Jeff Jarvis’ Issues 2004: Energy

Lynne Kiesling

Jeff Jarvis is writing a series called Issues 2004, and his post on energy policy from Monday tackles a lot of important questions and offers some recommendations. In addition, the comments on his post include a lot of good insights and thoughts.

Here are my thoughts. Jeff starts with his memories of the 73-74 oil crisis in the US, of which I largely remember sitting in line at gas stations with my mother, waiting to fuel up her 1971 Camaro and reading Laura Ingalls Wilder books (I was eight at the time). Perhaps it was a bit of a coincidence, but I do recall my father buying a Toyota in 1974 … and taking apart and rebuilding its catalytic converter several years later.

Jeff is correct that we have not reduced our dependence on foreign oil in the intervening 30 years. What is remarkable, though, is how much more economic activity we are able to create and enjoy with that level of oil dependence. In other words, we create more GDP per barrel of oil than we did 30 years ago. Still, we do consume a lot of oil, even if at the margin it takes less oil to produce an additional dollar’s worth of goods and services than it did then.

Of course, part of what’s going on here is that the technological dynamism of the past 30 years cuts two ways: newer technologies have become more energy efficient and deliver more value per unit of energy consumption, but what that means is that at the margin, the energy cost of new technologies is actually lower (all other things equal, including energy prices). That makes it cheaper to use these efficient technologies more, so in aggregate we may consume more energy because we pursue a larger volume of economic activity than we used to. That’s the nugget at the core of the GDP increase of the past 30 years. What’s unseen (to continue the Frederic Bastiat theme from earlier today) is one of the counterfactuals: how much economic activity would we have had without the technological change toward more energy-efficient technologies? Because what we see is an increase in energy use in absolute terms, we can indulge the predisposition to hysteria about energy use. Perhaps it’s overstated; but I do think, as one of Jeff’s commenters said, that it’s hysteria about wanting to sustain economic activity with energy prices as low as they currently are.

Jeff next tackles gasoline, suggesting a tax on inefficient cars that is paid as a wealth-transfer subsidy to owners of efficient cars. Such a streamlined policy would be more transparent than the Baroque web of federal/state/local gasoline taxes that we currently pay to subsidize the construction and maintenance of, for federal taxes, the interstate highway system. Some of Jeff’s commenters confront this Baroque tax system head-on, and rightly so. Dave Schuler paraphrases what he says in his own post on the topic:

So what should the federal government do about energy independence in general and dependence on oil in particular? In my opinion, the federal government should get the hell out of the way. This is a problem that the market is absolutely able to address. Government should stop providing false incentives and let the market operate. Don’t provide incentives for solar cells that take more energy to produce than they’ll produce in their productive lives. Don’t subsidize the production of ethanol that’s more costly in energy terms than the gasoline it displaces.

And, of course, the largest single subsidy that the federal government provides on the consumption of gasoline is called the Interstate Highway System. If the people in Massachusetts, or Wyoming, or Texas, or California want more highways, I believe that they absolutely have the right to build them. But they shouldn’t build them with money from Illinois or New York. And while we’re on the subject why is there an Interestate Highway in Hawaii?

I think that’s right; we do subsidize the use of technologies that are thought to have environmental benefits (such as solar and ethanol) that are less intense energy production technologies, which means that we use more resources to get the same number of BTUs of energy. The purported tradeoff is that we get less pollution in return for the increased use of resources to produce energy. That is a contentious topic — KP readers know that there’s a lot of research showing that ethanol production both is fossil-fuel energy intensive and produces emissions, while ethanol’s use contributes to ozone formation according to a new study that I linked to in this post. Solar panel production is prey to many of the same criticisms. Plus I think Dave’s right to point out that the Interstate Highway System is one of the biggest subsidies to energy use that we have, and that stopping that subsidy and pricing the use of the highway system would send accurate signals to drivers of the cost of their driving choices.

So if we ask the “compared to what?” question about gasoline taxes, I think in a frictionless world that the wealth transfer tax he proposes would create some of the incentives he intends. But reality is not frictionless, I don’t trust the government to implement the tax in a second-best efficient fashion, and I disagree with the top-down, control-and-manage mindset that claims to know what’s best for consumers (I’m not saying that Jeff is doing that, BTW, but many do). What if I’m a working immigrant with kids, and I scrape together enough cash to buy a secondhand but inefficient car so I can drive to work? If you tax my inefficient car and I can’t afford to buy it, you probably force me to either take a job accessible by public transportation or not work at all. That’s egregiously unfair. Energy costs are but one part of the complex lives we lead, and attempts to impose redistributive costs on us to change our behavior is going to reach up and bite us in unintended and unanticipated ways.

Jeff then asks about nuclear power. This September 2004 Wired magazine article looks at the academic research and the construction of nuclear power plants in China. China’s economic growth (which contributes to the currently high oil prices) is already straining their power supplies, so China plans to build 30 new nuclear power plants in the next 16 years, all using pebble-bed technology. Pebble-bed nuclear has been around since the 1930s. Instead of fuel rods, the uranium/carbon blend is encased in baseball-sized graphite/ceramic balls, and the reactor core is cooled with helium gas. No radioactive water, no spent fuel rods to make dirty bombs. And the scale of the plant is about one-third of the big ones that we are used to here. This is the nuclear technology of the future because it’s safer, cleaner and more secure. My hope is that this technology moves us away from our knee-jerk rejection of nuclear as an option, and that its different risk profile undermines the now-successful arguments for federal insurance subsidies (Price-Anderson).

Jeff goes on to discuss R&D and reducing world oil dependence, but I’ll stop here. Bottom line: we can do this, we are already doing this, and engaging government to satisfy our impatience is more likely to produce a worse outcome in the long run by forcing us to impose particular solutions instead of a variety of entrepreneurs all trying to find the energy approaches of the future. Tim Worstall’s comment on Jeff’s post touches precisely on that:

Please, no more new plans, no more money, no more tax breaks, research grants and definately [sic] no more bloody government interference. Just let the engineers and scientists get on with what they are doing, working to solve these problems under the rules and incentives already in place.

And let us use the information contained in price signals to evaluate our personal, subjective valuation of energy use to us, each in our own individual circumstances. The more we focus on transparency and reducing transaction costs in energy markets, the better those signals will be at capturing more of the true costs and benefits of our energy use.


10 thoughts on “Jeff Jarvis’ Issues 2004: Energy

  1. The fact that more GDP is created per a barrel of oil than 30 years ago does not make energy any less important. During the fuel protests in the UK in which truck drivers blocked fuel distribution it had to be explained to the British Prime Minister how essential oil was to the running of the country. It is reported we came within a few hours of running out of bread.

    I agree with Jeff and Dave that we shouldn’t subsidise production of biofuels etc. that are net energy negative (i.e. it takes more energy to produce than is ultimately returned).

    As to nuclear I’ve yet to see compelling evidence that the entire cycle from extraction to disposal (unlike the operating period alone which the nuclear industry is so keen on quoting) is net energy positive let alone economically viable. It should also be remembered that uranium is another resource of which there is a finite supply.

    To quote from the California Institute of Technology Newsletter:

    “To produce enough nuclear power to equal the power we currently get from fossil fuels, you would have to build 10,000 of the largest possible nuclear power plants. That’s a huge, probably nonviable initiative, and at that burn rate, our known reserves of uranium would last only for 10 or 20 years.”

    I absolutely agree the Interstate Highway System is one of the biggest subsidies to energy use in the United States. Stopping that subsidy and pricing the use of the highway system would send accurate signals to drivers of PART of the cost of their driving choices. Why part? Because it doesn’t take into account market externalities such as pollution.

    I disagree with Tim that everything that can be done is being done.

    It’s going to take decades to transition away from fossil fuels and yet some estimate of the remaining supply of cheap oil as being between a few years and a few decades at most. Remember there has to be enough energy to switch to alternatives. The price signals may come too late. We can’t eat money.

    However I believe the first important step is remove all direct and indirect (such as highways and incentives to automakers) subsidisation of non-renewable fossil fuels. We should then focus our efforts on clean renewable energy-positive power sources such as wind power.

  2. One caution: Wind power is a “resource of opportunity”, available when the wind blows at sufficient but not excessive speed, at the site of the wind turbine. To be a reliable source, multiple wind turbines must be installed in multiple, select locations. This strategy produces some reliable windpower and additional “opportunity” power. A visit to the AWEA website will provide further info.

  3. Those who are interested would do well to read Lester Brown’s book, “Plan B”, especially the ninth chapter on reducing fossil fuel dependence. (www.earth-policy.org)

    While I’m glad to see Ed Reid posting on wind power, it’s lamentable that nobody else sees (posts on) the potential in this…if only to raise the point for debate.

    I’ll let Mr Brown do the talking, as that chapter is in PDF for free download. Initial research and casual inquiry supports the case for wind power, especially when used in concert with other alternative means (eg hydrogen).

  4. I downloaded the chapter than Michael mentions and at first skimming I ran into this hooter:

    “Rather than wait for fuel cell engines, Braun suggests using hydrogen in internal combustion engines of the sort developed by BMW. He notes that converting a gasoline engine to hydrogen is relatively simple and inexpensive. This would also facilitate the early development of hydrogen stations in wind-rich areas while waiting for the mass production of fuel cell cars. Braun calculates that the electrolysis of water to produce hydrogen and its liquefication, along with the high efficiency of a hydrogenfueled internal combustion engine, would bring the cost of hydrogen down to $1.40 per equivalent gallon of gasoline.”

    I would like to see Braun (cited as an Energy consultant) defend these numbers. Hydrogen is incompatible with steel – it makes it incredibly brittle. The energy density of the gas is much less than vaporised gasoline such that the engine will produce only a fraction of the output that it did on regular gasoline. The exhaust is primarily steam leading to corrosion problems.

    This has been looked into and discarded as not viable.

    As for the cost equivalent – this is absurd. Electrolysis is one of the more inefficient ways to manufacture H2 – you will be basically throwing away over 90% of your source energy from the generator to the final use.

    Repeat after me: Hydrogen is a very inefficient energy transport medium. Hydrogen is not a fuel.

    For a very good overview of energy fundamentals, check out Don Lancaster’s website and this article:
    http://tinaja.com/glib/energfun.pdf

    BTW: A quick Google of Harry Braun shows that he is a presidential candidate as well as the brains behind the Phoenix Project:
    http://www.braunforpresident.us
    http://www.phoenixproject.net
    Long on hype and loose with facts…

  5. The same argument used to dismiss concerns about energy dependence could be used to support the contention that we are right to maintain our consumption by selling dollars to the Chinese central bank.

    Economically, it works, today. But it is irresponsible to overlook the geopolitical consequences. Saudi Arabia and the PRC are not Canada; inviting their influence on our economic policy decisions is just asking for trouble. Now with respect to energy it can be said that the train has left the station — we could have prepared for an environment featuring higher energy prices by raising gas and other energy taxes years ago, but we didn’t. Prices are rising now due to market forces, and the cost to our economy will end up substantially greater because we delayed taking action — the same thing that will happen if we do not address our fiscal imbalance now rather than later.

  6. Boy there were a lot topics in that post. Transportation economics is a particular interest of mine, and I disagree with the notion that the Interstate Highway System is the largest subsidy for the consumption of gasoline there is. John Thacker also challenges this point. The Interstate System construction is largely funded though fuel taxes collected on gasoline and diesel fuel. Some taxes are collected at the federal level and are funneled into the Highway Trust fund. Some taxes are collected at the state level,and sometimes funneled into a Transportation Trust Fund (as here in Minesota) and some times the taxes go into the state’s general fund. In states like Minnesota the situation is similar to the federal level where most of the taxes paid by the users are returned to fund highways driven on by these same users. Some taxes leak out to to fund things other than highways, transit and corn production for example, and the efficiency of the system would be improved without the leakage. I think we can be assured that if you do not use the roads, there is not much chance of your tax dollars funding the Interstate System. (Yes, if you consume any goods that are delivered by truck, you help to pay for the roads the truck drives on. Not exactly a subsidy to my way of thinking.) Could the system be more efficient? Yes, Gabriel Roth wrote an interesting book, “Roads in a Market Economy”. In the book he suggests the concept of “shadow tolls” where user fees collected through devices such as fuel taxes would flow back to the piece of pavement responsible for generating the tax. (It turns out, fuel taxes are an efficient way to collect taxes, since they is collectted at the wholesale level, and there are so few wholesalers of gasoline and diesel fuel. It sure beats paying a toll every 20 miles like in Chicago.) This way individuals who never drove on an Interstate Highway would not subsidize highway users, as the fuel taxes would be directed to their local streets (in poroprtion to the fuel burned on that street), offsetting a small part of the property taxes necessary to build and maintain property access. The same argumet would be made, that the taxes paid on fuel burned on toll roads should go back to the toll road authority, to lower the toll rate needed to support the facility.

    Roads can be viewed as a utility, I expect with many of the same network considerations that you write so eloquaintly about concerning power distribution. The road network has little more justification of being owned by governmental units than a power distribution system. Allowing market pricing and price feedback to consumers certainly has the possibility of making the network more efficient.

    I agree that there should be no such thing as donor states. New Jersey drivers should not pay for Wyoming’s roads. Fuel taxes could simply be sent back states and municipalities as block grants (based on the amount of fuel consumed in each locality). However, due to the range of long-hall trucks, it probably makes little sense to collect all diesel fuel at the state level. Trucks have the ability to bypass fuel stops in states that may have higher highway costs because of low traffic density, unfavorable terrain, or severe weather. Cars make far fewer interstate trips, so it may not be justifiable to to collect much federal tax on gasoline, but instead to keep the tax collection and disbursement local.

    I would certainly enjoy other analyses regarding network similarities between transportation networks, power distribution networks and other types of networks.

  7. Boy there were a lot topics in that post. Transportation economics is a particular interest of mine, and I disagree with the notion that the Interstate Highway System is the largest subsidy for the consumption of gasoline there is. John Thacker also challenges this point. The Interstate System construction is largely funded though fuel taxes collected on gasoline and diesel fuel. Some taxes are collected at the federal level and are funneled into the Highway Trust fund. Some taxes are collected at the state level,and sometimes funneled into a Transportation Trust Fund (as here in Minesota) and some times the taxes go into the state’s general fund. In states like Minnesota the situation is similar to the federal level where most of the taxes paid by the users are returned to fund highways driven on by these same users. Some taxes leak out to to fund things other than highways, transit and corn production for example, and the efficiency of the system would be improved without the leakage. I think we can be assured that if you do not use the roads, there is not much chance of your tax dollars funding the Interstate System. (Yes, if you consume any goods that are delivered by truck, you help to pay for the roads the truck drives on. Not exactly a subsidy to my way of thinking.) Could the system be more efficient? Yes, Gabriel Roth wrote an interesting book, “Roads in a Market Economy”. In the book he suggests the concept of “shadow tolls” where user fees collected through devices such as fuel taxes would flow back to the piece of pavement responsible for generating the tax. (It turns out, fuel taxes are an efficient way to collect taxes, since they is collectted at the wholesale level, and there are so few wholesalers of gasoline and diesel fuel. It sure beats paying a toll every 20 miles like in Chicago.) This way individuals who never drove on an Interstate Highway would not subsidize highway users, as the fuel taxes would be directed to their local streets (in poroprtion to the fuel burned on that street), offsetting a small part of the property taxes necessary to build and maintain property access. The same argumet would be made, that the taxes paid on fuel burned on toll roads should go back to the toll road authority, to lower the toll rate needed to support the facility.

    Roads can be viewed as a utility, I expect with many of the same network considerations that you write so eloquaintly about concerning power distribution. The road network has little more justification of being owned by governmental units than a power distribution system. Allowing market pricing and price feedback to consumers certainly has the possibility of making the network more efficient.

    I agree that there should be no such thing as donor states. New Jersey drivers should not pay for Wyoming’s roads. Fuel taxes could simply be sent back states and municipalities as block grants (based on the amount of fuel consumed in each locality). However, due to the range of long-hall trucks, it probably makes little sense to collect all diesel fuel at the state level. Trucks have the ability to bypass fuel stops in states that may have higher highway costs because of low traffic density, unfavorable terrain, or severe weather. Cars make far fewer interstate trips, so it may not be justifiable to to collect much federal tax on gasoline, but instead to keep the tax collection and disbursement local.

    I would certainly enjoy other analyses regarding network similarities between transportation networks, power distribution networks and other types of networks.

  8. I agree with Jay that the Interstate Highway System is not a subsidy for gas consumption but it does tend to result in another kind of subsidy. There are two distinct subsidies taking place in the gasoline tax, the first of which is a subsidy to trucking.

    Trucks today, particularly in interstate trucking, are carrying far more freight longer distances than they should be. The provision of an extensive transportation network, subsidized by the passenger automobile sector, is drawing freight that belongs on other modes onto the highway by creating an artificially lower price. Trucks, in a number of ways, consume more “transportation” when they operate on the public roadways. They cause more physical damage to the roadways and they cause disproportionately more congestion due to their less responsive acceleration, generally slower speeds and especially on city streets their limited maneuverability. In short trucks destroy more of the network and create more externalities in the form of congestion and pollution than they pay for relative to passenger automobile traffic. The result is not only an artificial shift in the distribution of transportation between modes but also results in more transportation as the production of a good consumed in Chicago is now, with the artificial subsidy to trucking, cheaper to manufacture in Mexico than Ohio.

    The second subsidy created by the Interstate Highway System is a transfer of funds from urban areas to the suburbs. People have a perverse expectation that the government should not only allow but also encourage sprawl. It seams to be a common pattern that residents move out to the edge of development on the fringe of metro areas such as Phoenix or Chicago where housing prices are cheap. There is no problem with suburban sprawl, although I have a strong personal distaste for the phenomenon it is perfectly logical for some people to reside in such areas if it will maximize their utility. The subsidy comes into effect when people move out to these areas and then demand new roads and services that are paid for with a subsidy from gas taxes collected in the central urban areas. This causes a ratcheting effect where the sprawl continues to expand, supported at every step by those living closer to the center of the urban zone. Not only is there the additional cost of extending roads but the need to expand the capacity of the existing roads that now have to support the additional traffic of the outlying development. This growth subsidy is not only a transportation problem but happens with water, sewage, power and any other network which must not only extend to support the growth but grow capacity to support the additional “traffic” throughout the system.

    While gas taxes are likely the most efficient way to collect user taxes to pay for the transportation system, there are some serious policy changes that need to take place to prevent a distortion of our transportation and location preferences from continuing.

  9. I am surprised that no one is talking about the world using “Electromagnetic Motors” to produce the power needed to supply the electricity to alomost everything we use.

    By designing a motor that uses the simple fact that like poles repell, we can produce the power to drive generators that have a positive return on energy. In fact, all you have to do is to web search “Gray’s Electromagnetic Motor” and you’ll find that our government has had this information since the 1960’s. With the introduction of such material as Annealling Silicon Crystals, electromagnetic motors should be able to produce enough positve energy production to offset the little energy required to make the magnetic fields.

    Although the introduction of an energy source that requires no fuel may have a negitive impact on the Oil and Utility companies of the world, the impact on the market should offset any major problems since people on average will have $2-300.00/mth extra spendable cash.

  10. I am surprised that no one is talking about the world using “Electromagnetic Motors” to produce the power needed to supply the electricity to alomost everything we use.

    By designing a motor that uses the simple fact that like poles repell, we can produce the power to drive generators that have a positive return on energy. In fact, all you have to do is to web search “Gray’s Electromagnetic Motor” and you’ll find that our government has had this information since the 1960’s. With the introduction of such material as Annealling Silicon Crystals, electromagnetic motors should be able to produce enough positve energy production to offset the little energy required to make the magnetic fields.

    Although the introduction of an energy source that requires no fuel may have a negitive impact on the Oil and Utility companies of the world, the impact on the market should offset any major problems since people on average will have $2-300.00/mth extra spendable cash.

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