May 1, 2011

The High Cost of Stupid Ideas

Wind is inherently intermittent and, in fact, has a tendency not to blow at the very time you need it most: the summertime.

The law of demand says that when the price of something goes down, people buy more of it. When the price of apples goes down, people buy more apples. When the price of cars goes down, people buy more cars. When the price of stupid ideas goes down, people buy more stupid ideas too. While the world is awash in stupid ideas, they seem to be very heavily concentrated in the energy sector, at least in the United States.

Until the cost of a stupid idea gets too high, people generally just ignore them. For example, as long as the price of gasoline is under $3 per gallon, we can afford to not drill in places where we know we will find oil. In 2008, when the price of oil got to be $140 dollars a barrel and gasoline exceeded $4 per gallon, people started wearing “Drill Baby Drill” T-shirts and the state of Virginia elected a governor who ran on a platform of drilling offshore.

Wind power counts as among the stupidest and most expensive ideas. Wind is inherently intermittent and, in fact, has a tendency not to blow at the very time you need it most: the summertime. When building its Capacity Demand Reserve Report, the Electric Reliability Council of Texas (ER COT ), which manages the flow of electric power to 22 million Texas customers, projects its wind farms to produce at less than 9% of its capacity during the summer.

Now, because the wind doesn't blow all the time, you have to rely on a gas-fired power plant to take up the slack, but because they only use this plant when the wind is not blowing, they don't get to use it at optimum efficiency. The combination of those things means that the price per kilowatt-hour of electricity is two to four times higher than that of natural gas or coal.

But wind farms have other problems, too. Nobody wants to live near them. If you go to www.projectnoproject.com you'll see a map of the United States, and on this map are all these places where wind facilities have been suggested, but the NI MBYs came out and said, “Hey, not in my back yard. They're loud and they're ugly.”

Then, there's the destruction of wildlife. During the Deep Water Horizon oil spill, people were outraged when they saw those oil-covered pelicans. The latest data showed that 3,271 bird carcasses were found covered in oil, but a wind farm right outside of San Francisco in the Altamont Pass, which has more than 4,000 windmills on it, kills 10,000 birds per year, with 80 golden eagles among them.

The fourth problem is sprawl. To get 1 million kilowatts of electricity produced by natural gas requires about eight square miles of land. Wind requires about 30 square miles of land; so on the whole, it's just a remarkably dumb way of generating electricity.

Another bad idea that's costing us money is higher taxes. President Obama's most recent budget contains a $53 billion tax on energy producers. When you put a tax on anything, you shift the supply curve upward and to the left by the amount of the tax. However, the demand curve for oil is very inelastic, and therefore the biggest part of that tax is going to be passed on to you and me in terms of higher gasoline prices. The second very predictable thing that's going to happen is that there would be less oil and gas produced in the United States, which would make us even more dependent on foreign sources for oil.

The third thing that you would notice is that because of the downward sloping demand curve, oil companies cannot shift all of the tax onto us in terms higher gasoline prices. But ExxonMobil, ConocoPhillips, Shell, BP: None of these companies pay federal income taxes. They are corporations; they are accounting fictions. Stockholders pay taxes and guess who the stockholders of the oil companies are?

Robert J. Shapiro and Nam D. Pham have studied oil company stock ownership and found that 43% is held in mutual funds, and typically, 55 million Americans with a median income of $68,700 — not rich people — own those mutual funds; 27% of oil and natural gas company stock is owned by institutional investors, like pension plans. Another 14% is held by IRAs and personal retirement accounts, which are held by 45 million Americans.

This tax is a great tribute to the economic illiteracy of our people: They honestly think oil companies are going to pay this tax. They're not going to pay this tax, we are.

Here's a little parlor game. When you hear the phrase “big oil,” what is the largest independent oil company that pops into your head? Most every American says ExxonMobil, but on a list of the top 20 oil companies in the world, in descending order of reserves, ExxonMobil is number 17.

There are 16 oil companies that own more oil reserves than ExxonMobil and they are all government-run companies like Saudi Aramco, National Iranian Oil Company, Iraq National Oil Co., Kuwait Petroleum Corporation, etc. Saudi Aramco owns about 260 billion barrels of oil reserves; Exxon Mobil owns 9.2 billion. They're not even close. ExxonMobil produces just 1% of the world oil output.

So in the next couple months when gas and oil prices start going up, and Congress hauls the heads of ExxonMobil before a hearing committee and asks why they are raising prices, the real answer is that they are not. They control only a tiny percent of the world's production.

So who does control the price of oil? The price is controlled by these other 16 national oil companies, and by us. We are driving up our own costs through stupid ideas. We're not allowing people to drill where we know there is oil; we are actually growing food for fuel; and we are subsidizing wind, which we know are remarkably stupid ideas.

If we were about to run out of oil and natural gas, then we would have to start diversifying our energy sources. But we are not about to run out of oil, and we are certainly not about to run out of natural gas. We are awash in natural gas right now. Dependency on foreign sources of oil is another common defense for alternative energy, but part of the reason the United States imports more than 60% of its oil is that we don't let people drill where we know they will find oil. How much longer can we afford ideas that stupid?

Dr. Loren C. Scott is president and founder of Loren C. Scott & Associates Inc. He was on the Economics Department faculty at Louisiana State University from 1969 to 1998, where he rose through the ranks from assistant professor to the holder of the Freeport-McMoran endowed chair of economics. He is presently professor emeritus of economics at LSU.