About the only bipartisan cheers in President George W. Bush’s
recent State of the Union address came with his claim that the
United States was “addicted to oil” and the inevitable proposals
thereafter for various state subsidies to new energy research. Yet
neither the diagnosis nor the proposed cure makes sense, since they
bear little relation to the realities of the market.
According to the American Heritage dictionary, addiction is
defined as a compulsive physiological and psychological need for a
habit-forming substance. By this definition, the United States is
not addicted to cheap oil, any more than it is addicted to water or
soybeans; the substance is essential to keep the economy moving,
but if an alternative were found the U.S. public would be only too
glad to switch to it. The principal U.S. economic addiction is to
cheap credit, an addiction fueled by the enablers of the Federal
Reserve, but Bush proposed no significant remedies for
that that ailment. In considering the problem of oil,
however, the underlying easy money, negative-savings-rate, federal
budget deficit environment is a big part of the problem; since
Americans consume far too much in general, they will consume too
much oil.
The U.S. economy is not addicted to oil. The majority of
affluent or comfortably off U.S. consumers have developed a
lifestyle that requires a huge amount of private transportation,
which in the present state of technology involves burning a lot of
petroleum. Choices have been made, notably the suburbanization of
U.S. cities that began even before World War I. (Construction began
on the Bronx River Parkway, the world’s first automobile divided
limited access highway, as early as 1907 and the first section was
opened in 1912.)
If cities remain compact, with development proceeding by means
of apartments along major arteries, the primary means of
transportation can remain bus and rail, as in Paris. With
suburbanization, this becomes impossible because the size and cost
of a rail or bus network of any given density expands as the square
of its radius. Thus a radial subway or rail network that extends 20
miles from a city center has gaps in it, where the network is too
far from much of the housing stock, and accessible only after a
lengthy bus ride (generally making the total commuting time
impossibly long) or with an automobile commute to the station. At
that point, the automobile becomes essential, and whining about oil
“addiction” becomes equivalent to whining about the public’s
incessant demand for food and drink.
COMPLAINING ABOUT THE U.S. ADDICTION to oil is largely a cultural
statement, akin to warning of global warming, by which the
speaker’s credibility at leftist metropolitan cocktail parties can
be assured. It is backed wholeheartedly by the global media, most
of whom reside in city centers, use automobiles only sparingly, and
refer to suburbanites among themselves as “bridge” or “beyond the
Beltway” people. It is notable that oil company profits, most of
which accrue to shareholders, are regarded with much more horror by
the media than tech sector profits, much of which are embezzled in
one way or another by that sector’s overpaid management.
This anti-oil snobbery has over the years had damaging effects
on the U.S. economy. It was responsible for the Corporate Average
Fuel Economy (CAFE) standards of the 1980s, which forcibly
downsized U.S. automobiles through regulatory fiat, left the
automobile market vulnerable to imports, and resulted in the
invention of the immensely ugly and slightly dangerous Sport
Utility Vehicle, which was through regulatory quirk exempt from the
controls. The financial decline of Detroit was a direct result of
CAFE, which placed the U.S. industry at a disadvantage to imports
for decades because its fleet mix was affected more harshly by CAFE
standards.
Conversely, anti-oil snobbery has perversely prevented the
United States from taxing petroleum products at levels comparable
to other countries. The unholy glee of the chattering classes in
their attempts to make it more difficult for the non-urban to drive
large cars and commute to work was noticed by the voters, who
correctly took the view that more than financial motivations were
involved. Thus increased gas taxes have always been deeply
unpopular — far more so than their equivalent in general sales or
other taxes.
BUSH’S STATE OF THE UNION ADDRESS was clearly written for cocktail
party consumption, rather than as a rational contribution to
policy. State-funded “research” at which money had already been
thrown in large quantities by the Energy Policy Act of 2005 was
further increased by 22 percent. No major advance has ever resulted
from state-funded research in the energy sector but hey, there’s
always a first time! Bush also announced the administration’s goal
of reducing U.S. oil imports from the Middle East by 75 percent by
2025 — at current 21st century rates of progress that’s ten major
terrorist attacks, eight invasions, six nuclear weapon panics and
three oil supply crises from now, but the thought’s a good one.
Notably absent from the speech were references to Canadian tar
sands, Colorado oil shale and drilling in the Arctic National
Wildlife Refuge, all of which can be expected to make important
contributions to U.S. oil self-sufficiency if allowed to do so by
Congress and the environmentalists. Opposition to ANWR drilling, in
particular, is a sign that the conversation has degenerated to the
cocktail party level; when opponents of ANWR tell you that ANWR oil
would supply U.S. oil needs for only 13 months, they omit to point
out that a more likely usage pattern is to get 5 percent of U.S.
needs for the next two decades, a much more strategically
attractive prospect.
Even more than by its refusal to drill in ANWR, the economic
un-seriousness of the U.S. political class is demonstrated by its
pretence that ethanol, the favored alternative to petrol, must come
from corn, wood stalks, soybeans or some other crop grown safely
within the United States, preferably in the key presidential caucus
state of Iowa, and therefore to be subsidized in return for
campaign contributions. No mention was made of the sugar-cane
derived ethanol program in Brazil which supplies 40 percent of
Brazil’s vehicle fuel, at a price less than half that of gasoline,
compared to the price of corn-grown ethanol that is only just
competitive with gasoline at today’s price of nearly $70 a
barrel.
The United States could reduce dependency on the Middle East by
importing sugar-cane derived ethanol and save money doing so, even
after deducting the cost of retrofitting car engines. Sugar cane is
grown in hot, wet tropical countries, not in Iowa (except at
exorbitant cost), but there are a whole host of such countries
available, in the Caribbean and the northern reaches of South
America, only one of which, Venezuela, is a significant oil
exporter — in some cases, such as Haiti, the United States is
committed to propping the place up anyway.
Ethanol burning in automobiles is even held by environments to
be helpful as regards global warming — the rationale is that
although ethanol, like gasoline, is a hydrocarbon the burning of
which releases carbon dioxide, growing the sugar-cane involves the
absorption of atmospheric carbon dioxide, and so the loop is
closed. This is typical cocktail party arithmetic; it involves
assuming that the land where the sugar-cane grows would otherwise
be an arid wasteland devoid of plant life. However, if we can avoid
environmentalists passing fatuous treaties hindering a partial
switch to sugar-cane ethanol, a useful solution to the U.S. energy
supply problem, let’s not nitpick their logic.
THE STRATEGIC PROBLEM WITH OIL is not that it has to be imported,
but that it has to be imported from a relatively small group of
countries, most of which are both corrupt and intrinsically
somewhat hostile to the United States. Since oil production
requires a large concentration of capital equipment, under
extraction agreements with the host government, oil revenues tend
to produce massive corruption of government officials, wasteful
prestige projects and arms buildup rather than genuine economic
development. Sugar-cane, on the other hand, is intrinsically a
private sector crop, requires only modest capital investment and is
fairly labor intensive even with modern cutting technology. Hence
growth in the sugar-cane sector is likely to help development and
facilitate the growth of a stable middle class in countries of the
Caribbean, Central America and northern South America for which the
United States has always taken a fatherly interest.
There’s a reason for the absence of sugar-cane from Bush’s
speech: the demands of domestic U.S. politics. Sugar-cane growers
in the Caribbean and South America are unlikely to provide
significant campaign contributions, so are not a favored class.
Indeed, sugar imports to the United States are currently regulated
by the “Global Refined Tariff Rate Sugar” program, which prevents
significant competition to coddled domestic sugar producers.
Needless to say, domestic sugar producers are major
campaign contributors, particularly in the key state of
Florida.
“New Energy” technologies offer significant promise of replacing
part of our oil consumption, and indeed must do so if we are not to
suffer increasing scarcities, higher prices and eventually a
shortage of this essential fuel. Nuclear energy and clean coal are
important parts of the answer, but for wholesale power generation
not transport. Fuel cell technology is promising, but the gasoline
consumption figures of the “hybrid” Toyota Prius and its
competitors appear to bear little relation in practice to those
achievable in theory. Wind power is very ugly and intrinsically
limited in scope, while solar power suffers from the problem that
photovoltaic cells tend to overheat — hence the largest solar
array in 2005 was in Leipzig, Germany, not generally thought of as
a sun-seeker’s paradise. Conservation can also help, but is most
effectively encouraged by the European method of high taxes on
gasoline rather than by command and control edicts from
politicians.
THE NEW ENERGY SECTOR IS NOT short of private funding; its
“cocktail party” popularity and the pressure of the Kyoto climate
change agreement has produced an ever increasing devotion of
resources to research, and a huge boom in speculative investment in
the last couple of years. Private equity investments alone in the
New Energy sector (excluding investments by existing corporations
or government or fund-raising by publicly listed companies) totaled
more than $1.6 billion in over 150 transactions in 2005, double the
level of the previous year.
As always with such explosive growth, much of the development in
the sector is ill thought through. Indeed the popularity of the
sector appears to be producing yet another bubble, and has
undoubtedly attracted many sharp operators and indeed outright
crooks. A boom/bust cycle appears to be inevitable, which is a pity
because it could set back genuine progress in the field for a
decade.
Price signals from the market and the “cocktail party”
credibility of New Energy will produce oil-replacing developments
at a rapid pace provided government does not impede the progress.
More important than “New Energy” itself, existing technology, both
to extract oil reserves from Canada and Alaska and to produce
ethanol economically from sugar cane, offers most if not all the
additional energy sources we need to avoid over-dependence on the
unstable Middle East.
Only politics can cause a crisis, but as usual, politics appears
to be driving government firmly in the direction of obstruction,
waste, and economic illiteracy.
