How to view this Blog

The purpose of this blog is to give another venue of a talk on the subject of energy independence. The blog is set up so that if you start with the latest entry and work down you will go through my entire presentation with some additional material addressing frequently asked questions. The premise of the talk/blog is that adequate energy taxes provide a complete answer to our energy problems. So if you are interested start with the next entry and work your way down. I think you will find the topic and the solution intriguing.
Geoff Berg

Addicted to Oil

This is the phrase made famous by our President in his 2006 State of the Union address. What does he mean by this?
Well America has 4.5% of the world's population but uses 25% of its oil. Per capita we use between 50 and a100% more oil than Europeans do. Furthermore, 60% of that oil is imported. This is an increase from 40% 25 years ago. This significantly impacts three factors that effect our long term safety and well-being.

Geoff Berg

Environmental Security

Our profligate use of energy is the single biggest threat to the global environment. Burning fossil fuel is of course the source of global warming. What is more this is also the thing that collectively we as consumers have control over. This was borne out in a book published by the Union of Concerned Scientist, The Consumers Guide to Effective Environmental Choices. In this book the authors looked at all the things that we could do that would have the biggest impact in protecting the environment. The 200 page book is summarized in the following table that appears in the book.

Priority Actions for American Consumers

1. Live close to work.
2. Think twice before purchasing another car.
3. Choose fuel-efficient cars.
4. Reduce travel.
5. Use alternative transportation
6. Eat less meat.
7. Buy certified organic produce.
8. Choose your home carefully.
9. Reduce costs of heating and hot water.
10. Install efficient lighting and appliances.
11. Choose renewable energy.

These are the things that we can do that will have the biggest impact in improving the environment. What is striking is that 9/11 items on the list have to do with conserving energy. Further in the text of the book the authors note that while they did not want to assign priorities, our use of cars and light trucks has the most significant impact.

So if we want to do the most we can to protect the environment we need to reign in our use of fossil fuels.

Homeland Security

Most of the threat from terrorism comes out of the Middle East. Not surprisingly so do most of the funds that finance those activities. In 2002 the Council of Foreign Relations did an extensive study of the sources of terrorist funding. One of the more damning findings they reported is spelled out in the following quote from that study.

“However, it is worth stating clearly and unambiguously what official U.S. government spokespersons have not: For years, individuals and charities based in Saudi Arabia have been the most important source of funds for al-Qaeda; and for years, Saudi officials have turned a blind eye to this problem.”

The Council on Foreign Relations

Since most of this money moves through non-conventional channels this seems to still be true today. But the real problem is where does all that money originate? It starts with us the consumer. Every time we fill-up some portion of that money ends up in the Middle East and inevitably some of that ends up in the hands of terrorists. We are the source of terrorist funding; we are paying for both sides of the war on terror.

As Pogo said many years ago, “We have met the enemy and they are us.”



YOUR OIL DOLLARS AT WORK.

Financial Security

Recently we have seen how volatile oil prices can effect the economy. Last Fall, when supplies tightened, prices went up contributing to the largest trade deficit in the nations history. Today prices remain high making financial markets nervous with the threat of inflation and higher interest rates.

These disruptions, of course, are nothing compared to the oil shocks of the 70’s. In 1973 and 1979 Middle Eastern conflicts prompted oil-producing nations to turn off the taps. The transportation sector ground to a halt. The pictures we saw of long gas lines after Katrina were the norm all across the country.

The rest of the economy followed transportation into the breakdown lane. There was double-digit inflation coupled with high unemployment, stagflation. These were the worst economic downturns this country had seen since the Great Depression. While today a smaller portion of the overall economy is dependent on oil, a larger percentage of that oil is imported. The bottom line is that a significant disruption of oil supplies could once again have the country running on empty.

Our continued dependence on oil leaves our country vulnerable to economic blackmail. For instance, if we are going to threaten the political survival of the current regime in Iran, they are certainly in a position to threaten the economic survival of this country.

Current Solutions

A comprehensive energy policy should protect the environment, and decrease our dependence on foreign oil. It should do these things without hurting the economy and it would be helpful if it cost as few tax dollars as possible.

Proposed solutions are generally multi-faceted and have elements that either increase the domestic supply of energy or decrease demand.

Solutions that increase supply include.

1. Relaxing restrictions on domestic energy drilling.
2. Subsidizing domestic energy producers.
3. Sudsidizing/supporting research in alternative energy sources.

Solutions that are aimed at decreasing demand include:

4. Subsidizing/supporting research in greater fuel efficiency.
5. Compulsory increases in fuel efficiency standards for the nations cars and light trucks.

The first four policies are part of the most recent energy bill to pass congress. The fifth solution is something that has been promoted by the environmental community for the last decade. Unfortunately, these solutions collectively or individually do not offer much hope of solving our addiction to oil. In order to understand this one needs to understand the economics of oil.

The Economics of Oil

The first thing to realize about oil is that it is a fungible commodity. All this means is that the price of oil is the same no matter where it is traded in the world. As a result anything that effects the supply or the demand for oil anywhere in the world will predictably affect the price of oil. Therefore, for oil the laws of supply and demand are universal. So if we understand the laws of supply and demand we can easily see how policy will effect how and how much we use of it. So let’s look at the laws of supply and demand. There are two.

The first law of supply and demand says that price is proportional to demand and inversely proportional to supply.

P ~ D/S

This is just common sense. The more people want something, the more they are willing to pay for it. Conversely the more readily available something is, the cheaper it will be. Whenever, we hear about the price of oil we hear about factors of supply and demand that are effecting it. The latest manifestation of this is, prices are high because the summer driving season is coming up (increase demand) and there is uncertainty in Nigeria and Iran (decrease supply). Note: factors in the North America coupled with factors in Africa and Southwest Asia affect the world price of oil because it is fungible.

The second law of supply and demand says that demand is inversely proportional to price.

D ~1/P

Again, this is just common sense. The more expensive something is the less likely people will buy it. Conversely, the cheaper is is the more people will be willing to buy it.

Using these very basic economic laws we can see what how effective the proposed energy solutions really are.

Increasing Supply; Increasing Demand

It would be hoped that increasing the supply of domestic energy would make us freer of foreign energy sources. Therefore, the administration has promoted:

Relaxing restrictions on domestic energy drilling.



Subsidize energy producers.



Subsidize and support research in alternative energy sources.

All of these ideas would take time to bear fruit and at least the first two are harmful to the environment. More importantly however is the fact that they would be ineffective. The laws of supply and demand make this obvious.

If you increase supply then price declines.

p ~ D/S

But when price declines then demand increases

D ~ 1/p

Therefore, when supply increases then demand increases. We end up using more energy because we have more energy to use.

Moral: We can’t grow our way out of the problem.

I May, I Must, I Want

If we can’t solve our problems by increasing supply, then we need to decrease demand.
Ideas that have been proposed to decrease demand include:





Subsidizing and supporting research in improved fuel efficiency.






Compulsory increases in fuel efficiency standards for cars and light trucks.









The problem with these solutions is they don’t decrease demand.
Demand is, “I want.”
In the first case creating vehicles that have improved fuel efficiency gives people the means but it doesn’t necessarily make them want to use such vehicles. If they are unfamiliar, less safe, less reliable, harder to find fuel for, or the price of fuel falls then people may not be inclined to buy them. Improved fuel efficiency means, “I can.” not “I want.”

Compulsory fuel standards are just that, compulsory. If people aren’t inclined to cram themselves into fuel efficient cars then they won’t. After 9/11 when energy policy was being debated, environmentalists were promoting increased standards. The auto industry pointed out that 15 % of the cars they made would meet the higher standards that had been proposed but those car represented only 4% of their sales. Compulsory standards means, “I must.” not “I want.”

In order to decrease demand we want people to want to save energy.

Imagine the Future

Try the following thought experiment.

Imagine you wake up and you and practically everyone else in America are conscientious about how they use energy. They don’t dally in the shower; they turn out lights when they leave the room (even the teenagers); they keep the thermostat at 65 and put on a sweater if they are cold.

When before they go out they think if they have to go; how they are going to go; if they are going to drive; and even how they are going to drive.

When they go to the store the first thing on their mind is to buy whatever is avaible that is fuel efficient or helps to save energy. Meanwhile scientists and engineers all over the country and indeed the world are working feverishly to develop products that will help Americans in their quest to save energy. Entrepreneurs are investing in these ideas in the hopes of cashing in the next great energy saving device.

As a result of all this concerted interest in saving energy within a few short years our consumption of oil falls by 20% and the price of oil falls by 75%!

You can stop imagining now. If you are over 45 all you have to do is remember. If you are less than 45 ask your parents.


What you have imagined all occurred starting in 1979 with the second Arab oil embargo. The price of oil doubled for the second time in the decade and immediately all Americans were consumed with saving oil.