Irrational Left-Wing Environmentalist Opposition To Canada’s Offer Of Oil

This article originally appeared on BigPeace.com on Sep 2nd, 2011

http://bigpeace.com/bschaeffer/2011/09/02/irrational-left-wing-environmentalist-opposition-to-canadas-offer-of-oil/

I was on Fox Business Tuesday night discussing Transcanada’s proposed Keystone XL pipeline which was proposed in 2008 as a1,600 mile extension of an existing network. Its purpose would be to tap into oil supply currently being extracted from Alberta’s controversial tar sands and ship it south to the storage facility at Cushing, OK and again to the Gulf Coast for distribution. Because it enters the US from a foreign country, in order for the project to proceed, the White House must first approve its construction. As such the Department of State must deem it in the national interest. A cursory Environmental Impact Statement (EIS) has met DOS satisfaction so a potentially favorable ruling for Transcanada could be imminent.

The prospect of an Obama White House approving the Keystone XL is drawing heated protests from left-wing environmental groups who would see its green light as a betrayal by an administration they counted on being more eco-friendly. Ostensibly their concerns are the potential hazards of a spill somewhere along the massive trunk line. They point to last summer’s 800,000 gallon spillage in Kalamazoo, MI as an illustration of the risks. But really the issue is about a broader opposition to the tar sands extraction itself and the process’ rather large carbon imprint that results. There is little debate that the planet is warming, but rather how much/little human activity plays a role. But even if, for sake or argument, it was proven that human activity was having some effect, the greater debate remains: what to do about it. If so where and how?

Any new policy shifts that will have a significant impact on economic activity/viability need to be made only after exhaustive cost/benefit analysis. When it comes to climate change, the burning question is how much should we alter (read: restrict) economic activity now to head off possible issues relating to carbon emissions down the road? What price are we in the USA willing to pay for clean air and water? And how aggressive should we be if we inevitably find ourselves acting in a unilateral fashion vis-a-vis the developing world that has chosen economic growth over protecting its environment? The same questions pertain to the Keystone extension.

I could understand and respect the protesters’ concerns more if the issue was a proposed strip mining excavation within our borders in say Utah where our own tar sands reside. The process of extracting heavy crude oil from the sands is messy and inefficient. For example two tons of sands will yield a barrel of crude and it takes two gallons of water to extract a gallon of oil. The greenhouse emissions from the entire process from mining to burning the refined fuels in one’s tank is anywhere from 5% to 20% more than traditional drilling methods.

On the flip side Canada’s fields are vast. EIA estimates reserves at 178 billion barrels but Shell Canada estimates it to be as high as 2 trillion bbls…eight times Saudi Arabia’s proven reserves. The Keystone XL if built will transport 500,000 bbls/day. Oil we very much need access to if we are serious about weaning ourselves from Arab oil. Given such economic pros versus environmental cons we can and should have a substantive and rational discussion about whether it is wise to tap into our own vast oil tar sands reserves. But, alas, the most vocal in this climate change debate seem to be the proponents of either manic hyperbole or stubborn denial.

In the case of the Canadian product, I think the economic and national security benefits of permitting Transcanada to lay their Keystone extension to tap into Canada’s huge oil reservoir outweigh the potential risks of environmental impact. In this case, I believe the protesters of the new pipeline are being ideologically rigid, economically foolish, hypocritical and disingenuous. They are also taking a stand that is detrimental to national security.

First of all, the tar sands in question do not rest in the USA so even if the pipeline is not approved, the fields will still be mined, oil will still be extracted from the slurry and the end product will still be pumped in trunk lines over hundreds of miles of North America, ultimately to be shipped in dangerous oil tankers destined for more than eager buyers in Asia. To resist the pipeline in the name of eco-friendship is irrational. The Canadians will develop this product and sell it with or without us as trading partners. So 500k of bbl/day of oil will be lost to us from a stable and friendly supplier, right on our peaceful border.

So what is going on here? Is the issue for the environmentalists the inherent dangers in the operation of this 1,600 miles of new trunk lines? There are over 2.3 million miles of lines in the US network that transport hazardous materials including natural gas and crude oil every minute of every day. Why protest this one? When placed up against such numbers, their trunk line concerns ring hollow. The clarion calls of “We don’t want your dirty oil” is really what they are all about. They simply are opposed to tar sands on principle. This is self-defeating and a bit irrational. The oil is already there, it will not go away, so we best take it before one of our competitors jumps on the offer.

I view it this way. As of this writing we still have no power in my neighborhood due to Irene’s pop-in visit. Some of us have generators, others don’t. To not take Canada’s offer is tantamount to someone turning down my offer of an extension chord from my generator to their house because he opposes the carbon imprint of my gasoline-powered internal combustion engine that drives my generator. It matters little to me of course. I’ll just offer it to the guy in the next house over while you wait for the advent of solar powered generators that may or may not be developed in the next decade or so. It doesn’t help you now though…nor does it compel me to shut down my generator so the carbon foot print remains. But such is ideological rigidity when it trumps common sense.

The USA currently imports 50% of its oil. Fortunately much comes from friendly nations on our border like Canada and Mexico. But nearly 20% comes from OPEC nations. If the OPEC nations are not openly hostile, they are either unstable or certainly no friends of ours like Canada. The history of many wars in the 20^th century is that of a quest for resources…Russia and Africa had it, Germany needed it. Indochina had it, Japan needed it. And it serves as a stark lesson to us that those two nations were eventually brought to their knees as much by the cutting off of their raw materials—energy especially—as by combat in the field. The extent to which a nation cedes control of its own energy infrastructure to a foreign source is directly correlated to its vulnerability. Therefore, the more energy we provide domestically, the more secure we will be. And the less need for costly and endless wars that make us many enemies and few if any friends.

Today where the USA is concerned, the unstable Middle East has much of the oil we need. Hence our endless adventures in this region and the cost in lives and treasure and international good will as a result. (Honestly, what makes an Iraqi’s life more valuable to us than a Sudanese’s?). The upside of a peace dividend windfall from no longer maintaining a military presence in a region whose resources we no longer need defend and secure is self-evident. Such a windfall could even be steered towards green technology R&D if we so choose it. Ironically I’ll wager that same self-righteous crew out on the streets protesting domestic energy initiatives will also be the first to scream “No Blood For Oil!” when we’re compelled to enter into yet another Mideast conflict to protect our energy and economy. You cannot have it both ways…not today at least.

There are two congruent paths that our national energy policy must follow. Short term: take advantage of resources on this continent in the form of sands, shale, coal, natural gas and biomass to wean us at least off those 4mm/bbl every day we import from OPEC. Long term: create a healthy economic environment free of draconian regulations that lowers barrier to entry and will lay the proper foundations of profit incentives to be had in green technology. China (who will gladly take the 500k barrels off Canada’s hands if the White House passes) burns a lot of oil for today’s economy; they are also the global leaders in developing solar and wind power for the future hydrocarbon free world we all want. Why is it that we cannot do both as well?

Congress and the Oil CEO's ...... A Transparent Farce

This article originally appeared on BigPeace.com on May 17th, 2011

http://bigpeace.com/bschaeffer/2011/05/17/congress-and-the-oil-ceos-a-transparent-farce/

Recently on Fox Business I offered up about today’s members of Congress that I cannot believe they occupy the positions once held by Daniel Webster, Henry Clay and the rest. What got my goat was the absolute waste of tax-payer money (and the incredible waste of time) on display when the members of Club-535 hauled in some of the most respected and serious businessmen around for a cynical publicity stunt so transparent as to be embarrassing.

The issue was whether or not Congress should repeal the so-called subsidies that the US government provides to the oil and gas industry. Ostensibly this is a punitive measure that targets oil companies for the rise in the price of gasoline at the pump, even though most gas stations are independently owned and operated…oh, and for making a profit in their businesses.

First of all, these are not subsidies per se. Rather they are tax breaks aimed at the entire manufacturing industry, a category that includes oil & gas, and they can be broken down into four components…only one of which is specifically targeted to the industry. (It also is the least significant).

Domestic manufacturing tax deduction — $1.7 billion. This is a tax deduction given to every manufacturer in the US as an incentive to keep manufacturing facilities in the United States.

Percentage depletion allowance — $1 billion. Any business can write down the cost of its capital equipment. Oil in the ground is treated as capital equipment. Again, all companies get it, not just oil companies.

Foreign tax credit — $850 million. All companies get credit for taxes they pay to other countries, not just oil companies.

Intangible drilling costs — $780 million. As opposed to over the life of an investment, the oil industry is allowed to write-down drilling credits in year one. This is the only “subsidy” that treats oil companies differently than the rest of the manufacturing world.

So what are we talking about here? A total of annual savings to the Federal government of $4.3 billion? (And this assumes no negative economic impact which is hardly a guarantee.) This is enough money to run for government for less than ten hours.

If you want to have a debate about all subsidies (tax breaks) then by all means let’s. But to single out one industry because its product happens to be in demand and as such it had the temerity to make a profit, is ludicrous and irresponsible. It is targeting people who are in the wrong business as far as politics is concerned because they happen to be in the right business as far as demand for their product goes. “Big oil” is more than just CEOs in a corner office. A company like Exxon-Mobile employs 82,000 people worldwide in all capacities from rig workers, to truckers, to geologists, surveyors, mechanics, pilots, schedulers, traders, cooks, pipeline workers, marketers, mid-level managers, etc. These are honest, hardworking people who are providing for their families while supplying world’s energy needs. Is it a crime that they get paid for their services? Apparently on Capitol Hill it is.

And yet, those same evil oil companies pay enormous taxes that far outweigh any tax breaks. Exxon alone paid $8 billion in taxes in just the first quarter. This is twice as much as the entire industry receives in annual subsidies. Yes, say our politicians, but look at Exxon’s profits. No company should be allowed to make $10.5 billion in profits while American drivers are getting squeezed at the pump. Oh? Who exactly decides what is enough? Chuck Schumer? Obama’s energy czar? Exxon provides a product that the world needs. One we cannot live without in fact. And for every dollar they bring in in gross profits they pay forty-three cents in taxes. In fact, the oil & gas industry averages roughly a 9.5% profit margin, placing it down at number 23 in the list of profitable businesses.

In case you’re curious, breweries are number one at 26% profit margin. Yet I have never seen Pete Coors raising his right hand before a bloviating committee…and Lord knows I need beer as much as gasoline! If big oil is “gouging” us, then other industries are positively robbing us blind. Industries that average higher profit margins than oil & gas include: applications software (22.7%), cigarettes (17.4%), railroads (12.9%) and wireless communications (11.1%).

A company like Exxon puts up big numbers because it is a very big company valued at roughly $396 billion. $18 billion is well within expectations of a successful enterprise of such scope and size. And they do not sit on this cash. Almost three-fourths of their after-tax profits are poured back into exploration and drilling. They must constantly be seeking out and delivering more energy for the consumer whose insatiable appetite continues to grow globally.

I find it fascinating that many who rail against “greedy big oil” probably do so on their iPads. Apple’s market cap is now an astounding $305 billion. And its profit margin is a whopping 21%…double Exxon’s. Steve Jobs is far more wealthy than Exxon CEO Rex Tillerson. How come? Well, one reason is that an Apple iPad 2 currently sells for $729. Yet its actual cost to make with Chinese workers [who take home a mere $185 / month] is $293 which means a gross margin of 54%!

So who is really the “gouger”? Exxon or Apple? Why is multi-billionaire Steven Jobs not in front of Congress explaining himself? Because, like his oil counterparts, he shouldn’t have to. He makes a product for which people are willing to pay an exorbitant sum relative to its manufacturing costs. And one can argue that we need iPads a lot less than we need energy!

I notice that coffee futures have come off in the past few weeks yet Starbuchs hasn’t reduced the price of a venti skim latte mocha chi-chi foo-foo cinnamon two pump steamer. Should we have the boys in the van abduct Howard Schulze and drag him before the committee to explain his 9.7% profit margins that partly that resulted from hiking price .25 on some drinks when the coffee futures went up, but not giving us back that quarter when the market sold off? Of course not.

Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board, and energy in particular, even though Washington’s policies from a decade of loose money, to sitting idle while we grew ever more dependent on overseas fossil fuels, to cordoning off huge deposits of domestic crude in our own waters and backyards are far more to blame than any CEOs. It may be politically expedient to finger-point at “big oil” for committing the cardinal sin of doing their jobs well and showing a profit (while ignoring the true ‘gougers’ in the higher profit sectors). But it makes for poor policy, and an astounding waste of taxpayer resources.

Oh, there is one oil subsidy I would very much like Congress to investigate. The roughly $2 billion our government is committing to helping Brazil develop its off-shore oil deposits…while we sit on 18 billion barrels of our own proven reserves that remain off-limits. You think that will happen?

Fed Turns a Blind Eye to Energy Inflation

This article originally appeared on Frumforum.com on April 29th, 2011

http://www.frumforum.com/fed-turns-a-blind-eye-to-energy-inflation

When New York Fed chairman and QE2 cheerleader William Dudley recently offered the fact that an iPad 2 is the same price as an iPad but with many more bells and whistles as an illustration that inflation is indeed tame, someone fired back the obvious: “I can’t eat an iPad.”

David Frum asks why, if inflation is such a real looming issue, are investors putting their money in China?  But I think his very definition of “inflation” is off.  Inflation is not caused by rising prices per se, rather rising prices are caused by inflation which is the decreased purchasing power of one’s currency. There is no better way to devalue a dollar than for the Fed to expand its balance sheet, which it has done at heretofore unheard of levels in an effort to: a) prevent deflation (done, but never necessary); b) promote price stability (fail); c) increase employment (fail).

Without recognizing the contradiction of his own previous arguments that commodities price increases are not inflation, Frum poses the following:  “China is in the grip of actual, current, existing inflation. Not inflation fears. Inflation. Prices of basic items like milk rising by 25%, apartments soaring to unprecedented multiples of annual household income, etc. Yet there seems no reluctance to invest in China. Why not?”

One answer can be found in how the Chinese measure inflation in the first place.  The inflation that Frum is talking about in China is based on a measure that includes a healthy weighting of food and energy in their calculations.  The Chinese do not look solely at “core inflation” as the Fed does when deciding monetary policy.    Frum in fact cites food rises such as: “prices of basic items like milk rising by 25%” as evidence of Chinese inflation.  Yet for some reason these same measures are irrelevant when mentioning US inflation… why again?  Because the Fed says so?  (Keep in mind that same Fed also offered in May 2007: “we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”  But I digress.)    One can have the discussion as to whether or not core inflation is valid as a measure of real costs to consumers, but you cannot compare one economy to another while applying a different general CPI formula to each and then make your case accordingly.

Until the Boskin concept of weighted measures of prices for the CPI surfaced in the early 1990s, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.  Over a period of several years though, straight arithmetic weighting of the CPI components was shifted to a geometric weighting.  The benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.  Obviously then stripping out food and fuel completely to create “core CPI” only adds to the muting effect it will have on measuring real inflation.

Once the system had been shifted to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology.

The point being, if we are going to talk about Chinese inflation being high while US inflation remains low (and yet paradoxically the Renminbi’s value against the dollar has risen) I think it behooves us to first use the same measures of CPI for each economy and then go from there.  When you do that, suddenly the Red Dragon—with its economy poised to be the world’s largest by decade’s end and a discipline that comes from being unbeholden to a failing/collapsing welfare ponzi state,  allowing it effectively tackle its
M2 surge—looks much more appealing than does the sick, heavily debt-laden, service-based, entitled and politically feckless eagle.

In fact, some argue that if the United States measured its inflation using pre-1980s methodologies it would be closer to 10%.  This figure anecdotally equates with what the average American is feeling when they go about their daily lives as well.  As anyone familiar with William of Occam will attest, sometimes the simplest answers are the correct ones.

I remind Frum that food and energy were at the forefront of Reagan’s inflation fears when he took office in 1980.  I also remind him that Social Security and other retirement benefits’ cost of living increases are pegged to the CPI as currently measured and as such there is a very powerful incentive, one could even argue sinister motivation given the social compact of the program, for the Federal government to understate inflation.  I ask any Social Security recipients reading this: have your increases kept up with your cost of living?  I didn’t think so.  In my humble opinion, you are being skinned.  Some call this conspiracy theory.  I just call it a logical conclusion.  This is a discussion for another day however.

Inflation across the globe is now on the rise, from Germany to Brazil to Vietnam and is spilling into US markets beyond food and energy.  We just renewed our healthcare plan here to the tune of a 16% annual increase in premiums.  Wal-Mart CEO Bill Simon warned last month: “We’re seeing cost increases starting to come through at a pretty rapid rate.” As of two days ago, consumer products giant Kimberly Clark announced that it is increasing the cost of its Huggies and Kleenex brand and other products 5%, citing lower earnings due to higher costs of raw materials.  I suppose these will be the next products stripped out of any inflation discussions we have going forward, just to keep things clean… and that includes the Fed’s hands and those of administration academics who have supported its policies.

Don’t be Fooled: Inflation is Here

This article originally appeared on Frumforum.com on March 2nd, 2011

http://www.frumforum.com/dont-be-fooled-inflation-is-here

David Frum has recently released a series of calls to the GOP to get off the faux inflation kick.  The argument seems to be that inflation is more of a bogey-man whipped up by some hard asset hawks like Ron Paul and their libertarian disciples on Fox and other outlets.  His and some FF contributors’ arguments against inflationary concerns are tied to the perceived verdict of the bond market, and the notion that the rally in crude oil prices are fanning the flames of unnecessary fears through anomalous price action.

First, it has been argued that the bond markets as expressed in the TIPS  spread are showing little concern. The observation is that the TIPS to vanilla Treasuries spread has significantly narrowed, indicating that fears of inflation have dissipated in the markets.  But this spread comes on the heels of an unprecedented period of turmoil in which the mandates for gravitating towards the safe haven of treasuries and the sense of security they provide could be driving yields down.  These factors could also be creating a liquidity premium in favor of these instruments as TIPS are more difficult to exit without slippage due to lack of a liquid buying pool.  Like all spreads, sometimes the action of one leg relative to the other tells more a tale than the action of the spread itself.

There is another market besides bonds however.  Commodities futures — whose very label implies a forward outlook.  And they argue quite strongly for increased prices where it really matters.  As the commodities markets across a wide spectrum of products show us (below), those who invest in the raw materials that are essential to our daily lives certainly do not see prices falling any time soon.

This leads me to another argument against slaying a supposedly non-existent inflation dragon: that the price of crude oil, so much in the news, is distorting our view of overall prices.  Says Frum: “But a surge in the price of one good, no matter how important, is not an ‘inflation.’ Inflation is a sustained and general increase in the price level, not an alteration in the relationship of prices to one another.”

This is all well and good if upward price action were indeed just limited to energies.  But the fact is commodities all across the board—many of which are stripped out of the core inflation index due to their historical volatility—have been on a relentless rise that can be more aptly labeled a trend rather than a spike.  Here are a few samples of the levels of commodities as reflected in exchange-traded futures. These prices impact the day to day lives and purchasing power of every person, rich or poor, employed or out of work, single or married, rural or urban. These are roughly the front month prices of various commodities over the course of just one calendar year ending today.

Heating Oil +44%
Natural Gas (-19.3%)*
Crude Oil +23%
Gasoline +32%
Wheat  +76%
Corn  +88%
Soybeans +30%
Oats +74%
Canola +46%
Live Cattle +21%
Lean Hogs + 13%
Pork Bellies +46%
Milk +18%
Gold +25%
Silver +100%
Copper +31%
Platinum +17%
Palladium 81%
Cotton +141%
Orange Juice +15%
Sugar +45%
Cocoa +21%
Coffee  +46%
Lumber +17%

Get the idea?  The rise in prices is not an isolated market event but rather a phenomenon that impacts anyone who must drive a car, take a plane, train or bus, eat, drink, buy appliances, or clothing, or even grab a cup of joe, etc.  In other words, live a daily life.

Is this, as Bill O’Reilly might scream, evidence that an evil cabal of “nefarious speculators is manipulating the markets and driving up prices at the expense of ‘the folks’”?  Every single one except natural gas?  First of all, supply/demand is what drives commodities prices both lower and higher.  As natural gas—the one commodity bucking the trend—shows, that rule still applies for there is an abundant supply of the product — and most important, it’s secure within the safe confines of the US and Canadian borders.  (Those who point out the fundamental oversupply of WTI crude in the USA ignore that we import 60% of our daily consumption needs).  There are no Qaddafis or octogenarian Saudi princes with their hands on the natural gas valves.  So supply remains constant and unthreatened.   And where are those evil speculators?  Oh, they’re in natural gas too.  But they are selling into over-supply, driving prices down.  Speculators in commodities go short with the same ease as they go long (no uptick or short stock rules, very low margin) so their bets are purer than in equities.  There is no built-in mechanism to create a long bias.  And still they are saying up and up.

And honestly, from a real world standpoint, does it really matter to a family on a limited budget if “core inflation” (which strips out food and energy, indeed their two highest and most unavoidable monthly expenses outside their mortgage) is low?  All they know is the cost of gasoline is higher, bread is higher, meat is higher, cheese is higher, clothing is higher, milk is higher, cereal is higher, the utility bill is higher, that new refrigerator they need is higher, etc.

At the risk of over-simplifying, three factors are causing price trends to increase.  First, as discussed, supply/demand dynamics are in favor of the latter over the former across the globe as economies improve and world populations, especially among the middle class in developing nations, increase.

Second, regional instability has had a large role in rising prices, be it due to political unrest in the Mideast (crude), to natural disasters in commodities rich regions such as flooded Queensland Australia (coked coal for steel production, sugar and wheat).  More than ever, local prices of goods and services are tied to global developments far over the horizon.

Finally, although monetary policy takes a back seat to supply/demand and unrest when it comes to the latest round of raw materials purchasing, the price of commodities, after falling sharply during the height of the financial crisis, began a relentless march higher in almost lock step with the Feds quantitative easing policies that flooded the markets with cheap dollars.  The past twelve months alone has seen the US Dollar Index fall -4% (-14% over five years) which certainly has not helped ease the upward pressure on dollar-denominated assets.

Remember, it is in Bernanke’s interest to downplay inflation by pointing to core price indicators.  But more than ever there is a disconnect between the form fit data and the day to day costs of just living.  From December of 2008 to the present the CRB index is up 75%.  At what point do price “spikes” become trends?  When do we accept that we are in a new era of de facto inflation, if not the traditional “core” definition.  Oil, for example, was already at the $85-90 range before the Tunisian uprising. It’s rise began in earnest last year after the Fed embarked on its QE2 monetary easing policy.

Far from being a windmill against which the Don Quixotes of Ron Paul and the libertarian-leaning pundits and talk-radio hosts are snapping their spears, inflation as felt by the consumer is very much real and thus a legitimate political issue to be addressed.  The Wall Street Journal recently offered a glimpse of the obvious that is nonetheless lost on the inflation doves tethered to an economic measurement rather than what is happening to Americans’ ever-lightening pocketbooks: “As higher prices flow through the pump and grocery store, middle class Americans are poorer than they otherwise would be.  They feel poorer too—which effects their confidence in the larger economy, and in Mr. Obama’s economic policies.”

Maybe some on FrumForum who have hopes for GOP ascendancy should take this into account before dismissing inflationary fears out of hand as mere hyperbole.

Here's How We Get to Energy Independence

This article originally appeared on CNBC.com on February 25th, 2011

http://www.cnbc.com/id/41785093/Here_s_How_We_Get_to_Energy_Independence

Respected columnist and author Thomas Friedman has been among the most audible voices in warning the USA about our dependency on foreign oil and our need to end our addiction to this commodity post haste. But his latest call for a $1.00 per gallon gasoline tax to curtail our fuel consumption, the proceeds of which would go towards deficit reduction, misses the mark.

First of all, where Mr. Friedman is absolutely correct is his concern itself which is well founded. Consider: in 1970 the USA imported 30 percent of its crude oil. That figure has effectively doubled in the last thirty years to just shy of 60 percent.

Not since the ill-fated Axis powers of World War II has such a powerful nation so relied on foreign entities to supply its daily energy needs. This is a potential national security nightmare. (Indeed, as much as losses in the field, Germany and Japan were brought to their knees by choking off their energy supplies and causing their military machines to grind to a halt.)

However, Mr. Friedman’s proposal of imposing altered behavior on consumers via a $1.00 gallon gas tax, even one phased in over time, will unduly penalize many lower and middle class workers who have little choice at this time but to commute (this is not like a voluntary consumption tax on soda) and for whom their annual fixed costs would increase anywhere between $500-$1,000 depending on the location and vehicle gas mileage.

Moreover, his idea places inordinate faith in the federal government to properly spend any new tax revenues they do receive with any modicum of discipline needed to pay down the deficit.

Imposing a draconian gas tax at this time, with 15 million already unemployed, with the economy in a precarious position, is not quite the medicine needed at the moment. In fact, it could make matters much worse. I don’t think it takes an economics guru to conclude that $1.00/gallon on top of an already high $3.18 national average could negatively impact consumption in other areas (and we are still very a much a consumption-based economy).

In just one example, an interesting study done by the Center For Business And Economic Research at Ball State University simulated the impact of a $1.00 price increase from a benchmark of $3.00 gallon (not via taxes, just a market rise) on the economy of Indiana. It concluded that the economic activity in that state would be lower by almost -2% and employment by roughly -1.3 percent.

It also offered that tax revenues would decline by -.5 percent. When economic activity falls, tax revenues do as well. Human behavior is unpredictable and it is not a given that $1.00 tax on gasoline will translate into a $1.00 net increase in revenues to Uncle Sam. There is the law of unintended consequences to consider.

I admit that this is just one report in one state, but I suspect similar studies will show the same. Even though numbers can be tortured to say anything to support a policy initiative, common sense dictates that a dollar steered towards higher commuting costs will have a negative impact on the rest of consumption and thus the overall economy all else being equal.

The most far-fetched component of Mr. Freidman’s “one little gasoline tax” proposal is that the extra revenues (should they materialize) will be diverted towards “paying down the deficit.” A noble idea, but if Mr. Friedman honestly believes that Congress will take this windfall and actually use it to for its intended purpose rather than employ clever accounting tricks to steer the cash to their favorite pet projects, well, I have a Social Security “lock box” stuffed with IOUs I’d like to sell him.

Still, if there was no other alternative to Mr. Friedman’s proposal, then I would give it serious consideration. But the fact is, we do have alternatives, both to give us some short-term relief and long-term stability.

As of yesterday we need to immediately open up ANWR and the shallow off-shore regions to exploration and drilling. I love caribou as much as the next person, but this must be done. Even the most conservative estimates tell us that by 2018 if development were green-lighted today, ANWR could be producing as much as 780,000 and then slowing to 710,000 barrels a day by 2030. Also it is estimated that 18 billion barrels of crude oil are contained in areas currently off-limits to drilling for environmental reasons. No nation has denied itself so much abundance of its own domestic natural resources as has the USA.

To be sure, there are environmental risks to an aggressive drilling policy. But environmentalists need to consider the consequences of the USA being cut off from 2/3 of its energy needs...unrealistic given that friendly Canada is our single largest outside supplier, but not impossible. There is no greater killer than the effects of poverty resulting from a collapsed economy.

Rationing the transportation of goods due to lack of petrol means limited delivery of food to our cities, medicines to rural areas, heating oil for homes and businesses in the northeast during the winter, etc. The humanitarian and health consequences would soon be apparent to even the most ardent of green advocates.

Beyond “drill baby drill” our real pathway to true energy independence lies in resurrecting the Synthetic Liquid Fuels Program. This program which began with such fanfare under Jimmy Carter was cancelled under the Reagan administration.

The reasons were ostensibly that it was against free-market principles but the real factor was that oil prices had collapsed and the immediate economic peril had passed. Reagan’s vision was myopic and based on the false premise that arose from the oil glut of the 1980s that oil would be inexpensive well into the next century. But now with turmoil all across the Mideast before us, global demand expanding, and oil trading at $100bbl and climbing, we find ourselves in the position of pouring literally trillions of dollars into the coffers of some potentially hostile regimes with whom we are in an economic and military death embrace.

Although I harbor a conservative’s mistrust of government in my DNA, I do know that government does have its role. Those F-15s that give us top cover while we drive on our interstate highway system demonstrate that. Of course what do these examples have in common? They fall under the auspices of national security. And energy independence must be treated as a national security matter and at least partially funded with tax dollars as we fund our armed forces.

Consider: the USA has more coal than the Middle East has oil. Furthermore, the Defense Advanced Research Projects Agency (DARPA), an agency of the Dept. of Defense (DoD) has estimated the cost of a 100,000 barrel per day 21st Century Coal-to-Liquids (CTL) synthetic fuels plant will be about $6 billion.

Other private sector estimates place the figure higher at $10 billion. Even that higher figure is about the cost of one and a half months of the Iraq war. (A war we are waging primarily because there is oil there remember.) So for the price of the Wall Street bailout—$700 Billion—the DoD could have been on its way to building between 70 and 100 new CTL plants, which would produce up to ten million barrels of synthetic CTL fuel per day.

That is still a high price tag for initial investment. And like many national security initiatives, there is little profit to be made from being the first mover of the technology. (Although in this case the technology goes back almost a century, but it would be a new implementation in this country on a mass scale).

Thus relying solely on the private sector to innovate and invest our way out of this energy dependence problem is problematic for now. That is, unless the government subsidizes the initiative through direct investment. This could even be a profitable venture. Estimates vary as to the profitability break-even cost of CTL, natural gas to liquid (NGL) or biomass refining. Some firms show the profit point to be $45 per barrel. Other estimates vary above and below this level by roughly $10bbl.

Carbon capture technology for cleaner conversion that might be part of any legislation pushes that level even higher.

Still, unlike in the 1980s, clearly we are now above the break-even threshold and thus are the conditions ripe for a hybrid semi-public entity model that could be subsidized by the feds to make up the shortfall should the price of oil dip below that $45bbl level.

Most analysts see this as most unlikely unless the oil producing nations purposefully flood the markets to kill such initiatives to protect their franchise. But they have their own problems in their streets at the moment. If anything, as Mr. Friedman also points out, the price of crude oil will continue to rise.

The current administration is so focused on touting the merits of a ‘new green economy’ that it is missing the potential of an old fashioned synfuels economy already within our grasp. The construction and plant employment opportunities, the increase in economic activity as a new industry emerges from the ashes of our industrial blight, as well as the incredible potential windfall of a ‘mid-east oil independence dividend’ down the road by no longer maintaining a military presence in the regions from which so much of our current energy needs flow is self-evident.

Every month $20 billion of our treasury goes just to maintain our low intensity combat operations in Iraq and Afghanistan, not to mention the staggering financial drain of supporting bases on the periphery.

And there is no end in sight to our involvement in the Mideast without first eradicating our reason for even caring what goes on there…which means an addiction to the commodity we import from the region. Unlike many other ‘shovel ready’ projects that were anything but, synfuels development presents a very real and beneficial investment on many levels.

There is historical precedent that shows the viability of a synfuels program.

But for Allied bombings, Germany was on its way to producing 60 million bbls of synfuels annually into 1946. (A small amount relative to today’s consumption, but scalability is there). Again, when South Africa was the target of punitive sanctions because of Apartheid, they implemented via Sasol a massive synfuels program out of necessity…proving that where there’s a will there’s a way.

And we need not replace all imported oil of course. We currently import a little over 3 million bbls a day from nations in the Mideast and Africa. This amount is quite replaceable by synfuels. I do not mind importing from such stable and friendly nations as Canada for example.

Rather than trust it with a satchel of new gasoline taxes, the federal government could be better utilized through the DoD. In fact, the military is already making strides in synfuels development. The Air Force has already run successful synfuels tests on converted B-52s and have put forth an aggressive goal to have 70 percent of its aviation fuel coming from coal-based sources by the year 2025. They get it. Thomas Friedman does too…even if his solution is off-sides.

Today, there are currently 700 automobiles for every 1,000 Americans; 500 for every 1,000 Europeans. There are only 30 for every 1,000 Chinese. But that figure is expected to balloon to 240 per 1,000 by the year 2035. The world’s thirst for oil is only going to increase, and with it the price. $100 crude is not an anomaly.

It is a harbinger of things to come. Increased exploration of our abundant proven reserves, combined with a sweeping synfuels program to utilize other energy resources within our borders are our surest bets to achieving attainable energy independence. Certainly more so than a whimsical $1.00/gallon tax (a number the very roundness of which implies to me that it’s the result of whimsical caprice rather than any serious analysis) that would hamper if not kill an already teetering recovery while diverting yet more capital away from the private sector and into the black hole of “deficit relief.”

Like Thomas Friedman, I wonder if history has ever seen such a time where so much of a nation’s own capital was handed over to its enemies for them to use against it—in order to import a product it already has plenty of at home.

Taxes should not be used to change our collective behavior by weaning us off the candy through making it prohibitively expensive; this ignores just how vital oil is to our daily lives. With a more realistic viewpoint that our 19 million bbl per day appetite for oil cannot be just taxed away, I propose we simply take an existing, available and proven century-old technology and ramp it up to make the candy ourselves. More drilling and synfuels may not be sexy or hip solutions.

But they are real and, most important, a part of the here and now. Not the distant future…a future over which we will have little control should the status quo remain unaltered.