“What can you do with thorium?  It’s sort of like garbage in a way… but it might save the world.”

– Jon Kutsch[1]

Introduction

Inexpensive access to energy is a requisite for a functional modern economy.[2]  The stability of the global economy is tied to the stability of oil exports.[3]  The bulk of global oil reserves are held by politically volatile nations.[4]  This combination is a serious threat to national security which has gradually fostered a desire for the United States to gain independence from the global energy market.  However, the contemporary and historic legislative efforts toward independence do not fully address the threat and entail politically undesirable externalities.  While the United States has become the World’s third largest producer of fossil energy,  our costs in production are significantly higher than our competitors.[5]  The underlying economics of this position call into question the ability of the United States energy sector to supply domestic demand without imposing tariffs sure to have wider economic consequences.

The scale of the problem is immense and, presuming legislators are driven toward action rather than inaction, several strategic questions arise.  Is energy independence in the United States really possible?  If so, can it be done without increasing tariffs, levying a carbon tax, or increasing carbon emissions in the process?  Are regulators and industry adequately equipped with the policies to implement such a change?  In the following sections, the author will attempt to answer each in turn.

Our journey begins with a history of United States energy policy from which we develop a model of our present policy.  Understanding this model provides appropriate framing for the subsequent discussion.  The issues are then analyzed within the framework of the Obama era sociopolitical environment.  Particular focus is placed on how the United States sources primary energy and the impact that selection has on consumer use of energy carriers.  Ultimately, emplacing a uniform and efficient structure for energy independence is a collective action problem.  Presuming energy total energy independence is the desired outcome, a series of recommendations are presented for legislators and policymakers to consider.

Policy Background

The United States has a rather patchwork history when it comes to energy law and legislation.  At the turn of the 20th century, legislative control over energy production rested primarily in the hands of State and local governments.[6]  As the country transitioned from wood fuels to coal and oil, the market for energy expanded from local to national and eventually international markets.[7]  Driven by the developments in the energy market, energy law and regulation underwent a similar transition from local to federal control.[8]  Increasing concentration of market power amongst the largest energy and energy transport firms prompted the Hepburn Act and the Elkins Act designed to reign in their power.[9]  The market disruptions of World War I led to the passage of the Food and Fuel Control Act (FFCA).[10]  The FFCA created the first federal energy agency with broad power to regulate prices across energy markets, the Federal Fuel Administration (FFA).[11]

The origin of the phrase "pulling a train."Though it was given broad regulatory powers, the FFA did not exercise its authority to any great extent and relied instead on soft power.  Instead of fulfilling its appointed goal of coordinating and establishing a national energy plan, the FFA’s existence was characterized by “a muted form of corporatism.”[12]  Specifically, those individuals charged with regulatory control often had direct financial interest in industry being regulated.[13]  Thus, federal regulation tended to respond only to particular market disturbances within a particular industry.[14]  This tendency to focus on a narrow market segment (e.g. coal or oil) rather than treating the United States demand for energy as an integrated whole has persisted to the present day.[15]  Regulating parallel to a given industrial segment has demonstrated advantages in lowering transaction costs, but it has a critical limitation in that it imports intra-industry conflict to the regulatory process.[16]  The process effectively only takes into account the segment cost to the public, which is concerned with the price of energy carriers or secondary energy and cannot effectively optimize for a given requirement of primary energy because to do so requires trading against particular segments.[17]  Conversion losses are the ultimate driver of public cost between primary energy and energy carriers.  Legislators and policy makers tend to confuse the relationship between primary and secondary energy when developing their objectives and policies.  Simply put, United States energy policy is currently unconcerned with developing an optimized system level energy infrastructure.

New Deal Ice Palace for FDR. Subtle, understated, and not at all Hitleresque.

The policies introduced through Roosevelt’s New Deal did little to alter this situation.  Further federal regulations were imposed on particular segments of the energy market through various new agencies and powers but there was no effort directed at engineering the market as a whole.[18]  In fact, due to labor’s political ties, much effort was directed at propping up the residential coal market where the conversion losses had become uncompetitive with energy carriers like electricity and heating oil.[19]  New Deal regulation aimed at stabilizing the coal industry was developed by the industry itself and largely ineffective.  The coal market was finally stabilized through technical means by its use as primary energy for commercial production of electricity.[20]  The siloed and industry-driven response of New Deal regulation left “little room for either energy planning or redistribution of wealth from producers to consumers.”[21]

The first major attempt at overhauling this patchwork system was undertaken by the Carter Administration but was ultimately unsuccessful. Responding to the lingering effects of the 1970’s Oil Crisis, President Carter sought to centralize federal control over the energy markets, break the United States of dependence on Oil imports, and jumpstart an energy transition from oil to alternative sources.[22]  The Department of Energy (DOE) was established as a cabinet-level position in an effort to provide the right level of central authority.[23]  The National Energy Act of 1978 attempted to alter the balance of domestic fuel away from exports use by promoting use of indigenous energy reserves, conservation, and alternative energy through various tax credits, rate structure shifts, and subsidies.[24]  Coal, in particular, was regarded as a critical source of primary energy to break the hold of foreign oil.[25]  The final piece of legislation to emerge from the Carter administration was the Energy Security Act of 1980 which promoted the use of coal as a feedstock for synthetic fuels (energy carriers) while attempting to drive the overall market toward geothermal and solar primary energy with alcohol as a dominant energy carrier.[26]

Unfortunately, these legislative efforts were destined to be half measures and failures. Authority had not been fully centralized in the DOE because “energy decisionmaking and policymaking responsibilities were scattered over several branches of the federal government, and even within the DOE itself authority was fragmented.”[27]  The analysis behind the National Energy Act and Energy Security Act together failed to take a systems view of conversion efficiency and sunk costs ultimately relying on the market to shift itself to other sources of primary energy.[28]

With centralized control an ostensible failure, the reciprocal policy of the Reagan administration seems a natural response.   Reagan had campaigned on a promise to deregulate the energy markets and abolish the DOE.[29]  Price controls on crude oil which had existed in one form or another since the Nixon administration had grown increasingly complex and economically untenable under Carter.[30]  To some extent, the new administration was successful in dismantling the regulation supported under Carter.  January 28, 1981, signaled the beginning of this reversal with President Reagan’s signature of the executive order for Decontrol of Crude Oil and Refined Petroleum Products.[31]  Predictably the Carter era synthetic fuels programs failed as, without price controls, they were no longer cost competitive with foreign oil producers.[32]

Arguably Reagan’s efforts were equally as unsuccessful.  For example, the contemporary theory of State and Federal energy regulation treats transmission elements as monopolies but generation elements and producers as a competitive market.[33]  The DOE is still a critical component of the President’s cabinet, and its authority is still fragmented demonstrating that “government regulation of energy is well embedded in the country’s political economy.”[34]  Little wonder that to date policymakers have been unable to coordinate an integrated national energy plan….

 

To be continued.

[1] Alex Pasternack, The Thorium Dream, Motherboard (Nov. 9, 2011), http://motherboard.vice.com/read/motherboard-tv-the-thorium-dream

[2] Eden S. H. Yu and Been-Kwei Hwang, infra note 37.

[3] Anthony H. Cordesman, American Strategy and US “Energy Independence,” Center for Strategic & International Studies (Oct. 21, 2013) http://csis.org/files/publication/131021_AmericanStrat_EnergyIndependence.pdf.

[4] John Browne, The Energy Crisis and Climate Change, Global Economic Symposium, http://www.global-economic-symposium.org/knowledgebase/the-global-environment/the-energy-crisis-and-climate-change/proposals/the-energy-crisis-and-climate-change (last accessed Feb. 23, 2015).

[5] Steven Mufson, How Low Can Oil Prices Go? Welcome to the Oil Market’s Old Normal, The Washington Post (Jan. 12, 2015), http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/12/how-low-can-oil-prices-go-welcome-to-the-oil-markets-old-normal/; Steve LeVine, The Real Reason Saudi Arabia Can Afford a Price War Against US Shale, Quartz (Dec. 12, 2014), http://qz.com/311179/the-real-reason-why-saudi-arabia-can-afford-a-price-war-against-us-shale/.

[6] Joseph P. Tomain, The Dominant Model of United States Energy Policy, 61 U. Colo. L. Rev. 355, 357 (1990).

[7] Id.

[8] Id. at 358.

[9] Id. at 359.

[10] Food and Fuel Control Act, Wikipedia (May 9, 2014), http://en.wikipedia.org/wiki/Food_and_Fuel_Control_Act.

[11] Tomain, supra note 6, at 360.

[12] Id.

[13] Id.

[14] Id. at 361.

[15] Id.

[16] Id. at 361-62.  Tomain offers the conflict between “major and independent firms, producers and refiners, and producing and consuming states” as an example.

[17] Primary Energy, Wikipedia (May 5, 2015), http://en.wikipedia.org/wiki/Primary_energy.

[18] Tomain, supra note 6, at 363.

[19] Id. at 364. Great quantities of coal had been used for both commercial and residential heating and cooking in boilers, stoves, and furnaces.  Residential conversion of primary energy to heat simply could not match the efficiency and economies of scale offered by a switch to commercial production of inexpensive energy carriers.

[20] Id. at 364-65.

[21] Id. at 365.

[22] Id. at 370.  Global economies

[23] The Department of Energy Organization Act of 1977, 42 U.S.C. § 7101 et seq (2015).

[24] Id.

[25] Not only does coal feature prominently in the statement of purpose for the Powerplant and Industrial Fuel Use Act of 1978, a legislative component of the National Energy Act, the Fuel Use Act actually went so far as to generally prohibit construction or operation of “a base load powerplant without the capability to use coal or [capability to be modified to use coal].”  Powerplant and Industrial Fuel Use Act, 42 U.S.C. § 8311(a)-(b) (2015).

[26] Tomain, supra note 6, at 371.

[27] Id. at 370.

[28] Id. at 371.

[29] Sheldon L. Richman, The Sad Legacy of Ronald Reagan, Mises Institute (Oct. 1, 1988), https://mises.org/library/sad-legacy-ronald-reagan-0.

[30] The inefficient Federal central planning of both prices and allocation of petroleum resources effectively magnified the objectively small supply shortage caused by OPEC and the Iranian revolution into the Gas Crisis of the 1970’s. Ben Lieberman, A Bad Response to Post-Katrina Gas Prices, The Heritage Foundation (Sept. 1, 2005), http://www.heritage.org/research/reports/2005/09/a-bad-response-to-post-katrina-gas-prices.

[31] Exec. Order No. 12,287, 46 Fed. Reg. 9909 (Jan. 28, 1981).

[32] Tomain, supra note 6, at 372.

[33] The Regulatory Assistance Project, Electricity Regulation in the US: A Guide (2011)

[34] Tomain, supra note 6, at 372.