The Washington Times - The Issue of Oil Examined by the Freedom Process

Op-Ed

By:  Terrance O'Hara
Date: April 19, 2012
Location: Rancho Santa Fe, CA

By T.J. O'Hara

As we addressed in Energy and the environment: An inseparable pair, the issue of oil has become a key battleground topic of the 2012 Presidential campaign. The price of this particular fossil fuel has a cascading effect on nearly every physical product that is consumed in the United States as well as many of the services that impact our lives (e.g., transportation, etc.).

We need to take a rational approach to evolve a strategy that appropriately reflects the impact of oil on our Nation and provides for a transition over time to less deleterious sources of energy.

As much as the Party candidates may enjoy denigrating each other, neither camp offers a coherent and actionable energy strategy. If only the EPA would use the Clean Air Act to issue a ban on political rhetoric. That would be a significant first step.

Let's use the price of gasoline as an example. It is already at an all-time high and rising. GOP candidates are using that as their "flavor of the month" to attack the President's performance. Their solution: promise to lower the price per gallon to $2.50.

You might want to ask: "How? "

In a recent speech, the President admonished the Republicans:

"You can bet that since it's an election year, they're already dusting off their 3-point plan for $2 gas. And I'll save you the suspense. Step one is to drill and step two is to drill. And then step three is to keep drilling. (Laughter.) We heard the same line in 2007 when I was running for President. We hear the same thing every year. We've heard the same thing for 30 years.

"Well, the American people aren't stupid. They know that's not a plan, especially since we're already drilling. That's a bumper sticker. It's not a strategy to solve our energy challenge. (Applause.) That's a strategy to get politicians through an election.

You might want to ask: "What was the President's solution? "

The President listed a wide variety of possibilities and then said, "All of the above."

You might want to say, "Nice bumper sticker, Mr. President!"

Actually, President Obama isn't wrong. We do need a comprehensive energy strategy, and it needs to be in alignment with our environmental policy. The key is that it has to be practically-based rather than theoretically attractive. We only need to examine the rhetoric to identify where the political sound bites break down.

For years, we have been told that drilling will not have a discernible impact on production for five to ten years. This is a relatively accurate statement as it relates to the supply side of the oil equation. Unfortunately, it has been used as an excuse to "delay" decisions. The result is that our dependence on foreign oil hasn't been significantly reduced since the Department of Energy ("DOE") was established to address that very issue.

Interestingly enough, the President is walking a political tightrope by simultaneously suggesting that investment in oil production is "bad" (or at least that "Big Oil" companies that do not support his campaign are), while he takes credit for the increase in drilling that has taken place during his Administration. The reality is that drilling has increased during his Administration, but the permits clearly were issued prior to his taking office. Additionally, most of the drilling has occurred on privately-own property rather than federally-controlled lands.

Correspondingly, while nearly everyone would support a transition to renewable energy sources, it simply isn't realistic from an engineering perspective at this point in time.

The DOE has invested billions of taxpayer dollars in private sector companies that are trying to bring renewable energy solutions to market. Unfortunately, many of these companies have failed, and far too many of them appear to have been selected on a basis of past political favors.

During this same period, the EPA has tried to affect the President's cap-and-trade initiative that failed to pass the Legislative Branch of our government through the backdoor of its regulation. Putting the unconstitutionality of that approach aside, it has generated egregious results, and when Congress has taken action, it has often only added to the absurdity.

For example: at the end of 2011, "Big Oil" was assessed about $6.8 billion in fines for having ignored an edict to blend certain types of biofuels (made from woodchips and certain inedible plants) into their gasoline and diesel to lower greenhouse emissions. On the surface this seems reasonable. Regrettably, this biofuel does not exist outside of a handful of experimental laboratories. It is not available in production quantities at this time. That being said, the "quota" will be increased next year from 6.6 million gallons of the non-existent fuel to 8.65 million gallons. So, the fines will increase while the impossibility to comply remains the same.

Now, guess who ultimately pays the fine?

So, what is a rational approach to our current energy and environmental concerns?

Recognize the temporal reality that oil must play a near-term role as we migrate to more environmentally-friendly solutions that have not yet evolved to a practical or competitive stage of deployment.
Approve permits for domestic drilling and transport (i.e., the Keystone Pipeline) that will create jobs, comply with all state-of-the-art environmental mitigation capabilities, and reduce U.S. dependence on foreign oil over time.
Do not impose regulations that require the introduction of biofuels, etc. that are not commercially available at this time (the fines of which only add to the cost of fuel without producing any beneficial environmental impact); instead, create rewards for accelerated development and commercial release.
Rather than trying to pick renewable energy "winners and losers" in the private sector (which tend to be politically-skewed as opposed to practically determined): invest in educational grants that foster applied research and development in related areas; harvest any resultant patents on behalf of the taxpayers of the United States; provide access to such patents without royalty for companies that are based in the United States and employee U.S. citizens; provide access to such patents with a mid-tier royalty for U.S.-based companies to the degree they deploy any related product overseas; and potentially provide access to such patents with a high-tier royalty for foreign companies.
The results would include:

Job creation;
Economic expansion;
The elimination of unnecessary costs to oil-based fuels that otherwise are transferred to the consumer;
A minimization of cost impact to all transported product and transportation-related fuel consumption;
A benefit to the science and engineering colleges of our university programs (spurring a possible shift in long-term job opportunities and global competitiveness); and
A return on investment to the American taxpayer … just to name a few.
So, let's test this approach within the context of The FREEDOM Process.

Foreign Policy: Our dependence upon foreign oil significantly impacts our foreign policy, particularly with respect to the Middle East. The unspoken premises of our past military actions within Iraq were as much predicated upon protecting access to (and the stability of) oil supplies as they were matters of National defense and/or humanitarian aid. The sooner we can reduce our Nation's dependence upon foreign oil, the sooner we can disengage from intervening in the sovereign affairs of other nations. In turn, this will reduce the target for terrorism that our oil dependence has created for us.

Resource Policy: As has already been discussed in this article as well as in Energy and the environment: An inseparable pair, our Nation requires a comprehensive energy and environmental policy that rationally reflects the temporal restrictions of technology. While Party candidates have elected to become deeply entrenched in extreme positions relative to oil, the reality is that we have little choice but to include it in our near-term set of solutions.

Correspondingly, we must aggressively identify opportunities to reduce our long-term dependence upon oil (including that which is domestically produced). Because of our current economic reality, we can ill afford to create a false economy with respect to oil given its impact on the cost of so many other products and services. Any attempt to manipulate the price of oil to create premature competitive parity with respect to renewable alternatives does more harm than good.

That being said, regulatory control over the speculative manipulation of oil pricing is an appropriate concern of the Federal Government. While commodity speculation within the context of certain industries (e.g., trucking, transportation, etc.) reflects an appropriate hedge against projected swings in pricing, non-industry related speculation by organizations that are characterized by the new catchphrase "too big to fail" should appropriately fall within the purview of securities law. Not only would the Commerce Clause provide a basis for such control, but even the fundamental language of Article 1 Section 8 of the Constitution (i.e., "the common Defence (sic) and general Welfare of the United States") would seem applicable.

Economic Policy: The price of oil is driven by a multiplicity of factors, including but not limited to: locating, extracting, refining, containing, shipping, storing and distributing the oil. Commodity speculation, taxation and Federal regulation add to the cost as well. Then, add consumption on the demand side of the equation.

With the possible exception of water, no other commodity has as compelling an impact on our society. Oil products are used to power the vehicles that transport people and virtually every tangible product known to mankind; they are used in plastics and composites; they are used to warm some of our homes; and, to a lesser degree, they even contribute to our electrical grid (about 1% of our electrical power is derived from oil).

As a result, any price fluctuation in oil has a cascading impact on our economy. Yet, the President is right: Party candidates treat it like it's a political bumper sticker (himself included). Perhaps as the President said, "the American people aren't stupid," but the jury is still out on the Party candidates.

A comprehensive energy policy, with oil at its forefront in the near-term, would go a long way toward stabilizing and expanding our economy. Should we invest in renewable energy solutions simultaneously? Absolutely! However, many of them are not competitively viable presently and others will require years to effectively evolve the technology.

In the interim, we should allow domestic oil production (along with an intelligent utilization of other established fossil fuels such as natural gas) to accelerate our transition from foreign oil dependence. Concomitantly, we should encourage existing energy companies and emerging competitors to invest in the next generation of renewable energy technologies; not through punitive fines, but rather through rewards (e.g., tax credits, etc.) and the natural benefits of being a "first mover" in a capitalistic environment.

Since the United States is the largest consumer of oil in the world (by orders of magnitude), any significant shift in its demand for foreign oil (or even the implication that there may be a shift) can serve to reduce, or at least stabilize the price of foreign oil. This, in turn, can have a favorable valuation impact on the US dollar (a discussion of which is beyond the scope of this particular article).

Education Policy: The Engineering and Science departments of universities are comparatively expensive to operate based upon their infrastructure requirements. By redirecting Federal educational funds to such programs, we can accomplish the following:

Potentially lower the cost of tuition, which would make such programs more attractive;
Grow the number of graduates with the skills that will be required to maintain our Nation's technological superiority in the global economy;
Accelerate the research and development of renewable energy solutions, as well as risk mitigation technologies with respect to fossil fuels; and,
Create a return-on-investment opportunity for the taxpayer in the form of a national patent estate in renewable energy technologies that could stimulate job growth and economic expansion.
This brief list is not meant to be exhaustive of the benefits, but rather illustrative of the opportunities that exist within intelligent deployment of taxpayer funds within the context of our university system.

Defense Policy: By reducing our Nation's dependence upon foreign oil, we would have the opportunity to significantly reduce an element of our Defense spending. Our military actions in Iraq alone cost over $1 trillion in approximately a decade. Of course, this only reflects the dollar cost versus the human cost.

Correspondingly, a majority of the United States' foreign aid is directed toward four countries; three of which are in the Middle East (predominantly because of our need for political allies to help protect our oil interests). The preponderance of that money is earmarked for weapons purchases and military equipment upgrades, most of which are acquired from other countries. With the exception of Israel, these countries also vote against the United States approximately 75% of the time with regard to significant U.N. resolutions.

In effect, we are perpetuating the volatile environment of the Middle East because of our dependence upon foreign oil.

Operations Policy: By refocusing and appropriately constraining certain Federal regulatory agencies, we can reduce the costs associated with promulgating ineffective rules (and in some cases, potentially unconstitutional ones). We can also reduce the infrastructure that is necessary to monitor such rules and to enforce them.

This will reduce the private sector cost associated with compliance that is otherwise passed on to the consumer. From a business viewpoint, the related savings can be redeployed to create jobs, invest in renewable energy R&D, etc.

From a behavioral perspective, we would be shifting an element of the public/private sector paradigm from a punitive environment to one based upon reward, and a similar argument can be made with respect to our funding of education.

Medical Policy: The faster we transition away from foreign oil dependence, the faster we can reduce our military operations in foreign countries. This will allow us to begin to move our troops out of harm's way.

It will also allow us to reevaluate Federal spending that would otherwise be allocated toward Defense and consider its redeployment toward programs that impact the quality of life of our citizens (i.e., Medicare, Medicaid, Social Security, etc.). Any reduction in Federal agency costs can be similarly evaluated.

Additionally, a more intelligently orchestrated (and less politically combative) solution to our comprehensive energy needs will have a favorable impact on our environment. As a result, our long-term health will be rewarded.