Oil Money

Boone Pickens likes to say the $700 billion or so per year we expect to pay for imported oil over the next several years amounts to the greatest transfer of wealth in history. Boone is overselling his wind farms and natural gas as the solution but he does have a point. Current US net foreign debt amounts to a worrisome $3 trillion. The next president could see that more than double. If he has two terms he could see it bankrupt the country; that is unless we do something about it, and of course there is something we could do about it. We are sitting on somewhere between 1.5 trillion and 2 trillion barrels of known reserves in shale rock alone. We might want to consider extracting some of that oil. $150 trillion would go along way toward solving a lot of financial problems, and most of the reserves are on federal lands.

Not that the oil is really worth that much. It may not all be recoverable and at anywhere above $50 per barrel there are too many alternatives for liquid fuels. Cost estimates for extracting shale oil currently run about $30 per barrel. Still, to paraphrase Everett Dirksen, a trillion here, a trillion there… pretty soon you’re talking real money. With all the unexplored and undeveloped options off shore, in the arctic, in clean coal, and in algae culture there are plenty of trillions to be found. Don’t talk to me about ethanol. That has its best use in corn whiskey and I don’t like corn whiskey.

All of these options have the advantage they cut directly to energy independence and fuel price issues because all can be used to produce liquid fuels, the products that use most of our petroleum. All the fuels can be used in existing engines and delivered through existing infrastructure. None require tax subsidies because they can all be produced profitably at costs equivalent to less than half the current price of oil. All are at least as clean as petroleum. All of them need more research because none of them are proven for production on a commercial scale but all of them are more ready for prime time than any other alternatives. It is reasonable to expect that all could be producing substantial amounts of fuel within three to five years. The government doesn’t need to do anything except get out of the way.

Here is my suggestion. Let’s adopt a regulatory environment to encourage rather than restrict or prohibit production of liquid fuels from unexplored or undeveloped resources. Let the markets work. At the same time let’s begin drawing down the strategic petroleum reserve at a rate designed to exhaust it in five years, with the expectation that by that time we will no longer need it. If speculators are part of the current problem, and it makes sense that they are, that ought to take the wind out of their sails.

Most important, let’s understand clearly the nature of the crisis we are in. We may be in a long term global warming trend, it may have serious negative consequences for the planet, and man made greenhouse gasses may be the principle cause. All of those things may also not be true. That’s the subject for another essay. We most certainly do have a short term transportation fuels crisis on our hands. The world wide demand for liquid fuel is going to increase steadily for at least the next three decades. All those Chinese and Indians are going to get their cars. We cannot conserve enough to compensate. Nor can we convert rapidly enough to electric, hydrogen, or natural gas powered vehicles. New production of hydrocarbons must be a part of the solution. We have a number of options at our disposal and we had best get on with it. Else Boone Pickens may be right. We may witness the greatest transfer of wealth in history.

Economic Atlantik-Brücke

When Angela Merkel visited the US two years ago she made a very sensible proposition, one President Bush welcomed but that got very little attention in the American press. Her idea was to incorporate the US and the European Union along with probably Canada and Mexico, into a single free trade zone. We really should treat this more seriously. As Richard Rosecrance points out in the current issue of The American Interest America owes it’s place in the world as much to our status as an economic powerhouse as a military one, and that’s about to change. The EU’s economy is now bigger than ours is, China’s is about to become so, and India’s may not be far behind. In thirty years we could find ourselves in fourth place with a corresponding reduction in influence. I not sure we’ll be able to maintain the enormous defense expenditures required to continue acting as the world’s policeman either. So who’s going to do that? China? It’s time we started rethinking what sort of world order might be emerging and Mrs. Merkel’s suggestion would be a good place to begin.

A combined market would encompass about 13% of the world’s population but somewhere around 60% of it’s production. It would represent an alliance of people with a great deal in common with shared values and much to agree on. As the EU has amply demonstrated, the trade ties would have huge implications for a more peaceful world. On a continent that saw almost continuous warfare for at least two millennia, Germany is now no more likely to go to war with France than Virginia is with Maryland. Access to such a market would be a very large incentive to put a break on any bellicose ideas others might have. The same mechanisms that work to maintain orderly trade can also help in addressing all sorts of intractable issues from clean air to potential pandemics.

I can imagine that Japan might like to be in on the deal, and would have to open up long protected markets to get there. Mexico would have to adopt reforms that might finally bring prosperity on our southern border, and solve an illegal immigration problem that has frustrated every American administration in my memory. That’s exactly what has happened in Eastern Europe as former Warsaw Pact members have clamored for admission to the EU. For a short time Polish workers were flocking to Ireland. Now they are going home. Poland and Ireland both benefited.

A pact with Europe wouldn’t be subject to the same Xenophobia as the often proposed Free Trade Zone of the Americas. Ross Perot’s giant sucking sound wouldn’t have the same ring. Americans love to complain about the French but most of us would jump at the chance to spend a summer in Provence. Congressional trade demogogs would have to produce an entirely new line of rhetoric. It is we, not the Europeans, who might have to make concessions on environmental and labor issues. American unionists and clean air advocates ought to be all for it, though I’m not holding my breath.

In fact I’m not so naïve as to think any such grand offing is in the cards any time soon. Protectionists have the upper hand at the moment. Globalization has become a dirty word. But all of that is bad for the economy and in the long run that is bad for politicians. We could be in for some rough years. Our foreign oil bill alone is staggering. Between that and the declining dollar we may be about to see another round of stagflation, a word so long out of use anybody who doesn’t remember the Carter years probably doesn’t know what it means. Carter was a one term president. It took another sagging economy to bring a Democrat back into office. Politicians would do well to remember that.

The Cruelest Tax

It used to be said of socialists they loved humanity but hated the people. Something like that could be said of the modern environmental lobby. In their conspiracy to restrict fuel supplies and price transportation out of reach for all but the wealthiest they would bankrupt millions of Americans and condemn much of the world to perpetual poverty. The great socialist experiment failed, producing unimaginable misery in the process. We have the opportunity to avoid that fate for our next several generations but we had better get our act together. The zealots are out there and they are singing a siren song. What could be a greater calling than to save the planet? Of course as with socialism, the devil is in the details. Sky high prices cascade through the economy. Inflation erodes the value of savings. Marginal workers are laid off. Some have to quit because they can’t afford gas to get to work. Many who can barely afford the gasoline continue to drive their old clunkers, put off tune ups, and produce even more pollution. As people begin to catch on the twenty first century commissars spread more and more propaganda. No disinformation is beyond them.

They say off shore drilling puts our beaches at risk. The truth is we haven’t had a major spill from a drilling rig in almost forty years, not since 1969 off Santa Barbara. Thousands of platforms have weathered numerous hurricanes without incident. The tankers bringing in imported oil represent a far greater hazard. They tell us drilling in ANWAR will destroy a pristine wilderness. Baloney, drilling just down the coast along Alaska’s North Slope hasn’t done any appreciable damage. They claim oil is fungible so replacing imports with domestic production won’t have an effect on global prices. The fact is basic laws of economics hold that any increase in supply or decrease in demand will put downward pressure on prices. There are common sense measures to be taken on both sides of that equation to hold prices to manageable levels. We don’t need to repeal the industrial revolution.

Peak oil theorists maintain that the world has reached the upper limit on potential production. Future supplies will inevitably decline, so get used to permanently high prices: also demonstrably false. The United States alone has enough untapped reserves to satisfy the world’s appetite for decades if we choose to develop them. They’re just off limits. Add clean coal-to-liquid technology and we are talking many decades. New alga culture methods coming on stream will make the supply of carbon based fuels virtually limitless. That’s what this is really all about, carbon dioxide emissions. The rest is just smoke screen. But reducing CO2 in the air is another technical problem we could solve if we put our minds and money into it. The $700 billion or so we expect to spend annually for the next few years on oil imports would pay for a lot of R&D, all of it going into our domestic economy instead of being drained away.

Restrictive policies on development aren’t the only explanation for the dramatic rise in fuel prices over the last several years. Speculation in commodities markets plays a role. So does the declining value of the dollar and there is no question that increased demand from China and India is having its effect. But the increase in demand can be met. The expectation that it will be met would go a long way toward bursting any speculative bubble. The resulting decrease in US trade deficits should also reverse the dollar’s decline. This is in large part a manufactured crisis. I understand most members of congress got an earful while they were home for the 4^th of July. Good. It’s time they did.

Charlatan Obama

He’s a free trader but opposes every trade agreement on offer. He’s pro nuclear power but only if the waste issue is satisfactorily addressed. No possible resolution is satisfactory. He offers a message of peace and racial harmony but for twenty years attended a church known for its confrontational and divisive theology. He is a patriot but has associated himself with some of the nation’s most violent radicals. He’s for energy independence but opposes all new drilling or exploration where there are known domestic petroleum reserves. In Rocky Mountain shale alone the United States owns six times as much oil as Saudi Arabia but Obama opposes its extraction. Instead he proposes higher automobile mileage requirements and greater reliance on ethanol, a fuel requiring almost as much energy to produce as it yields, and one less efficient than the gasoline it supplements. He addresses energy independence by discouraging economic activities that require energy. He’s for clean coal but would impose impossibly strict carbon emission standards, far higher than on the fuels it would replace. He’s all for reviving a sagging economy and would raise taxes to do it. He wants to prosecute the war on terror vigorously but would initiate a precipitate withdrawal from Iraq, leaving the field for an unencumbered terrorist renaissance, or would he?

We’ve established a pattern here. Obama’s solution to ruinous gasoline prices is a windfall profits tax on big oil, a recycled idea from the Carter administration that had the disastrous effect of discouraging domestic production. Surely someone has explained to him that despite its size, Exxon Mobil is only number 14 on the list of global oil companies, the really big ones are all safely out of his reach. He would use the proceeds to fund endless research on alternative fuels, all the while complaining that any new offshore drilling would take years to have an appreciable effect. Presumably no new alternative fuels would be acceptable either.

Senator Obama has painted himself into quite a few boxes. If he is elected president and behaves responsibly in Iraq his base constituency will most likely react with a vengeance. If he does not he could well produce a national security catastrophe. Either outcome could make his a one term presidency. Ask the senior George Bush about his “read my lips” pledge on no new taxes. If Obama renegotiates NAFTA the Mexicans will want something in return for any new concessions. What’s he going to give them? Looser immigration controls? $4 gasoline is having painful results. People are losing their jobs, not eating right, and avoiding expensive trips to the doctor. Al Gore wants it to go to $5. If we aren’t already in a recession that ought to do it.

No wonder Obama doesn’t want to debate John McCain. Questions are Obama’s Achilles heel. In the primaries there weren’t many real policy distinctions but in the general election the contrasts are stark. Obama has begun the traditional move toward the center and he is already getting push back from his base. The New York Times has taken him to task for changing positions on campaign financing, faith based social initiatives, and gun control. They’ve fired warning shots across his bow on any redefining of issues like Iraq, taxes, health care, or Supreme Court nominations. But Obama needs to expand his base and has been catering to people with radically opposing views. Trade Unions expect him to block any new deals, Wall Street financiers (and big contributors) think he is a closet capitalist. Both sides think they have been promised something. The pattern holds on issue after issue. I don’t see how he pulls this off.

Aldonza or Dulcinea

Of the Broadway Musicals I have been privileged to see, one of the standouts was Man of La Mancha. The lyrics are inspirational, none more so than as Don Quixote sings with the low born Aldonza. To him she is Dulcinea, his queen, his lady, his true love. She begins with as poor a self image as one can imagine, a self described whore. By the time they finish singing his belief in her has transformed her. She becomes Dulcinea. Don Quixote may have been tilting at windmills, his name has certainly entered the lexicon as champion of the hopeless cause, but I think deep down inside most of us are pulling for him. Dulcinea may not exist but the idea of her can make the world a better place.

I’ve been thinking about Dulcinea recently as two very different views of America and her place in the world begin to crystallize. One view is of a sick society in desperate need of reform on issues ranging from foreign policy to energy to racial relationships. The other holds to a more traditional view of an America that has met every challenge in the past and whose best days are ahead of her. I suspect most Americans fall somewhere in the middle, but with a pronounced tilt toward optimism, proud of our country. That’s why we were shocked at Rev. Jeremiah Wright’s anti-American tirades. It’s also one reason we hold much of the mainstream media in such low esteem. The constant drumbeat of what’s wrong with America is offensive.

That’s been especially true of their disgraceful attempt to paint the war in Iraq as a catastrophe, and to produce one in the process. As the situation on the ground steadily improves, they have shifted focus to the lack of political progress, and as Iraqis make said progress, they ignore it, mindlessly repeating the mantra of proclaimed chaos. This week the news should have been that Iraq has now satisfactorily met 15 of 18 congressionally mandated “benchmarks” as assessed in the required quarterly report from the White House. Brit Hume correctly predicted on Fox News that only his channel would make it a headline. All three broadcast networks ignored it, as did the New York Times and the Dallas Morning News. The Associated Press carried the story but with an inane lead about how the next US president will have to deal with the painfully slow pace of the Iraqi government. Democrats who stipulated the benchmarks in the first place now dismiss them as false standards. These people have neither shame nor intellectual integrity. That they have the effrontery to call themselves patriots adds insult to injury.

Speaking of patriotism, this week we were also treated to the spectacle of a major presidential candidate insisting that he would not tolerate having his called into question. That he found it necessary to defend it suggests he recognizes it has already been called into question. It’s going to take more than a flag pin on his lapel to address those doubts. His explanation that his patriotism is of a different and more sophisticated kind doesn’t help either. We know a patriot when we see one, and we recognize unpatriotic rhetoric when we hear it.

It is the energy issue however that I expect will prove the most divisive in this election cycle. One side sees an America that has been bent on destroying the earth and only drastic revisions in our lifestyle can save it. If it requires major economic disruption, that is a price that must be paid. The other sees an overreaction, a technological issue not that different from problems we have overcome before. As fuel price shocks cascade through one industry after another we will have to decide if we are more comfortable with Dulcinea or Aldonza.