Friday, April 13, 2012

Some Simple Math For Both Clean Energy And Energy Independence

I was a math major long ago in college so doing math allows me to gain some basic understanding and insights into problems. It has always amazed me that our so-called leaders in the political class are always either unable or unwilling to do simple math prior to enacting legislation. If they did the math, many times they would find that their programs are really not worth the effort, from purely a simple math perspective.

Cash For Clunkers was supposed to be an anti-recession and pro-environment program and is a perfect example of where those in Washington did not do the math. The latest analysis from the U.S. Treasury department showed that about 380,000 new cars were sold under this rebate program.

Let's assume that each of those cars had a market value of $20,000, for illustrative purposes. If we assume that EVERY single of of those 380,000 cars were INCREMENTAL sales in the market for new cars, i.e. none of those sales would have happened without the Cash For Clunkers rebate promotion, than the total market impact of Cash For Clunkers was 380,000 cars times $20,000 or $7.6 billion.

However, the U.S.economy is currently about $14 TRILLION in size. If we divide the Cash For Clunkers net value of $7.6 billion by the size of the economy, the math shows a percentage of .05%. It is highly doubtful that an economic program that is only .05% of the national economy is going to move that economy forward and out of a recession. Thus, in this best case, there was little or net gain to the national economy but it cost the American taxpayer about $1.5 billion (380,000 cars times the $4,000 rebate per car) to get that nothing. It is simple math.

(In fact, the math is much worse since that same Treasury report indicated from their analysis that there were no incremental sales from the program. The 380,000 cars sold under the Cash For Clunkers rebate program would have occurred anyway.)

Any sane, logical person would not have done this program if they had just done a little math up front and saved the taxpayers $1.5 billion or so.

But with a little strategic creativity, you can make energy math work for the betterment of the country. This assumes you are willing to break out of the current ways of thinking about energy and look at the long term view. We started this thought process in our early February blog where under the United States of Purple Presidency banner, we proposed a long term approach that addressed both the potential global warming issue and the need for energy independence (that post can be accessed directly at

The essence of that plan included some very simple principles, as illustrated by the following explanation relative to gasoline:

  • The Federal government would place an incremental $5 tax per barrel of oil for ten years.
  • After ten years, that incremental tax per barrel would add $50 to the cost of each barrel.
  • This would increase the cost of car travel, leveraging the driving public to either buy more fuel efficient cars, drive fewer miles, or pay much more in gas. Two of these three choices would result in less dependence on foreign oil imports and reduce the amount of global warming gases released into the atmosphere.
  • The additional cost burden on gas would also encourage alternative energy source development and alternative energy technologies since everyone would know what the future looked like (higher gas prices).
  • By doing this gradually over a ten year period, the consumer would have a definitive, certain view of what was going to happen to their driving budget and allow them to adjust their habits according to their personal choice.
  • The beauty of the plan is that the extra gas tax collected would never get into the wasteful hands of the political class. It would be redistributed back to consumers via their Federal income tax returns as a credit so that the economy did not suffer a loss of disposable income, it would just be redirected away from gas consumption.
This is a gorgeous strategic plan that you will see when you click to go to the original post. It is simple, it introduces certainty into the market, and it bypasses the whole unproductive debate of whether global warming exists or not since it addresses the potential that it does exist with a larger, more coherent approach, and it does not remove buying power form the economy.

But let's take this good plan a step further with a little math. Obama has wasted several billions of dollar by handing out taxpayer money willy-nilly to a bunch of ill-run, ill-financed, and ill thought out alternative energy companies. Solyndra is the most public disaster but others include Spectra, Everygreen, ENER1, etc. This very shallow, tactical approach does not work since there is no overarching strategy and no leveragable plan.

But if energy independence is the goal, let's do some high level, crude but informative math:
  1. The U.S. uses about 19 million barrels of oil a day.
  2. My recollection is about 45% of the oil we use is imported.
  3. There are 365 days in a year.
  4. This morning the price of a barrel of oil was about $103.
  5. Thus, EVERY year, over $320 billion of our wealth leaves the country for use in the rest of the world.
  6. Let's assume that you could cut that outflow of wealth in half (how to do that is explained below) to $160 billion.
  7. Let's assume that the $160 billion would  flow to U.S. energy companies and that 10%, or $16 billion, of that additional domestic revenue would flow into the Federal government as taxes.
  8. We have reported in previous blogs that respectable sources have shown that a typical American home could be made solar powered, energy independent for about $50,000.
  9. If we did not allow the political class to get their hands on that annual $16 billion windfall, you could wean about 6.4 million American homes off of oil heat EACH YEAR at no cost to the home owner.
  10. If you made the homeowner pay half of the cost of the $50,000 installation, you could wean 12.8 American homes off of oil, or any other carbon based heat sources, every year.
  11. Using some October, 2011 Census housing data stats (, in under three years you could wean every owner occupied housing unit in what the Census considers the "South" (just under 30 million housing units) off of oil and other heating sources by making them solar energy independent under the above math principles.
This plan assumes a several things:
  • We are able to reduce our foreign oil imports in half and keep that wealth in the country, a challenging assumption.
  • Homeowners will step up and pay the $25,000 for their half of the solar installation. Given that they now know that the cost of oil is likely to be 50% or so higher within ten years ($5 per barrel incremental tax every year for ten years),  that may not be too big of an issue from an assumption perspective.
  • The Federal government and the Federal political class is actually able to administer such a program, a highly debatable assumption.
But the beauty of the plan is that it does not involve any additional taxes, it does not saddle us with stupid programs like Cash For Clunkers, and it injects the certainty of a definitive plan into the marketplace where everyone, consumers, homeowners, businesses, and researchers, can function within defined, long term parameters.

The challenge is to reduce the amount of oil imported in half. Past efforts over the last four decades have obviously not worked and should not be tried again. Something brand new, radical, and daring needs to be done to reduce our carbon footprint and make us much more energy independent. The only way to succeed in such a daunting manner is to "drill, baby drill."  That's right, to use less oil, we as a nation need to find and obtain as much oil as we can within our own reach, certainly a contrarian and radical view.

This involves drilling off of our coasts, everywhere we can. It involves drilling in new areas and in new and different ways using all of the technology and science we can. It involves drilling in the Arctic. The only way to use less oil in the long term is to use more of our own in the short term. This is the only way to divert the $320 billion a year back into the country from foreign oil exporters.

Now, the Democrats, the liberals, the global warming people are now going ballistic. But what solutions have they proposed that have any chance of working? Cap and trade had absolutely no chance of success even if it was passed by the political class in Washington since it is unwieldy, too bureaucratic, and would have introduced tons of uncertainty into the market and economy. Cash For Clunkers, Cash For Caulkers, and Cash For appliances were all disasters, both strategically, tactically, and financially.

 If you can find enough domestic oil anywhere you can in the short term, say in the next ten to fifteen years, and divert oil money to domestic sources and taxes and away from foreign oil sources, within a handful of years you can have tens of millions of American homes energy independent for the long term. At that point, you can start shutting down the more dangerous options for getting oil within our borders and off of our coasts to protect our environment as much as possible. 

The math does not lie. There are huge chunks of wealth leaving this country every day to foreign countries that sell us their oil, foreign countries that do not always have our best interests at heart. There is solar energy technology today that can make U.S. homes virtually energy independent, that fact has been proven in the marketplace. Global warming may or may not be an issue but under this plan, who cares? This approach would reduce global warming gases as a by product.

The math shows us a way to self finance our way out of the global warming and energy dependence issues that burden our economy and nation today. All it takes is some leadership with the ability to think outside the box and take a contrarian view of "drilling more oil to use less oil." Until someone else has a better way to resolve these issues, I stand by the math and the pathway it exposes.

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