Pickens Plan ... What improves it?

Boone has a good start on a plan ... by the by, his biography " The First Billion is the Hardest" is a very interesting read ... but I wish our team could have debated his plan with him from day 1. There are some ready enhancements which Boone missed.

The Core Idea: American Must Stop Importing Crude Oil

The general thesis is sound. The USA needs to develop the political will to stop relying on imported oil and imported capital to live beyond our means. We should stop annually sending about 3/4 of a trillion dollars to people who we do not admire (and who do not like us) to fulfill our addiction to liquid petroleum. We should instead develop solar and wind power and find new ways (we like CNG, too) to fuel our transportation. And we agree with Boone that the government needs to use its powers to redirect the energy system of the USA, most directly because Big Oil and Big Power do not view this move as being in their direct (special) interests.

But this point needs to be made for forcefully that the original Pickens Plan. Dependence on crude oil is a problem for the whole world. There will be no peace or development of liberal, democratic governments in most OPEC countries until a collar is placed on crude oil. History teaches that totalitarian government and wars are much more likely wherever oil holds sway. We need to replace the dependence on petroleum precisely because occurrence and ownership are poorly distributed. OPEC must be defanged.

The former czar of crude oil was Sheik Yamani. He often warned OPEC about the need to keep crude oil prices low enough to discourage competing energy sources from developing. There will be an end to the Petroleum Age, he often warned them. He predicted that man will find a new way before the world physically ran out of oil. And Sheik Yamani was right in his analogy: the Stone Age did not end because man ran out of rocks. We believe that the time has arrived for the United States to lead the world at creating the conditions to nurture those Alternatives by protecting them from petroleum pricing, not from each other.



Only Technology Can Do It

Here's where the Pickens thesis needs improvement: the real key throughout is TECHNOLOGY. The best power available to the US government is to provide generallized support to the American entrepreneurs who have always solved our national problems when allowed. By generallized support, we mean to not pick technical winners, but to protect these NRG Entrepreneurs from OPEC actions or unintended oil gluts. Occasional periods of low oil prices will make the new solutions look like poor gambles in the short term. At those times, inability to raise risk capital in the short term will prevent these new technologies being available in the long term. So we need the U.S. government (hopefully working with most of the G20) to raise the internal costs to users of all liquid petroleum products so that better alternatives can be chosen by the market.

Use a Rifle: Tax Oil Imports, Increasingly

As a trained MIT economist and dedicated free marketeer, my favorite way to accomplish this outcome would be to impose an import tariff on all crude oil and related liquid petroleum products ... i.e. to tax OPEC for access to the North American market. This tariff should be scheduled to start quickly and rise consistently over the next 10 years or more. And it should be matched throughout the G20. The tariff should be in addition to a defined carbon tax imposed in the same, scheduled way. And the same law should direct some of the tariff revenue to mitigate the unintended consequences: low income Americans should be protected from the tariff being regressive, and global industries like petrochemicals should be protected from non-tariffed competition. With this approach, all participants would have greater certainty in considering any domestic alternative. And the financiers needed for NRG technology ventures would know enough about future competitors and price levels to consider financing each alternative energy.

Bridge to the NRG Future: Compressed Natural Gas

The phrase "alternative energy" has gained currency. "Alternative to what?" we might well ask. We think crude oil is always the ultimate target for our alternatives. Boone has it right when he says that for North America we have a trump suit in natural gas, which has been freed up by new production technology. With even more new technology, the answer is Compressed Natural Gas (CNG) for transportation, as Boone has also said. As a bridge to even better alternatives in 2030, the NAFTA countries would all benefit by becoming the world's technological center for using domestic CNG to run vehicles.

The CNG vehicle technology is available ... and very improvable ... so why aren't we rushing to use it? Because of the uncertainty about gasoline and diesel prices over the next several years. Americans wait for a panic to make a need obvious. Or maybe it is the American need for instant gratification at fault. Sorry Charlie, only governmental, general actions to raise the price of gasoline and diesel will allow the CNG alternative out of the bag.

And Boone has it right in trying to educate Congress on the fact that CNG is a "today" alternative. Both federal and state laws are now on the books to provide federal incentives for use of grain-based ethanol. Laws are in place (both state and federal) to require electric utilities to provide X% of electric power from "alternative" sources by certain dates. But CNG is not an "alternative" to these people. Wake up, Washington! If subsidizing CNG filling stations and vehicles is not in the national interest (as the most direct way to reduce our 2015 reliance on Middle Eastern oil), then why do these other subsidies make sense? We believe it shows who has the best lobbying efforts with Congress, combined with the penchant for government to "pick winners." Poor CNG ... only Boone and a few others are lobbying in support of what we see as the Bridging Alternative.

So we think that the most practical modification to the Pickens plan is to push up the price of any crude oil imports and let every alternative benefit, including especially wind and CNG. Look at Washington's role in creating the financial crisis ... and its inability to solve the problem. Why should we allow Washington politics to pick the solution to our clear need to stop importing and using liquid petroleum? And why should we care if the solution is provided by safe domestic oil, CNG, wind, solar, nuclear or whatever. Let our resiliant, creative American innovation, fueled by wave after wave of immigrants, solve the problem of alternatives and slay the OPEC cartel by creating a freer market in NRG.

Wind Energy, but For the Wrong Reason

Boone thesis is that we subsidize and promote wind energy on the Great Plains, build huge electrical transmission systems to the customers, and replace natural gas in our electical generating system with wind electricity. Others are pushing the same idea for solar. Both ideas are bets that the experience curve effect will bring down the cost of these alternative sources of electric power to a competitive level. Part of this thesis is that we need to do this to make enough natural gas available to replace crude oil in transportation. On balance, we give Boone a B- for this part of the Pickens Plan.

The wind in the plains is Not-So-Great. There is better wind available over the ocean (and in the Great Lakes, which behave like small oceans). Eventually, entrepreneurs are going to solve the technical problems to make offshore power, much closer to many American population centers. For San Francisco, Los Angeles, San Diego, Seattle, Houston, Tampa, New York and Chicago, the answer lies over the visible horizon at sea. Winds are better and less variable, environmental concerns are more easily handled, and regulatory barriers are low. All that is needed is price protection of the power from carbon-emitting, OPEC-manipulated alternatives, and this technology will develop. Already, Europe leads at ocean-based wind power. And their lead is growing. We should make power on the plains and we should transmit it to our use centers, with every bigger and better transmission systems. But the future for our coastal populations is at sea.

The biggest economic problem with wind is the relatively low load factor. Because wind power (or solar power) peak outputs do not match demand peaks, any system with major proportions of power from these sources will face difficulties in balancing its system. Without economical NRG storage/regeneration capacity, the system cannot even use the wind/solar energy that is currently available. Building transmission systems is not effective at solving this problem. Germany and Denmark are already at this point, with inadequate technical answers in hand. Again, technical entrepreneurs will not be able to solve this problem until protected from low pricing from the coal- and gas-fired generating stations which currently are the swing plants on most systems. At first, the plains-based plants of the Pickens Plan will use the new transmission system to access markets in Dallas, Kansas City or Omaha. But eventually, their power sales will be constrained unless new storage/recovery technology is installed.

So we believe that this is an excellent example of why Congress should not be encouraged to pick winners. There is a general need to store alternative electic power ... solar or wind ... and this should be encouraged by general, indirect means. There is a general need to encourage all wind energy by protecting them from the less desired alternatives, but this should not be specific to the Great Plains. There is a general need for improved electrical transmission to connect sources with customers, but we should let the market justify these new systems, not specify where they will be built. When electric prices get out of whack in a certain area .... when power stacks up at the source ... or when certain users find they cannot buy power economically ... its just the market operating and creating information. Some players will guess right, some wrong. Some companies will make high profits, some will lose their shirts. As long as we keep a level playing field, this process will find new ways to access new technologies and resouirce to meet needs. We should only look as far as AIG to see how well the American political process will solve the problem.

So Boone gets a B- for the windy part of his plan. We should protect wind entrepreneurs, including Boone, from undesirable competitors who are motivated to kill their projects and ideas. Some of the technical enablers of wind power, often part of the American Wind Energy Association, have been at this for 30 years and more. We believe wind energy is at a technology transition which could unleash a real contribution to economic growth in America, the largest wind market now and in the future. And new wind-oriented technology could be one of the largest export industries in North America.

When OPEC has emergency meetings in Vienna and cannot find any way to stop the Wind Juggernaut, we will snicker or even guffaw. But that won't happen unless the U.S. Federal Government protects the wind entrepreneurs from OPEC and lets them fight it out to see who gets rich.

Disclaimer

As you might gather, our team is working on various technologies which we hope will play a role in both CNG for transport and wind energy systems. So we're biased.