How are we investing in future energy?

Beet_Juice asked this question on 12/13/2000:

If grandparents are concerned with their grandchildren, and America is concerned about it's future, and oil supplies are limited, and there is no cheap alternative, why do people seem so unconcerned about the energy crisis, although limitations in energy are the source of many material problems? Why is there not more research in energy if people care so much about salaries and other material goods when a cheaper alternative energy source could make the world a lot richer (materially) than anything else?

Please do not brush this question off (explain your answer). I have asked it to many people and gotten unserious responses that haven't helped a bit. Thanks.

JesseGordon gave this response on 12/13/2000:

I promise not to brush it off -- I've been studying exactly that set of questions for the last 10 years.

My conclusion is that the answer is with economics and how it ties in with politics.

First of all, oil is the cheapest source of energy around. It should NOT be, but the US government subsidzes it very heavily, so the net effect is that it is cheaper than anything else. The main subsidies are via tax breaks for oil exploration and previously on things like "windfall profits".

There's an enormous "hidden subsidy" in the form of the US Navy, on which we spend billions to ensure a smooth supply of oil from the Mideast. if we didn't do that, the price of oil would simply rise to cover the expected costs of regular breaks in the oil supply -- but we don't let that happen.

Cheap oil becomes self-perpetuating, because people get used to it, by heating their homes with oil, and by buying larger cars than they would if oil were not so artificially cheap. But given the cheap oil caused by US government subsidies, politicians can correctly say that people rely on cheap oil, and therefore we must preserve it, by perpetuating oil tax breaks and US Navy activities in the Mideast.

Second, there are plenty of cheap alternatives. Solar, wind, oceanic waves, methane, nuclear, propane for cars -- these have all been pretty well developed. The problem is that oil is so darn cheap that none of them can actually make a profit. Everywhere else in the world, where the price of oil is NOT kept so artificially low, those sorts of energy sources have been developed much more extensively. But without the leadership of the US, they won't really catch on -- so the world is waiting for us.

The US government DOES sponsor research in all of those fields. But the research is hampered by the price barrier of cheap oil, as well as by political opposition of oil-state senators. If the subsidies on oil were removed, there wouldn't need to be subsidzied research at all. In other words, if we canceled tax breaks for oil companies, and stopped paying for the US Navy to patrol the Persian Gulf, and let the price of oil rise to where it should be, private companies would conduct all of the alternative energy research themselves, because the potential profit would then be enormous.

Third, there's a pretty good argument about the "limited" nature of oil supplies. It's best articulated by Julian Simon in a book called "The Ultimate Resource." He says that people's cleverness will always be able to squeeze out more oil from wells, or from shale, or from whatever we need, until the cost slowly rises and alternatives become practical. Hence there is effectively no limit on the actual quantity of oil in the ground -- it should simply not be considered in limited supply. He's got some pretty solid economics behind him on that, even though I don't like his conclusions. Many Congressman concur with this argument, and hence will perpetuate the current system indefinitely.

Fourth, what do we do? The Oil Minister of Saudi Arabia once said (paraphrasing): "The USA could put OPEC out of business in one year if they put their minds to it." The Saudis know -- their reign is temporary, only until we get our act together.

Given that the oil tax breaks and US NAvy subsidy will continue indefinitely, what can be done? Well, ultimately, the oil will effectively run out, in the sense that the pumping and shipping costs will eventually exceed the costs of solar energy, wind energy, etc. The problem is that if we wait that long, we may end up cooking to death in greenhouse gases -- but that's a whole separate issue.

I wrote an article 9 years ago that the answer was to institute a gasoline tax, at about $2 per gallon. If it were phased in over 5-10 years, people would buy smaller cars; and it would never hurt people's heating bills if you focused the tax on gasoline. $2 per gallon is STILL less than Japan and Europe charge; plus it makes some economic sense because that's about the net effect of the US government subsidies.

In 1993, Clinton & Gore tried to institute something similar to that, in the form of a "BTU Tax." That's a bit more general than a gasoline tax, since it would tax all forms of energy usage. It failed, and failed miserably. The people of America were simply not politically ready for the idea. Hence here we are, 7 years later, with cheap gas, ever-growing SUVs, and a president-elect who promises he'll be drilling for oil in Alaska before his term is out.

Beet_Juice rated this answer:

Excellent! You seem quite knowledgable, and this issue is more complicated than I originally thought. I would be interested in studying this issue.

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