Energy Strategy

Energy Efficiency. Prior to 1973, the value of energy efficiency was not widely recognized. As a result, U.S. energy consumption grew rapidly, more than doubling from 1950 and 1973. Then, U.S. oil and natural gas production peaked in the early 1970s and OPEC imposed its oil embargo in 1973. The resulting economic, political, and psychological shock forced the U.S. to focus on energy efficiency. Consequently, energy consumption grew more slowly after 1973 and leveled off in the last ten years at about 100 quad per year. By continuing (and redoubling) its focus on energy efficiency, the U.S. can achieve robust economic growth for the foreseeable future without increasing per capita energy consumption. For example: 1) the efficiency of new light vehicles could double in the next 15 years if the U.S. implements the recently proposed CAFE (Corporate Average Fuel Economy) standard, 2) new natural gas power plants are twice as efficient as old coal plants, and 3) new buildings, equipment, appliances, and industrial processes are often much more efficient than old buildings, equipment, appliances, and industrial processes.

Natural Gas. U.S. natural gas production peaked in 1973 and declined 17% by 2005. Then a near-miracle occurred: U.S. natural gas production began increasing again. Why? Because two technologies (horizontal drilling and hydraulic fracturing) enabled economic production of shale gas. Between 2005 and 2010, U.S. natural gas production increased 19%. It now exceeds peak production in 1973. As a result, natural gas is plentiful in the U.S. and its price is less than half that in many other countries. The EIA (Energy Information Administration) projects that U.S. natural gas production could increase another 24% by 2030. This is enough to satisfy not only normal demand growth, but also allow natural gas to replace coal and oil in some applications. Abundant, low-cost natural gas could give the U.S. a significant competitive advantage for many decades.

Oil and Liquid Fuels. U.S. production of oil and other liquid fuels peaked in 1970 and declined 30% by 2005. Then a turnaround occurred, just as with natural gas. From 2005 to 2010, U.S. production of oil and other liquid fuels increased 16%. In parallel, oil imports from Canada increased over 300% since 1970. As a result, U.S. liquid fuels production plus imports from Canada are now roughly equal to their peak value in 1970. Most of this growth is attributable to increased oil production from unconventional resources (oil sands, shale oil, and shale gas liquids), but some is also due to biofuels (primarily ethanol). This increased production, coupled with reduced consumption, has dramatically decreased U.S. oil imports -- from 60% in 2005 to 49% in 2010 and 45% in 2011. In addition, imports from Canada have steadily increased, so Canada now provides over one-quarter of U.S. imports. The EIA projects that liquid fuels production in the U.S. (and Canada) could increase an additional 30% (and 62%) by 2030. Smart energy policy could take advantage of this opportunity and eliminate most oil imports from countries other than Canada by 2030, making the U.S. essentially energy-independent. Energy independence will improve the U.S. economy, enhance national security, and expand foreign policy options.

Renewable Energy. Eventually, the U.S. and the world must transition from fossil energy to renewable resources or other alternatives. Currently, renewables provide only 8% of U.S. energy supplies, and less than half of this is provided by "new" renewables such as biofuels, wind power, and solar energy. But renewable energy production is increasing rapidly, about 7% annually during the past four years. If renewable energy production continues to grow 7% annually for the next 20 years, renewables could provide over 25% of U.S. energy needs in 2030. However, if the U.S. relies too heavily on (arbitrary) government mandates and subsidies to force widespread adoption of high-cost renewables, the public will become disenchanted with renewable energy and slow its growth. A better approach is to 1) reduce the cost of renewable technologies (for example, with research and development) and 2) internalize the external cost of fossil fuels, so renewables can compete in the marketplace. Note: Internalizing the external cost of fossil fuels will help renewables compete in the marketplace because it will increase the price of fossil energy and also stimulate industry research and development to reduce the cost of renewables.

Climate Change. A great deal has been learned about climate change since the Rio Earth Summit highlighted the problem in 1992. Clearly, those who deny that human activities are increasing the concentration of carbon dioxide in the earth's atmosphere and affecting the world's climate are wrong. But so are those who say that climate change is the most urgent problem facing humanity. Smart energy policy will find the middle ground and address climate change by encouraging cost-effective low-carbon, carbon-free, and carbon-negative (sequestration) technologies, without sacrificing U.S. and global economic growth. Some approach for internalizing the external cost of greenhouse gases is needed to provide market incentives to address climate change.

Cap and trade is not the best way to address climate change. Carbon taxes would be better, but the best approach may be a "bottle bill" for greenhouse gases. Such a bill would work as follows: Those who extract carbon from the ground, import it, or emit other greenhouse gases would pay a fee, similar to the refundable deposit for beverage containers. Any company or person who prevents this extracted carbon from entering the atmosphere (or removes it from the atmosphere) would receive a payment equal to the refundable deposit. Bottle bills generally reduce bottle litter by 70% to 80%, and a well-designed bottle bill for greenhouse gases could be equally effective over a period of several decades.

The U.S. will benefit from implementing a bottle bill for greenhouse gases -- whether or not other countries follow -- for four reasons. First, and most importantly, such a bill will stimulate investment in new, clean, and efficient facilities, equipment, vehicles, and technology. This will encourage economic growth and reduce oil imports and air pollution while also decreasing greenhouse gas emissions. Energy is much cheaper in the U.S. than in most other countries, so even with a reasonable refundable deposit on carbon and other greenhouse gases, the U.S. will still enjoy a significant "energy cost" competitive advantage.

Second, the U.S. has many oilfields, farms, and forests that can beneficially sequester carbon, so the refundable deposits will not be wasted, but rather put to good use expanding oil production and encouraging good farming and forestry practices. No other country has so many opportunities to usefully sequester carbon and the technical and entrepreneurial capability to take advantage of these opportunities.

Third, a bottle bill for greenhouse gases will make renewable energy more competitive with fossil fuels and thereby allow elimination of the current (unsustainable) government mandates and subsidies for renewables. Instead of politicians picking energy winners and losers, a bottle bill will allow free markets to decide which technologies are best (and lowest cost).

Fourth, a bottle bill will provide a large financial surplus for at least several decades. This surplus could be instrumental in addressing the current government fiscal problems. For example, it could be used to reduce taxes (perhaps as part of fundamental tax reform), stimulate economic growth, and limit the size of the national debt.

The U.S. is in a unique position to take advantage of these opportunities. By improving energy efficiency and increasing oil and natural gas production, the U.S. can create many good jobs, reduce the real (explicit and implicit) cost of energy, achieve energy independence, and stimulate robust economic growth. Energy independence will allow the U.S. to be a more effective global leader, because foreign policy and military strategy will not be as constrained by oil-supply concerns. By developing cost-competitive renewable energy technologies, the U.S. can ensure that these technologies will be available (and scalable) when they are needed. By implementing a practical market-based approach to address climate change, the U.S. can cost-effectively position itself for the future by encouraging 1) energy efficiency, 2) fuel shifting from coal and oil to natural gas, 3) renewable energy, 4) nuclear power, and 5) value-added carbon sequestration.

The whole world will benefit if the U.S. exploits these opportunities. A strong U.S. economy will be an engine for global economic growth. More importantly, energy technologies developed in the U.S. can be used worldwide for the benefit of all people on the planet. By solving its own energy problems, the U.S. can help the world address global energy challenges.

What will it take to capitalize on these opportunities? To some extent, the U.S. is already benefitting from them. Energy is the primary engine for economic growth in some states such as North Dakota (which has the lowest unemployment rate in the nation) and Texas (which has created more jobs in the past few years than any other state). It is also a major contributor to economic growth in several other states such as Louisiana, Arkansas, Oklahoma, Pennsylvania, and Colorado. Nevertheless, to realize the full potential of these opportunities, politicians must put aside their ideological differences and work together to implement pragmatic, nonpartisan energy policies based on common sense and compromise. Three policy objectives of particular importance are 1) improve energy efficiency, 2) expand oil and natural gas production, and 3) implement a practical, cost-effective system to internalize the external cost of fossil fuels.