How to Trade America’s Addiction to Oil

The United States’ energy dependence has followed the same path as a junkie. We have become addicted to cheap oil over the last 40 years. In fact, our entire economy was built on cheap oil. Just like any good junky, we weathered the initial supply crisis in the 1970’s, and, having seen the error of our ways, vowed to set ourselves straight. Fortunately, it was just a temporary shock and we didn’t really mean it. Besides, remember how bad it was? It was horrible for domestic employment and inflation was everywhere. We were invaded by foreign automobiles. We were forced to listen to crackpot after crackpot on the evening news telling us that we should be using alternative energy sources available right here in the US. Thank goodness that didn’t last.

Fast-forward to 1990 and a tiny little country in the Golden Crescent was having its “freedom” threatened. Amazingly, one little country, smaller than New Jersey and with fewer people than the city of Houston, was able to mobilize the mightiest fighting force in the world. A desperate addict needing a fix will do almost anything to ensure their supply keeps flowing. The subsequent rally in oil prices was hardly noticed due the prosperous economic times of the period. We got to watch the war on TV with Wolf Blitzer calling the commentary from the video feed on the nose of precisely guided weapons. The technology boom got underway, the war was a huge success, and we reveled in national pride.

Here we are in 2010 and we’ve gotten used to paying a higher premium for petroleum products and we’ve successfully defended our suppliers. My issue is this: The United States must develop a consistent and focused energy plan if we are ever going to become self -sustaining. We have the resources. The US has greater natural gas reserves than the Saudi’s have oil. This past week, I’ve read two alarming pieces targeting the future of the United States’ energy consumption. After doing some research on my own, it has become clear that there is a major disconnect between where we are being told we are headed versus where we actually are headed.

The government stimulus packages and vehicle emission standards have pushed for electric cars as the primary source of green energy. It’s made for great press as our ailing auto manufacturers have produced catchy, warm and fuzzy commercials and brainwashed the general public into believing we are on the road to self-sufficiency, leading us away from foreign oil dependency and the wars it has brought with it.

However, if we look behind the wizard’s curtain, we reveal some startling facts.

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The US currently imports 67% of its oil.

The cessation of Gulf oil production will increase this to 75% by 2012. This will put oil at $125 per barrel and gas at $4-$5 per gallon by 2012.

Half of our top ten oil importers are countries that are unsafe to visit, according to our State Department. Their official language reads, “Travel warnings are issued when long-term, protracted conditions that make a country dangerous or unstable lead the State Department to recommend that Americans avoid or consider the risk of travel to that country.” This includes countries like Iraq, Nigeria, Saudi Arabia, etc.

According to T. Boone Pickens, our current energy policy prices in oil at $300 per barrel by 2020. Oil is currently just over $80 per barrel.

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I wrote about the spread between natural gas and crude oil a few weeks ago, stating that it was near an all-time high. The spread between any two markets is based on using a standard measure for both to determine absolute value. Energy markets are measured in British thermal units, or BTUs. This defines how much work, or power, is generated by the combustion of a given quantity of substance. The current relationship between crude oil and natural gas is that it takes $14.07 worth of crude oil to do the same work as $3.80 worth of natural gas. This means we pay about 3.7 times as much for crude oil to do the same amount of work as we would for natural gas. The five-year average for this ratio, including today’s inflated price, is 1.7.

Natural gas has always sold at a discount to crude oil, and until the last ten years, the relatively low price of crude oil has dictated business as usual. In the wake of 9/11 and the global recession, the government has spent hundreds of billions of dollars aimed at stimulating the economy, nurturing energy independence, cleaning up the environment, and improving the infrastructure of the country. Unfortunately, the money from that pie—our tax dollars—have been sliced so thinly that the result is virtually nil. Our dollars have been spent on a jack-of- all-trades and master of none. This is most clearly evident in the outside investment and performance of alternative energy source companies specializing in wind, geothermal, solar, and fuel cells, which have all lost at least 30% over the last year. Clearly, the investment community has little faith in the current administration’s ability to coordinate a sustainable alternative energy plan.

Finally, the push towards electric automobiles is simply a public relations gimmick. According to the US Energy Information Administration, highway diesel usage trumps residential gasoline consumption by more than an eight-to-one margin. Does it really make sense that the government enacted emission restrictions on passenger vehicles prior to commercial vehicles? Electric, residential automobiles with two seats and a 100-mile range are not going to effectively address the problem of energy independence.

The primary focus of our energy policy should be natural gas. It burns 30% cleaner than crude oil and nearly twice as clean as coal, which it’s also currently cheaper than. Finally, in energy equivalents, apples to apples, we have three times more energy reserves than Saudi Arabia. We should regain our dignity by developing the infrastructure, creating fueling stations, and putting our people to work through the use of new technologies with an extended shelf life. This is a fundamentally sound path towards a cleaner, more productive, and independent country.