Tell Me Again How A Bad, Risky Investment Turns Into A Good Investment When the Taxpayer Pays?

A little while ago we reviewed an Obama administration program that would provide federal loan guarantees to the nuclear energy industry if that industry's players would start building new nuclear power plants. The article we cited mentioned that private investors and nuclear energy companies would not build new plants because it was too risky of an investment but would be happy to do so if the Federal government more or less bankrolled their risk at the costs of about $50 billion.

We found two basic problems with this approach:

• First, if it is a bad, risky idea when private interests pay for it, what makes it a good idea if taxpayers pay for it? The risk is the same but it has been shifted to us, the taxpayer, by the political class and their close friends in the nuclear power industry.
• Second, we proved in that post that taking that $50 billion or so and using it to convert existing residential housing to solar powered homes would serve the energy needs of more people than the nuclear option, would create no new radioactive waste, could be online and working almost immediately compared to the long lead times of nuclear energy plant construction, was environmentally friendly, and was far less risky.

I review that post because an almost identical situation has arisen and was reviewed by a David Whitford article in the March 22, 2010 issue of Fortune magazine. It seems that the ethanol industry wants the Federal government, i.e. the U.S. taxpayer, to provide a loan guarantee for 80% of a proposed $4 billion pipeline construction that would pump ethanol from the Midwest to the east coast. In fact, an Iowan Congressman has already proposed legislation to that effect. A spokesperson for Magellan Midstream Partners, the pipeline builder who would build the pipe, is quoted in the article as saying: "We're not willing to spend the kind of money it would take on a project that's viable only as long as the government continues its interest in ethanol."

Thus, the title of this post: if the pipeline builder thinks the project is to risky if the builder initiates and funds the project, what makes it any less of a risk of the taxpayer pays for it? This political class reasoning makes no sense except for getting re-election donations from the people and companies involved.

What are some these risks and downsides? Mr. Whitford goes into them:

• If oil prices stay low for a significant length of time, then the economics and hassle of using ethanol as a fuel additive become unattractive. In which case, the taxpayers are stuck for a multi-billion project that goes nowhere.
• As mentioned in "Love My Country, Loathe My Government," using corn for ethanol, which is the primary crop that this pipeline will be used for, is a very dicey environmental play since there have been some studies showing that raising corn and producing biofuels and ethanol from it does not reduce energy consumption or greenhouse gases. More recently, in his article, Mr. Whitford cites a new Duke University analysis found that "carbon releases from the soil after planting corn for ethanol may in some cases completely offset carbon gains... for at least fifty years."
• And finally, building a pipeline from the Midwest to the east coast would require a tremendous amount of negotiating to get right of way permission to build the pipeline on land owned by others, raising a whole slew of eminent domain issues, i.e. the government seizing land, for a theoretically fair price, and turning the land over to private interests (see Step 19 in "Love My Country, Loathe My Government" for a review of the Kelo Supreme Court ruling disaster.)

Given these issues, let's switch to a short article that was in the March 12, 2010 issue of The Week magazine. A small Silicon Valley start-up company, Bloom Energy, announced in late March that they had proven the concept of a fuel cell that would revolutionize clean energy technology. The article claims that Bloom's fuelcell, which is about the size of a large brick, can produce energy by combining a wide array of different types of fuels with air to produce a large amount of clean energy efficiently. Other sources I have reviewed relative to Bloom imagine that individual homes could be provided with inexpensive Bloom fuel cells to inexpensively, efficiently, and effectively power their homes off of a natural gas feed or other energy feed which would also reduce greenhouse emissions.

Now, unlike the D.C. politicians, I at least know that I am not an energy expert. They are not experts either but they just won't admit it. However, the article points out that FedEx, Google, and Walmart have signed on to test the cells. Thus, these are profit driven companies and I must assume that they see merit in using this technology TODAY, not several years down the road when, and if, the ethanol pipeline is functional. Another news source indicated that Google is already using Bloom fuels to power some of their data centers. I am sure that Google would not take the chance of an energy outage and must see merit and savings, money wise and environment wise, from these fuels cells.

Imagine if this technology actually got to the home owner level. Homeowners would be much freer to choose their energy source, control their energy usage, save money to enhance their family's lives, and not have their tax dollars put at risk by large, risky government investments. They could avoid all of the risks listed above that come with this pipeline. Energy control would become much more decentralized and much more stable from an availability and cost perspective since the cells would be able to be used with different energy sources.

This example of energy decentralization is very similar to the post we did on the nuclear power plant industry. Rather than rely on the government and the nuclear energy industry to build large and potentially dangerous central power plant generators, using the same money to put solar panels on the roofs of American households would decentralize the costs, the risks, and the control of energy in this country while providing a boost to the environment. And whenever you reduce control of the political class, you increase the freedom of every American.

Why do we constantly have taxpayers exposed to these high risky investments? Its because the political class does not have a sensible, well thought out, overarching energy strategy as proposed in "Love My Country, Loathe My Government." As with the health care fiasco, without understanding all of your options, all of the trade offs, all of the interrelationships, you cannot have a workable strategy. All you end up with are scattered tactics such as backing the building of huge centralized nuclear power plants and constructing risky pipelines across half of the country. Isolated tactics like these do not solve problems, overall analysis and strategies solve problems.

Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble.