in multiples of ten, let's start with the first decade of the 20th century. This is when the US and Great Britain enterred the modern world light years ahead of everybody else.

What allowed this to occur? Interestingly enough, it was the invention of the electric light bulb in 1879. Prior to the electric light bulb, people lit their homes with kerosene lamps. Kerosene was produced through the refinement of crude oil -- a, and in many ways still, mysterious substance discovered in Titusville, PA in 1859 (some say sooner but the Drake Well in Titusville was the first well discovered on purpose). Kerosene remained the primary commodity for the lighting of residential structures as we approached the 20th century. And as early adopters invested in infrastructure (something encouraged by governments), eventually the light bulb overtook kerosene as the primary commodity.

Knowing where the electric innovation was leading, John D. Rockefellar formed the Standard Oil Trust in 1882 and R&D began (though it may have already been in place) for the purpose of transforming crude oil from a means for residential lighting to a means for more efficient transportation. In 1907, the first gasoline station opens up in St. Louis (see Daniel Yergin's The Prize).

What's important to realize here is that these changes did not occur in the vaccuum of a "free" market. Sure, private innovation drove the change but public governance is what brought the idea to reality. Without adequate patent and trade laws, this innovation will likely have died in a market ruled by the oil monopoly's iron fist. The other big player in the way of policy was the Sherman Anti-Trust Act under which Standard Oil was dissolved in 1911. This is an example of government intervention freeing up the market place as opposed to the deregulation which freezes the market by sealing it in the hands of private interests.

Another monumental event occurred in 1911 -- Winston Churchill became First Lord of Admiralty. What did he do? Foreseeing a major continental conflict, Churchill mandated an initiative to convert the Royal Navy from a coal-powered fleet to a diesel-powered fleet. This ensured naval prowess at a time when the British Empire was waning.

In keeping with the spirit of Mr. Twain's insight let us now review the differences and the similarities between the conditions now and those of a century ago:

Similarities
Innovation: We are now in a phase of innovation as we were when Thomas Edison invented the light bulb. It's important to realize that while Thomas Edison receives a great deal of credit for his discovery, he wasn't the only one looking for an electric solution to the demand for artificial lighting. He was part of an army of innovators. Today, we have a similar situation. Scientists all over the globe are looking for solutions to our energy crisis from carbon sequestration technology, to carbon neutral fuel synthetics, to windmills, to solar power -- there is a race for the answer and it is competitive.

State of the Market: Then, as now, there is a peculiar desire among those with an advantage to maintain the status quo. Some may think I'm talking about Big Oil...strangely I'm not. I'm referring to OPEC and Russia. Now, to some degree Big Oil is trying to stall things (i.e. lobbying in opposition to tax credits for companies trying to develop alternative fuels -- though, while this is bad, they are not doing so to keep us addicted to oil but for them to get in on the ground floor of the alternatives which they view as inevitable). If you have a minute, go to MSN.com and read an article by Jim Jubak where he posits the end of Exxon.

How does OPEC and Russia stall this innovation? Well, it's a complicated line of reasoning but it goes like this -- earn the cash, finance the debt, collect the interest, contain the supply. Both OPEC and Russia possess massive reserves of US currency. Rather than hold the cash, they buy up bonds to finance our national debt, they then cash in those bonds to (you guessed it) hold more cash...and the cycle goes on ad infinitum. What does this have to do with stifling the growth of alternative fuels? Nothing directly -- but, together, the two entities control 2/3 of the world's supply of crude. Now, they must do two (seemingly conflicting) things -- 1.) Make it scarce -- by containing the supply, they can undermine buyer power in commodity futures markets and thus control price. 2.) Preach abundance -- by suggesting there's more to be had and that larger profit margins mean greater cost-reduction investment down the line and buyers continue to have faith in the cyclical nature of commodities markets. This is the new supply/demand law -- when demand is high, gradually increase available supplies but never to the point where you undermine your price strategy. It is by tying up capital that these entities skew the cost benefit analysis of investment in alternatives.

Hegemony at Stake: When Churchill converted the Royal Navy to diesel, he understood that he would be at a major disadvantage if he did not. The more we are dependent on oil, at this moment, the more we are at the diplomatic mercy of Russia and OPEC (which includes Iran and Venezuela). If we can succeed in building the proper infrastructure for a transportation fuel other than oil, we can regain our global hegemony.

Differences
Innovation: The difference here is that the stakes are much higher. Russia is moving very quickly to contain our influence in the world, what's more in our own hemisphere with emerging relationships with Venezuela, Bolivia, and Nicaragua (again). Petrodollars also fund madrassahs churning out the next generation of jihadists. Climate change -- enough said. If you don't buy into climate change, consider a resurgent Soviet Union and terrorism -- they are convincing enough on their own.

State of the Market: Globalization today is far more fast-paced than the globalization in the first decade of the 20th century -- the IT revolution bears the blame/credit for that. Also, to a large extent, governments have been sitting out as private industry has built bridges without regard to sovereignty (though government now seems to be getting rushed back into the game to stunt the financial crisis).

If one good thing can come from this government reinsertion, it's that it can actually bring about the coordination necessary to establish an infrastructure that will make the next phase of our energy sector a reality -- the non-fossil fuel revolution. Government was far more involved in our growing energy sector in the early 1900s than now.

Hegemony: Energy innovation has always been a strategic move and has never offered an immediate benefit. It takes time. The future of our hegemony depends on alternatives to oil. That is an unavoidable fact. Further dependence on oil, as stated before, digs us into a diplomatic hole when it comes to dealing with oil supplying nations. This is why a "drill, baby, drill" energy policy is not just wrong, but disastrous. I define a decision as "wrong" when our desitination is straight ahead, and we turn right or left. I define a decision as "disastrous" when our destination is straight ahead, and we do an about face. "Drill, baby, drill" is an about face -- not only is it wrong, but it's obviously wrong.

Some say that if we drill off-shore and in ANWR, we can compete with Russia and OPEC. But with only 3% of the world's supply sitting their, we barely make a dent in our own consumption let alone that of China and India. What's more is that there are plenty of US oil companies that drill for oil all around the world and we are still small potatoes compared to Russia and OPEC -- so the allegation that a 3% increase in supply will make any meaningful difference is absurd.

Are there holes in Barrack Obama's plans, of course -- nobody's perfect. One thing is I'd like to see less of is a focus on food-based fuels like ethanol. It says something when a society is willing to burn necessities to sustain luxuries. It's tough for a politician to speak against ethanol, especially one that's trying to win Iowa. But I'll forgive him on this, if it means the alternative is having a president who thinks we can simply drill our way out of this problem. If there's one thing the W presidency has taught us, it's to be suspicious of simple solutions to complex problems.