The Economics of Corporate Welfare

100 The Great Divide – Chapter 5

Chapter 5

Energy: The Economics of Corporate WelfareThe Political Power of Extraction IndustriesIn the decade 1991–2001, Metro America paid $1.6 trillion more in taxes than Retro America, and Retro America received $0.8 trillion more in federal payments than it paid in fed-eral taxes. As the saying goes, a trillion here and a trillion there adds up to real money. Much of this $0.8 trillion goes to Retro America in the form of the

lion’s share of subsidies and tax breaks to the energy industry—oil and gas, and coal. The primary reason these noneconomic subsidies continue to flow decade after decade is the politi-cal power of the extraction industries, a power that has been wielded in both Republican and Democratic adminis-trations but has been greatly magni-fied under the Bush administration. During the Clinton administration, the extraction industries had limited influence: We have been able to iden-tify only two cabinet, subcabinet, and White House staff members with extraction industry connections. In contrast, we have identified 53 mem-bers of the Bush administration with close ties to the extraction industries.

In addition, there are five Republican Chairs and five Democratic ranking members of House and Senate extrac-tion-related committees who are from Retro states where extraction indus-tries generate a significant share of gross state product.

Clinton’s two extraction industry appointees were Thomas F. (Mack) McLarty III—a childhood friend whom the president appointed as his Chief of Staff—and Joshua Gotbaum, whom he appointed to the subcabinet post of Executive Associate Director and Controller of the Office of Man-agement and Budget. Prior to joining the White House, McLarty was the chairman and chief executive officer of Arkla Inc., a natural gas company.

© RJ Matson/Artizans.com

53 Enablers of Crony Capitalism1

1. President George W. Bush: Bush’s oil company, Arbusto, merged with Spectrum 7 in 1984. By 1986 Spectrum was on the verge of bankruptcy and was bought out by Harken Energy. Harken gave Bush a seat on the board, together with stock options that he later sold in what some critics say was an insider-trading transaction.

2. Vice President Dick Cheney: Former CEO, Halliburton, with ties to the Carlyle Group, a global investment company that has done business with the Saudi royal family.

Cabinet and Department Officers

National Security Council3. Condoleezza Rice, National Security

Advisor: Formerly on the board of directors at Chevron, Charles Schwab Corporation, the William and Flora Hewlett Foundation, and the International Advisory Council of J.P. Morgan.

Department of Agriculture 4. Ann Veneman, Secretary: Formerly a

lawyer for extraction companies.

5. Jim Moseley, Deputy Secretary: Former owner, Ag Ridge Farms.

6. Mark Rey, Undersecretary for Natural Resources and Environment: Formerly a timber lobbyist.

7. Dale Bosworth, Chief, U.S. Forest Service: Formerly a civil servant; supports logging in national forests.

Department of Commerce8. Donald Evans, Secretary: Former oil and

gas executive.

9. Kathleen Cooper, Undersecretary for Economic Affairs: Former ExxonMobil executive.

10. Bruce Mehlman, Assistant Secretary for Technology: Formerly a lawyer for utilities corporations.

11. Craig S. Burkhardt, Chief Counsel for Technology, U.S. Department of Commerce: Former partner at the Illinois law firm of Sorling, Northrup, Hanna, Cullen & Cochran, where he concentrated in regu-

latory and administrative law, governmental relations, and election law. He provided regulatory and legislative representation of Fortune 500 clients in areas including electricity and gas.

12. Connie Correll, Senior Adviser to Under-Secretary for Technology: Former VP for Tech Net, an oil, gas, mining, and chemicals network.

13. Jon Dyck, Chief Counsel for Industry and Security: Former partner, Baker Botts, LLP, Bush family lawyer and one of the top three firms for energy matters.

14. James Walpole, General Counsel: Partner, Chadbourne & Parke, which represent oil, gas, and liquefied natural gas corporations.

Department of Defense15. Donald Rumsfeld, Secretary: Served as

nonexecutive chairman of Gilead Sciences, Inc., chairman and CEO of General Instru-ment Corporation; served on board of governors of the Atlantic Institute.

16. Thomas White, former secretary of the army: Worked for Enron from 1990 to 2001.

Department of Energy 17. Spencer Abraham, Secretary: Former

energy lobbyist; as a senator, recipient of large, energy-related campaign contribtions.

18. Kyle McSlarrow, Deputy Secretary: Former partner, Hunton & William, coal lawyers.

19. Patrick Henry Wood III, Chairman, Federal Energy Regulatory Commission: Former engineer with ARCO; attorney with Baker Botts.

20. William Massey, Commissioner, Federal Energy Regulatory Commission: Former partner, Mitchell, Williams, Selig, Gates & Woodyard, specializing in energy practice.

21. Robert Card, Undersecretary: Former executive, Kaiser-Hill Co., LLC, in charge of Rocky Flats cleanup.

22. Mike Smith, Assistant Secretary for Fossil Energy: Former oil and gas executive.

Department of Housing and Urban Development23. Mel Martinez, Secretary of Housing and

Urban Development: Served three years as president of the Orlando Utilities Commission.

24. Alphonso Jackson, Deputy Secretary of Housing and Urban Development: Former president of American Electric Power-Texas, a $13 billion utility company in Austin, Texas.

Department of Interior25. Gale Norton, Secretary: Former senior

counsel, Brownstein, Hyatt & Farber P.C., represented Delta Petroleum, Timet-Tita-nium Metals, Shaw Group (manufacturer of pipes for oil companies and power plants), NL (National Lead) Industries, and others.

26. J. Steven Griles, Deputy Secretary: Former principal, NES, which specializes in lobbying for oil, gas, and energy companies; former lobbyist for Occidental Petroleum and National Mining Association (just cleared by the Bush administration of unethical behavior for continuing to press for the natural gas project of his lobbying client after he entered federal service).

27. Lynn Scarlett, Assistant Secretary for Policy, Management and Budget: Former CEO, Reason Foundation, funded by American Forest and Paper Assoc., American Petroleum Institute, American Plastics Council, Chevron Corp., and Dow Chemicals. Scarlett said,“Environmentalism is a coherent ideology that rivals Marxism in its challenge to the clas-sic liberal view of government as protector of individual rights.”

28. Rebecca Watson, Assistant Secretary for Land and Mineral Management: Former partner with Gough, Shanahan, Johnson and Waterman, specializing in mining, natural resources, and energy.

29. William Raley Bennett, Assistant Secretary for Water and Science: As a shareholder in a Denver law firm, represented mining, grazing, recreation, and water development interests.

30. Camden Toohey, Special Assistant for Alaska: Former executive director, Arctic Power, a lobby group pushing to drill in Arctic National Wildlife Refuge (ANWR).


53 Enablers of Crony Capitalism1

31. Drue Pearce, Senior Advisor for Alaskan Affairs: Was on Arctic Power’s board of directors.

32. Kit Kimball, Director of Office of External and Intergovernmental Affairs: Former executive director, Western Regional Council, representing Fortune 500 companies with focus on development in Western states.

33. David Bernhardt, Director of Congressio-nal and Legislative Affairs: As an attorney with Brownstein, Hyatt, and Farber, Bern-hardt lobbied Congress and federal adminis-trative agencies on behalf of Delta Petro-leum Corp., Timet-Titanium Metals Corp., NL Industries (international chemical company), and the Shaw Group (maker of piping for oil companies and power plants).

34. William Myers, Solicitor and Executive Director, Public Lands Council: Former director, National Cattlemen’s Beef Asso-ciation; counsel for Cattlemen Advocating Through Litigation (CATL).

35. Kathleen Clarke, Director, Bureau of Land Management: Former director, Utah Depart-ment of Natural Resources, where she became a favorite of the state’s mining companies.

36. Jeffrey Jarrett, Director, U.S. Office of Surface Mining: Former director of planning, and a division manager for Cravat Coal Company.

37. R.M.“Jonnie” Burton, Director, Mineral Management Service: Former vice president, Dwights Energydata, Inc. and vice president of TCF, Inc., an oil and gas exploration company.

Department of Justice38. Thomas Sansonetti, Assistant Attor-

ney General, Environment and Natural Resources Division: Former partner with the law firm of Holland and Hart in Chey-enne, Wyoming where he lobbied on behalf of corporate mining interests, including Arch Coal and Peabody Coal.

39. James Baker, Counsel for Intelligence Policy: Senior counselor to the Carlyle Group, a global investment company that has done business with the Saudi royal fam-ily; partner in Baker Botts, the Houston law firm whose client list includes Halliburton.

Department of Labor 40. Elaine Chao, Secretary (wife of Sena-

tor Mitch McConnell): Served on board of Parsons Corp., Middle East contractor.

41. David Lauriski, Assistant Secretary for Mine Safety and Health: Former general manager, Energy West Mining Co.; chairman of the board of directors of oil, gas, and mining companies, member of the board of Utah Mining Association.

42. John Caylor, Deputy Assistant Secretary, Mine Safety and Health Administration:Held management jobs for Cyprus Minerals, Amax Mining, and Magma Copper.

43. John Correll, Deputy Assistant Secretary, Mine Safety and Health Administration: Former executive with Cleveland Cliff (Iron ore mining), AMEX and Peabody (mining companies).

44. Stanley Suboleski, Federal Mine Health and Safety Review Commission: Former executive with A.C. Massey Coal Company.

45. Michael G. Young, Commissioner, Federal Mine Safety and Health Review Com-mission (an independent agency not affiliated with the Department of Labor): Former director of regulatory affairs for the Pennsylvania Coal Association.

Department of State46. Stuart W. Holliday, Coordinator, Interna-

tional Information Programs (IIP): Former executive director of the Dallas Council on World Affairs and energy consultant.

Environmental Protection Agency47. Mike Leavitt, Administrator: Former gover-

nor of Utah with a record of lax enforcement of environmental laws in regard to U.S. Mag-nesium and Kennecott Utah Copper Mine.

48. Jeffrey Holmstead, Assistant Adminis-trator for Air and Radiation: Former prin-cipal at Latham and Watkins, representing the American Farm Bureau Federation and Montrose Chemical; adjunct scholar, Citizens for the Environment, a libertarian group funded by Charles and David Koch, whose wealth comes from oil.

Council on Environmental Quality49. James Connaughton, Secretary:

Former lobbyist for the mining and chemical manufacturing industries.

Office of Management and Budget50. John Graham, Office of Information

and Regulatory Affairs: Founding direc-tor of the Harvard Center for Risk Analysis, where he received funding from America’s champion corporate polluters: Dow Chemi-cal, DuPont, Monsanto, Alcoa, ExxonMobil, General Electric, and General Motors.

Miscellaneous51. Karl Rove, Assistant to the President:

Former stockholder of Enron.

52. Marc Racicot, Chairman, Republican National Committee: While governor of Montana, he signed a bill backed by mining and oil companies and another supporting strip mining. Worked for the law firm Bracewell & Paterson, which had Enron as a client.

53. Mercer Reynolds, Finance Chairman, Reelection 2004: Former cochairman of Spectrum 7 Energy Corporation, which was active in the oil and gas exploration business.

This amazing list gives credence to the charge that crony capitalism flourishes in the Bush administration, and it does not bode well for the nation.

In addition to these high-ranking appointees from the extractive industries, Retro states are well represented in Congress. The following is a list of chairs and ranking members of congressional committees:

Republican ChairmenHouse: William Tauzin, Energy, Louisiana

Senate: Thad Cochran, Agriculture, MississippiTed Stevens, Appropriations, AlaskaPete Domenici, Energy, New MexicoJames Inhofe, Environment, Oklahoma

Democratic Ranking MembersHouse: Charles Stenholm, Agriculture, TexasNick Rahall, Resources, West Virginia

Senate: Tom Harkin, Agriculture, IowaRobert Byrd, Appropriations, West Virginia

Energy – The Economics of Corporate Welfare 103

Mr. Gotbaum was a partner in Lazard Freres and Co., specializing in energy-related products.

President Bush and the Bush family have strong ties to the oil industry going back to John D. Rock-efeller and the early days of the indus-try. George W. Bush’s great-grandfa-ther, Samuel Bush, was an associate of John D. Rockefeller and ran Buck-eye Steel Castings in the early 20th

century. The daughter of George Herbert Walker, the financier and associate of the Harrimans, married Samuel’s son, Prescott Bush, invest-ment banker, U.S. senator, and father of George Herbert Walker Bush (Bush Senior). President Bush Junior and his closest advisers have heavy ties to oil. Bush’s own oil venture was unsuccessful, but because of his fam-ily ties, he sat on the board of direc-tors of Harken Oil, which saved him from bankruptcy by buying his com-pany. Vice President Cheney served as a congressman from energy-rich Wyoming and was Chief Executive Officer of Halliburton, an oil service company. National Security Advisor Condoleezza Rice was a member of the board of directors of the Chevron Corp. A Chevron oil tanker was named “Condoleezza Rice,” but due to adverse publicity was renamed in April 2001 the “Altair Voyager.”

These crony capitalists gain power and often personal wealth by switch-ing between high-ranking positions in business and government and using their influence in one to promote proj-ects and points of view sympathetic to the other. This kind of behind-the-scenes manipulation can undermine the positive effects of entrepreneurial capitalist development and is anath-ema to a free enterprise system. Of course, crony capitalism is always a

factor in government and big business, but in the Bush administration it is rampant and harks back to the robber barons of the president’s great-grand-father’s generation.

As a result of Oval Office ties to and emphasis on the energy and extrac-tive industries, an unprecedented num-

ber of cabinet officers and other appoin-tees come from these industries. The list is long, beginning with the Presi-dent and Vice President and includ-ing cabinet and department officers, secretaries, assistant secretaries and undersecretaries, counsels, directors, and members of commissions.

The U.S.–Middle East Oil Connection spans generations. TOP: President Richard M. Nixon (right), shaking hands with Mohammed Reza Pahlavi, the Shah of Iran at the White House, October 23, 1969. © Wally McNamee/CORBIS. BOTTOM: President George W. Bush and Prince Bandar bin Sultan, the Saudi Arabian Ambassador to the U.S., relaxing during a 2003 visit at the Bush ranch in Crawford, Texas. © Eric Draper/AFP/Getty Images


Oil and GasRetro states are the largest producers of energy in the United States, while Metro states are the largest consum-ers. Metro states contain 65 percent of the population, are responsible for 69 percent of the GDP, and consume about 70 percent of energy. Retro drilling accounted for almost all the oil America consumed until domes-tic reserves declined to the point where oil production costs in the United States now runs from $17 to $26 a barrel, in comparison to the Persian Gulf fields, where it costs from $1 to $5. Today, domestic pro-duction accounts for about 45 per-cent of U.S. consumption, and the percentage is falling. Gas production is also falling, but fortunately Can-ada is able to augment U.S. produc-tion. The main source of energy where we have ample reserves is coal.

Unfortunately, coal is also the dirti-est energy source in terms of air pol-lution and global warming.

Although Metro America is gain-ing increasing independence from Retro energy, the current arrangement of energy flow from Retro to Metro and money flow from Metro to Retro is the product of historical precedent and political power rather than ratio-nal economic arrangement. As a result, we have unnecessary energy subsidies and unnecessary pollution that in the long run harm both Metro and Retro states. One of the unfortunate proper-ties of economies that depend on energy extraction is that the wealth is not spread throughout the economy. It tends to favor the few and escape the rest. Moreover, a fossil fuel–based economy will not be indefinitely sus-tainable on either side of the Great Divide. The following section offers a

general discussion of the consumption and production of energy in the United States. We then recommend changes in U.S. energy policy that will benefit both Metro and Retro states.

U.S. Energy Production and ConsumptionThe United States is the world’s largest consumer of oil, accounting for about a quarter of world consumption. We are also the largest consumers of oil per capita and per dollar of GDP. Gas-oline, jet fuel, and diesel for transpor-tation are the biggest uses of oil. Some-what surprisingly, the United States is also the world’s second-largest oil pro-ducer, producing more than 10 per-cent of the world’s supply; Saudi Ara-bia, the world’s largest producer, contributes almost 12 percent. But we consume so much oil that domesti-cally we supply less than half our

The term “crony capitalism” denotes a type of capitalism in which business success depends heavily on one’s connections to those in power. In this way of operating, business decisions are significantly influenced by friendships and family ties, rather than by market forces and open competition. The system greatly enriches those practicing it but is often injurious to the country. The Enron controversy is a classic case in point. LEFT: President Bush puts an arm around the shoulder of his close buddy, Enron CEO Ken Lay, whose corporation thrived under the President’s favoritism. © Houston Chronicle RIGHT: The logo of the Enron Corporation reflects its might, brought down by a greed-driven bankruptcy that financially wounded investors and employees alike (but not top management, who concocted fraudulent schemes, and most likely deemed themselves protected by the corporate connection to federal power). © James Nielsen/Getty Images


needs.2 Eighty percent of domestic oil production in the United States is con-centrated in four states and in federal offshore sites. In 2002, Texas was the largest producer, with almost 20 per-cent of the total, followed by Alaska, with almost 17 percent; California, with slightly more than 12 percent; and Louisiana, with about 5 percent. Federal offshore production, primar-ily in the Gulf of Mexico, accounted for a little more than a quarter of the domestic total.

Clearly, the United States is not a cost-effective competitor to Saudi Ara-bia and other Gulf states. A 1995 Oak Ridge National Laboratory report esti-mated that some Persian Gulf countries can discover, pump, and ship oil at a cost of $1 to $5 a barrel. U.S. costs at currently producing sites range from $17 to $26 a barrel.3 Although OPEC countries produce about 40 percent of the world’s crude oil, they have 70 per-cent of the worldwide oil reserves. Saudi Arabia alone controls 26 percent of total worldwide reserves, and Iraq another 11 percent. This tremendous reserve capacity, coupled with the low cost of removal, gives Saudi Arabia great power over oil prices.

The United States is the second-largest oil producer in the world, but our reserves are so small (8 percent of Saudi reserves) and we operate so close to capacity that we can neither control nor influence oil prices. Moreover, U.S. production and reserves declined by 25 percent and 20 percent, respectively, during the 1990s, while OPEC produc-tion and reserves increased by 23 per-cent and 5 percent, respectively.4

This dependence on Middle East-ern oil supplies has forced us to sup-port some very unsavory regimes: for example, today it is Saudi Arabia; in the 1980s it was Saddam Hussein; and

before the Second World War, it was the Shah of Iran. Boyd and Chermak have estimated that we spent $17.5 bil-lion on defense in the Middle East in 1995.5 That figure has increased by a factor of 20 if we consider our current military operations and occupation in Iraq as at least partly induced by con-cern over oil supplies.

Matthew Simmons, chairman of the Houston energy research and investment banking firm of Simmons and Company International, recently prepared a study examining Saudi Arabia’s proved oil reserves. Simmons, an energy adviser to the 2000 Bush-Cheney campaign, concluded that the Saudi oil reserves were overstated. According to Simmons, Saudi oil reserves went from 360 billion barrels of proved reserves in the mid-1980s to double that number without any new oil being discovered or new rigs brought into production. If Simmons

is correct, Saudi oil production will peak much earlier than expected, per-haps as early as 2012 instead of 2037.

The Saudi officials deny Simmons’ claims. In addition, mainstream ana-lysts point to the expansion of proven reserves around the world and the use of better technology to recover more oil. This, they claim, will move the production peak into the future. Because the information about Saudi Arabia’s reserves is secret and because the techniques used to estimate reserves are not robust, it is very diffi-cult to prove or disprove the state of Saudi Arabia’s proved reserves.

Whether Simmons or his critics are correct is irrelevant to our analysis. Even at a significantly reduced level of proved reserves, Saudi Arabia still has the ability to control world oil mar-kets. More important, the United States needs to move away from a fossil fuel–based economy as rapidly

TOLES © 2002 The Washington Post. Reprinted with permission of UNIVERSAL PRESS SYNDICATE. All rights reserved.


as possible for the many reasons that we have stated. If Simmons is cor-rect, the United States should con-sider a massive program to wean us off fossil fuels.

Oil and Gas Subsidies and Tax BreaksIn addition to costs associated with protecting our Middle Eastern oil supplies, there are a number of direct subsidies and tax breaks for oil and gas companies:• Modified Accelerated Cost

Recovery System (MACRS) allows companies to remove the tie between the useful and the depreciated life of capital equip-ment. Although the ACRS applies to all capital investment, the oil industry is a major beneficiary of its provisions.6

• The Percentage Depletion Allow-ance was instituted to encourage exploration and production of oil and other finite natural resources. The idea behind the depletion allowance was that an oil field is a

finite resource, so it is of greatest value before production begins. As the oil is removed from the ground and sold, the market value of the oil field declines. The depletion allowance allows oil companies to take a cost deduction from income to account for the declin-ing value of the oil field. The depletion allowance is in addi-tion to the normal depreciation and amortization costs usually taken by industry in the produc-tion of goods and services.

• Intangible Drilling and Develop-ment Costs (IDC) can either be expensed or depreciated. If

expensed, a producer can deduct the amount of the IDC from gross income during the period incurred. This allows oil firms to book greater expenses in one year than other businesses are normally allowed to. This and the depletion

allowance are two of the reasons that oil firms pay less in taxes than the general business community.

The Union of Concerned Scien-tists has estimated that the effective income tax rate on the oil industry runs at 11 percent, as compared to the non-oil-industry average of 18 percent. This saves the oil industry approximately $2 billion a year.7 Similarly, in 2001, Joseph Mikrut estimated that incentives for oil and gas production in the form of tax expenditures would amount to $9.8 billion for the years 2002 through 2006. He gives the breakdown pre-sented in Table 5-1.8

Are We Really Dependent on Domestic Production?Early in the 20th century, an argu-ment could be made that the infant U.S. oil industry needed protection and subsidies to supply the needs of

Table 5-1 Oil & Gas Tax Incentives (5 years 2002–2006)

Incentives & Tax Break Billion $

Accelerated Cost Recovery 4.4

Depletion Allowance 2.3

Passive Loss Limitation 0.1

Intangible Drilling Costs 0.6

Non-Conventional Fuels 2.4

Other Tax Breaks 10.0

Total 19.8

Annual Average Subsidy 4.0



a burgeoning economy. Whether the subsidies helped or simply enriched the industry, it is clear that the U.S. economy could not have achieved its level of growth throughout the 20th century without adequate oil supplies. The initial rationale behind the tax breaks and subsidies given to the oil and gas industry at the beginning of the 20th century was to encourage exploration and production of oil. But in the last quarter of the 20th century, as the industry became a mature, giant industry, the tax breaks and other sub-sidies had little effect on production.9 The small U.S. reserves and the high cost of production in the United States as compared to other oil-producing countries mean that domestic produc-tion makes less and less economic sense. In short, the principal benefi-ciaries of the tax breaks and subsidies that make domestic production possi-ble are the oil companies and their executives and investors; and the prin-cipal financial burden falls to taxpay-ers, who foot the bill.

A current argument for oil subsi-dies is that they are necessary for maintaining energy security to ensure domestic economic growth. Given the high cost of domestically produced oil, this is a specious argument. Ana-lysts generally recognize an inverse relationship between the price of energy and GDP growth, although they disagree about the strength of the relationship. A 1996 U.S. General Accounting Office (GAO) report claims that if the United States were to rely more heavily on domestic oil, the price of oil would rise further to reflect increased production costs. Greater reliance on low-cost imported oil instead of domestic production has saved consumers and businesses hun-dreds of billions of dollars. Conse-

quently, the lower prices have added to the growth of both GDP and jobs. This means that if subsidies designed to increase reliance on domestic produc-tion raise the U.S. price of oil, thereby lowering the rate of economic growth, it simply helps the oil industry at the expense of the wider economy.10

A related justification for moving toward energy independence through increases in domestic supply is the potential for supply disruptions. This argument simply does not hold water. In the first place, the United States cannot achieve oil independence at its current or projected levels of demand. There aren’t enough oil reserves in the country, and even a significant reduc-tion in dependence on foreign oil will not reduce the vulnerability of the U.S. economy to price spikes and sup-ply disruptions. The 1996 GAO report acknowledges that oil supply disrup-

tions can impose large costs on the U.S. economy and cause consumers and businesses to make difficult and costly adjustments. But as significant as these costs may be, they are unlikely to exceed the day-to-day benefits of lower-cost imported oil. Even if we were able to reduce imports signifi-cantly, the economy would still be vulnerable to supply disruptions. The message in the GAO report is that no nation can insulate itself from oil dis-ruptions. A disruption in one part of the world will affect all other areas. Relatively small disruptions in Vene-zuela and Iraq in 2002 and 2004 caused significant spikes in oil prices. Finally, importing 100 percent of our oil to conserve our much depleted reserves might be the best solution to the problem of energy security. It is highly unlikely that all foreign sup-pliers would be out of the market at

March 1991, near the end of the Gulf War, when Iraq’s defeat was inevitable, Saddam Hussein ordered his retreating forces to set fire to the Kuwaiti oil fields. © Peter Turnley/CORBIS


any one time, but should foreign sup-plies be drastically curtailed, the stra-tegic reserve could supply our needs while domestic wells were brought back into production.

Energy Efficiency Versus Exploration and DrillingThe two major factors affecting energy consumption are the price of

oil and the level of economic activity. Although the quantity of oil demanded is not very responsive to price changes in the short run, it is quite responsive over time as high energy prices induce more conser-vation. As a result, demand for oil has gone through pronounced swings over the past 30 years in response to price changes. When

prices increase, consumption falls, and when prices decrease, it rises.

If the United States wants to become less dependent on imported oil, it must increase the energy effi-ciency of the transportation sector (automobiles, trucks, buses, air-planes, and trains). This sector is the largest user of petroleum products, consuming more than 65 percent of the total supplied to end users. Between 1974 and the present, the sector’s share of the total has increased by more than 12 percent.

Although substantial energy effi-ciency gains could be made on truck fleet mileage, trucks, both large and small, are exempt from fleet mileage requirements. Increases in fleet mile-age will greatly change the demand for oil and, as a result, the available reserves. Even modest mileage gains can provide greater benefits than the discovery of large new domestic reserves. The new fleet of hybrid cars, including the Toyota Prius, Honda Insight, and Honda Civic, demonstrates the possibility of nearly doubling fuel mileage in an intermediate-size car. By model year 2006, there will be nine more models available, including a Dodge Ram pickup and a Ford Escape SUV.11 The National Academy of Sciences has found that the current fuel economy standards save the nation 2.8 million barrels of oil each day. It identifies more than two dozen current and emerging technologies that can help increase vehicle fuel economy with-out compromising safety, size, or performance; a few of these technol-ogies are already used in some cars and light trucks. But, tighter fuel economy standards, at least 40 miles per gallon, are needed to introduce the technologies across auto, SUV,

TOP: SUVs idle as parents wait to pick up their children at a private school in the Dallas suburb of Garland, Texas, 2003. © Richard Michael Pruitt/Dallas Morning News/CORBIS BOTTOM: A FedEx General Motors hydrogen fuel-cell delivery vehicle, Tokyo, 2003. © Tatsuyuki Tayama/FujiFotos/The Image Works


and pickup fleets. These tighter stan-dards would reduce total oil use by about 25 percent and oil imports by 50 percent.12

Demand for oil is also stimulated by public policy that subsidizes an automotive-centered transportation system. Our roads are mostly paid for with gasoline taxes, but they must be subsidized by general tax revenues. Gasoline and sometimes autos them-selves are exempt from general sales taxes, leaving other goods to shoulder more of the general tax burden in sales taxes. People with automobiles choose to live farther from the center of their activities, creating more urban sprawl and raising the costs of many urban services. People should be able to choose where they live and how they move around, but they should pay the full cost of their decisions. If all the cost were included for using cars, we would most likely choose to make our cities somewhat denser and this would reduce oil consumption.

An obvious solution that is effec-tive in several large cities like Boston, Washington, D.C., and New York is public transportation. Light-rail trains, subways, and commuter trains are low-cost to the commuter, conve-nient, and user-friendly. Commuting by public transportation eliminates the hassles of rush-hour traffic, find-ing parking in a congested city, and paying the rising cost of fuel.

Except in the very long run, we are not going to get rid of our depen-dence on foreign oil, and we are not going to get rid of our dependence on fossil fuels. But we can increase our energy security by reducing our demand for oil through using it more efficiently and relying on cost-effec-tive alternatives. In that process, we will reduce air pollution, health

costs—as fewer people suffer from asthma—and the cost of energy sub-sidies, thereby freeing up billions of dollars for more productive uses.

CoalAccording to the Energy Information Administration, coal companies in the United States produced one billion short tons of coal in 2002. Coal-fired electric power plants consumed 90 per-cent of the coal produced. These plants

account for more than 50 percent of the total electric power produced in the United States.13 Three Retro states, Kentucky, West Virginia and Wyo-ming, produced nearly two-thirds of all coal in the United States in 2002.14

Coal subsidies are promoted as a way of maintaining employment in high-paying jobs in coal-producing regions, but even with the billions of dollars of subsidies between 1987 and 1997, employment in coal mines

TOP: West Virginia coal mining; mountaintop removal and valley fill. © V. Stockman /www.ohvec.org BOTTOM: Royal Scott Minerals in Anjean, West Virginia is one of 245 mine reclamation sites that West Virginia is obligated to clean up under federal law. The EPA estimates it will cost $2,285,000 to clean up this site alone. © AP Wide World Photos


declined by almost half, from 154,645 to 81,516. Although coal production grew modestly over this period, employment decreased due to consoli-

dation and growing productivity.15 The coal subsidies are as follows:• Capital gains treatment of royalties

paid for the privilege of mining the land. Coal-mining companies and individuals receiving royalties from coal companies may treat those payments as capital gains rather than ordinary income. Capital gains are taxed at a lower rate than ordinary income. With the newly reduced capital gains rates in the Bush 2003 tax cut, this subsidy will increase substantially.

• Mining reclamation consists of safely closing mines and restoring the land to its previous natural state. These are legitimate expenses of doing business. But mining companies can deduct reclamation and closing costs as soon as they begin to mine, long before the mine is closed, the land

reclaimed, or the money spent.• Federal programs for research and

technological development. The clean-coal technology program provides federal matching funds of up to 50 percent to private indus-try for research to develop cleaner-burning coal technologies. In addition, the clean-coal technology program allows the IRS to grant tax credits to producers of syn-thetic fuel. The credit of $26 per ton of fuel, about the price of a ton of regular coal, is a major source of profit for these plants, representing an estimated $2 billion in tax credits for 2003 alone.16

Even if subsidies contributed in some minor way to employment in the industry, we have to question the efficacy of such a subsidy in a mature industry. No one suggested that the federal government subsidize the dot-com, telecommunications, or electric power industry when they collapsed at the beginning of the current decade. The effect of these industries’ melt-down was far greater than the decline in employment in the coal industry. Rather than subsidize coal firms, that money should be spent directly on education, training, retraining, and relocation, where necessary, of coal miners and other workers in coal mining areas.

The coal and other fossil fuel industries contribute to pollution and environmental degradation. Although these industries have made significant strides in paying for pollu-tion and environmental degradation caused by fossil fuels, they still do not cover their full costs. Some of the remaining costs, as well as costs for such items as increased health care or environmental degradation, are picked up by taxpayers.

Porcupine caribou grazing in Alaska’s Arctic National Wildlife Refuge, the crown jewel of America’s refuge system. This pristine place is under threat by an oil industry that has its sights set on the biological heart of the refuge, its coastal plain, an area critical to the survival of many birds and mammals. © AP Wide World Photos

Table 5-2 Coal Tax Breaks: 1992–2002

Tax Break Billion $

Capital Gains Treatment 0.8

Reclamation Deductions 0.4

Clean Coal Technology 0.3

Grants

Clean Coal Technology 20.0

Tax Credits

Total 21.5

Annual Cost to Taxpayers 2.2


The major beneficiaries of the tax subsidies to the coal industry are the firms and their managers and stock-holders. Not surprisingly, these firms grease the political system that pro-vides these benefits through signifi-cant political contributions. Accord-ing to Common Cause, the metals and mining industry made more than $3.3 million in political contributions for the 2001–2002 election cycle, roughly 0.5 percent of the two-year identified subsidy. The industry made political contributions of more than $3.2 million, with 85 percent going to Republicans. For the period 1995–2002, the industry contributed nearly $14 million, with 82 percent going to Republicans.17 If the subsidies are viewed as a return on investment based on the political contributions received, the returns to the industry far outstripped those of the stock market boom of the 1990s.

Energy Policy The Bush-Cheney Energy PolicyWith 53 extraction industry advo-cates operating inside the Bush administration, it is little wonder that the Bush-Cheney energy policy relies heavily on fossil fuels and puts the interests of its corporate friends above those of the general public and the environment. Like legend-ary Engine Charlie Wilson of Gen-eral Motors fame, who stated that what was good for General Motors was good for America, these enablers and the industries they serve believe that what’s good for the extraction industries is good for America. In 2001, Newsweek noted that “not since the rise of the rail-roads more than a century ago has a single industry [energy] placed so many soldiers at the top of a new

administration.” The policy direc-tion of these energy soldiers is clear—do the industry’s bidding. Following is a thumbnail sketch of the Bush/Cheney energy policy:• Calls for drilling in the Arctic

National Wildlife Refuge (ANWR), one of America’s most pristine areas. The Department of Energy estimates that at its peak produc-tion, ANWR will supply barely 6 percent of the U.S. demand for oil.

• Proposed changes to rules imple-menting the Coastal Zone Manage-ment Act of 1972 that will under-mine coastal states’ ability to block offshore oil drilling.

• Relaxed New Source Review (NSR) controls in response to lobbying by the power industry. NSR controls required power plants to install pollution control equipment when coal-fired power plants are upgraded. This action will allow dirty power plants to continue spewing pollution, saving the industry billions but endangering the health of millions of Americans.

• Reduced the emphasis on energy efficiency, an energy source that can provide greater annual gains than drilling in ANWR. The Bush administration tried to roll back minimum efficiency standards for

TOP LEFT: Aerial view of the Exxon Valdez oil spill in Prince William Sound, May 1989 © Natalie Fobes TOP RIGHT: Two sea otters, victims of the Exxon Valdez oil spill, recuperate at a rehab facility where only their faces have been cleaned. © Jim Lavrakas/Anchorage Daily News BOTTOM: Exxon Valdez oil spill workers use pressure washers to remove oil from the beach on Smith Island. © Bob Hallinen/Anchorage Daily News


residential air conditioners, failed to promote improvements in fuel economy for SUVs and trucks, and has cut funding for the Depart-ment of Energy’s research and development programs aimed at energy efficiency.

The energy policy was codified in the energy bill that failed to pass in 2003. Some key proposals of the bill were to:• Increase subsidies to the nuclear

power industry and to the oil, gas, and coal industries

• Promote oil, gas, and coal develop-ment on pristine public lands

• Reduce local and state control over the siting of high-voltage transmis-sion lines

• Weaken the federal government’s regulatory oversight of the electric power industry

The bill did not include:• A national renewable energy

portfolio standard• Requirements for electric utilities

to improve efficiency or• Improvements in fuel economy

standards for cars, pickups, and SUVs

The Congressional Budget Office estimated that conservation and alter-native fuel tax credits in the bill amounted to $8.9 billion over the ten years 2004–2013. Another $14.6 bil-lion in tax credits over ten years would be given to increased production of oil, coal, natural gas, and nuclear power. The CBO estimate of the ten-year cost of the bill to the federal gov-ernment would be more than $30 bil-lion. But when all of the authorized costs and all of the costs shifted to consumers are included, the total could exceed $140 billion. The vast majority of these credits (federal and other) would go to producers of con-ventional oil, gas, and coal.

According to Common Cause, the oil and gas industry contributed almost $10 million in soft money dur-ing the 2001–2002 election cycle, with 80 percent going to the Republicans. Between 1995 and 2002, the industry contributed a whopping $42.9 million in soft money, with 75 percent going to the Republicans.19 These contribu-tions are in addition to those made directly to political campaigns. The energy bill allows the oil and gas indus-try to reap the rewards of its invest-ment in the political system even though it is impossible for the bill to achieve its objective of making us less dependent on foreign oil. There is no mandate to increase use of renewable fuels in electricity production.20

The quid pro quo that the energy industries receive for their political contributions runs into many billions of dollars and represents a fabulous return on their investment. It is the taxpayer who picks up the tab for the billions flowing to the crony capitalists who inhabit the executive offices of the energy companies, the executives in the Bush administration, and finally to their factotums in Congress.

Efficiency and Alternative SourcesEnergy efficiency can be viewed as one of the United States’ most important sources of energy. Unfor-tunately, it is almost invisible to the consumer. Making it visible would require the consumer to regard saved or unused energy as equiva-lent to energy produced.

Achieving Energy EfficiencyThe Energy Department’s Informa-tion Agency projects that the United States will need at least 1,300 new power plants to meet expected demand by 2020.21 Energy efficiency



and conservation can obviate the need for a large number of those new power plants. As we saw in the California energy crisis, consumers achieved a 10 percent reduction in a very short time. A 10 percent savings over the next 16 years would reduce the number of power plants needed by 130. Longer-term programs to reduce energy use in new buildings, such as building energy codes, tax credits, and public benefit programs, could avoid an additional 170 power plants. Pro-grams to improve existing buildings by targeting residential air condition-ers and commercial lighting and cooling could reduce demand by another 210 power plants.22 These are just a few examples of steps that can be taken to increase energy efficiency and reduce energy use.

The argument is not about whether energy efficiency and conservation can reduce the number of power plants needed. They can. Instead, the argument is about the total number of power plants that can be displaced. Because any such number is an esti-mate using forecasts, there will neces-sarily be a wide variance in the num-bers. But based on the above data, a minimum of 250 power plants could be displaced, and the number could easily exceed 500. Thus, between 250 and 500 unnecessary power plants might be built, simply because a Retro-controlled Congress, dedi-cated to the extraction industries, will not pass energy-saving legisla-tion that would save billions of dol-lars and have little or no impact on our standard of living. This Retro-promoted construction of unneces-sary power plants will be in the backyards of between 250 and 500 victimized communities. After they are constructed, these unnec-

essary plants will mostly use coal, which will lead to more pollution and more sickness. Only an admin-istration and a Congress doing the bidding of the energy industry would put forth such a crass policy.

Energy efficiency can signifi-cantly reduce fossil fuel consumption and needs to be encouraged through federal policy. One of the advantages of energy efficiency is that the savings can be immediate with little invest-ment. As mentioned, the recent Cali-fornia energy crisis provides an example. As the crisis unfolded dur-ing 2001, the Bush administration dismissed conservation as a tool. Vice President Dick Cheney stated, “Con-servation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy.” As energy firms, with the full knowledge of the Bush administra-tion, colluded to increase prices in California, Californians spoke to Cheney through their actions. They

reduced consumption of electricity by 10 percent almost immediately.

Efficiency advocates have testi-fied before public utility commis-sions that current technology savings from conservation can largely meet the increase in energy use at a cost lower than that of conventional energy sources. But conservation often requires significant up-front costs that many homeowners and businesses are unwilling or unable to invest in, even though they will save money in the long term. Only federal government programs can overcome this obstacle. The returns in expanded economic growth will more than off-set the federal R&D expenditures and incentives needed to develop nonpolluting alternative energy sources. One method to encourage energy efficiency is through tax incentives, credits, and deductions and accelerated depreciation sched-ules. Tax incentives can be provided for the following:

More than 130 residents from Bern, Kansas traveled almost 300 miles in November 1997 to tour the Maytag Neptune Plant in Newton, Ohio, which produces an energy-efficient washer that was tested by residents of the Kansas town. © Linda Kahlbaugh/AP Wide World Photos


• Construction of energy-efficient new homes and efficiency

upgrades of existing homes• Construction of energy-efficient

commercial and industrial buildings• Highly efficient refrigerators and

clothes washers and dryers• Purchase of hybrid gas-electric

and fuel cell vehicles• Other energy-efficient equipment

Among the top performers in energy efficiency has been the appli-ance and equipment standards pro-gram. The standards program alone reduced U.S. electricity usage by 2.5 percent annually, and additional gains can be made. The federal gov-ernment should also encourage state and local governments to adopt higher efficiency standards for residential, commercial, and industrial buildings. A source of funding could be pro-vided by a national public benefits trust fund established to collect a fee on electricity usage. Electricity pro-viders would charge customers a fee that would go into the trust fund. The fees would provide a significant resource for investment in energy efficiency, renewable energy, low-income programs, and R&D. The residential share of this fee would amount to about 50 cents per month, or $6 per year, per household. Over time, the benefits of such a trust fund would far outweigh the costs.

Channeling Energy Subsidies from Production to ResearchIn addition, subsidies to oil and coal production should be phased out within a short time. Ending them will not create any serious economic dis-ruptions, because all energy prices are related to the price of oil. Because oil prices are set primarily by OPEC and Saudi Arabia, a decrease in subsi-

dies to U.S. oil producers will not affect the price of oil, and as a result, even significant price increases in other energy products will be difficult to sustain. Unfortunately for the envi-ronment, eliminating these subsidies will not materially change the market shares of the energy produced by oil, natural gas, coal, and other fossil fuel energy sources. Two effects of ending subsidies are foreseeable: oil, gas, and coal company profits will drop, and some uneconomic domestic oil will be replaced by imported oil.

The path to an improved energy mix, greater energy independence, and reduced pollution lies in funnel-ing the existing energy subsidies into research and development of alterna-tive energy sources, and in providing more subsidies to help build alterna-tive energy industries. These subsi-dies are justifiable supports and incentives to infant industries. The billions of dollars of oil and coal sub-sidies prevent the move toward a rea-sonable energy policy and any sem-blance of energy security. The U.S. economy has proven to be highly flexible and adaptive. Faced with higher energy prices or an energy shortage, businesses and consumers have adapted through fuel switching and conservation. Instead of offering a variety of cost-effective alternatives, the Bush policy emphasizes depen-dence on oil and coal. These subsidies reduce the incentive for private investment in research and develop-ment of alternative energy sources that, although they are not yet com-petitive with the more traditional fos-sil fuel sources, show great promise. It is difficult to imagine that Ameri-can ingenuity could not make these alternatives cost-effective with fossil fuels if it became a national priority

instead of a national afterthought. We have seen that when an alternative energy source becomes cost-effective, businesses and consumers switch.

According to Green Scissors, between 1948 and 1998 the federal government spent $20 billion on research on energy efficiency and renewable sources and $92 billion on research on fossil fuels and nuclear energy.23 Both fossil fuel and nuclear industries are mature industries that do not require research-funding subsidies to improve their product or facilitate its marketing. Moreover, both industries are significant pollut-ers, so that continuing or expanding current consumption of these energy sources will further aggravate pollu-tion ills. Alternative energy sources are in the incipient stages of develop-ment. Without curing the current imbalance of subsidies, a forward leap by the alternative energy indus-try relative to the fossil fuel and nuclear power industries is unlikely.

Solar, Wind, and Biomass EnergyCurrently, solar energy prices can be from 2 to 20 times that of conven-tional electricity sources but are most typically three to five times the cost. As a result, solar energy is most often used in remote industrial and domes-tic applications; for example, remote rural telecommunications, navigation lighting, cathodic protection systems, off-grid homes, and power for villages in the developing world.

The cost of installed solar capac-ity declined more than 80 percent between 1982 and 2003, with the most rapid decline occurring between 1990 and 1996. Businesses in New Jersey and New York, responding to solar power incentives at the state and federal level, are installing power


grid–connected systems, so the use of solar power is on a growth curve.24 If we shift subsidies from fossil fuels to R&D and incentives in the solar energy field, we can expect contin-ued dramatic cost declines and increasing demand. Without them, economically viable solar energy will be delayed.25

Wind power is another clean energy source that shows consider-able promise. Today wind energy advocates claim that wind energy can be produced at a cost of 4 to 6 cents per kilowatt hour (kwh). Even at 6 cents per kwh, wind energy begins to move into the competitive range of conventional energy sources (3.5 to 4.5 cents per kwh). As with solar

energy, wind energy costs declined by 80 percent between 1980 and 2000 and were cut in half between 1990 and 2001. The wind energy industry has experienced 30 percent growth per year over the last decade. In 2001, California had 1,650 megawatts of wind power capacity. Southwest Windpower of Flagstaff, Arizona, expects to put a residential wind tur-bine on the market by late 2005.26

Wind energy advocates claim that wind power can supply 10 per-cent of the United States’ electric power requirements. The fact that Denmark obtains 20 percent of its energy from wind power proves that this is possible. Reaching that goal will require considerable advance-

ments in wind power technology, but these advancements will come more quickly with substantial federal research and development funds.27

Biomass energy from wood products, vegetation, crops, and aquatic plants is another renewable energy source. Biomass accounts for 15 percent of the world’s total energy supply. It accounts for 35 percent of energy used in developing countries, where it is used for cooking and heating. Unfortunately, in develop-ing countries, the use of wood and vegetation contributes to denuding forests, which leads to environmen-tal and ecological damage. Biomass in the industrialized world has taken on a different character and may offer

The offshore wind farm at Horns Rev is the first large project in the Danish government’s energy action plan “Energy 21.” The wind conditions on Horns Rev are so good that the future offshore wind turbines are expected to produce twice as much power as onshore wind turbines of the same size. This facility will have a power of 160 MW. © Elsam


competition to fossil fuel use in the transportation sector. Biodiesel, pro-duced from renewable resources or waste products, is a substitute for conventional diesel fuel and pol-lutes much less than conventional diesel fuel. The major disadvantage

is its cost—two to four times that of conventional diesel. At present, it is typically used in a mixture that is 20 percent biodiesel and 80 percent conventional diesel, which allows diesel engines to obtain most of the benefits of using biodiesel.

Development of these alternative energy sources is not a panacea for ending our dependence on imported oil, because they do not substitute for oil in the transportation sector. Rather, they will replace the coal, natural gas, and atomic fuel that produce electric-ity, leading to a cleaner environment but to minor changes in our consump-tion of oil. Key to achieving energy independence is finding a substitute for the transportation sector’s con-sumption of fossil fuel. In the near term, hybrid engine cars offer signifi-cant reduction in fossil fuel use, but we have already surrendered the lead in this technology to the Japanese and will have to struggle to catch up. In the longer term, ending dependence on oil from volatile foreign states requires a transportation system that is mostly independent of oil.

Fuel Cell Technology and the Hydrogen EconomyFuel cell technology is a potential competitor to fossil fuels in the trans-portation sector. Fuel cells, which turn hydrogen into electricity, are pollution-free, emitting only water and heat. But they have a long way to go before they replace the gasoline or diesel engine. In his 2003 State of the Union address, President Bush pre-dicted that the first car driven by a child born today may well be pow-ered by hydrogen and be pollution-free, and this prediction was empha-sized in the 2003 energy bill. But given Bush and Cheney’s love affair with fossil fuels, development will be slow to nonexistent until there is a change of administration.

Currently, fuel cells are about ten times more expensive per unit of power than internal combus-tion engines. Furthermore, because

TOP: Close-up of individual solar panels at the world’s largest solar project in the Mojave Desert, California. © Kevin Schafer/CORBIS BOTTOM: Aerial view of Solar Two in the Mojave Desert in Daggett, California. A consortium of ten companies and the United States Department of Energy commissioned a project to construct a large-scale solar power plant capable of generating 10 megawatts of electricity. This is enough power to supply nearly 10,000 homes. © Airphoto - Jim Wark


hydrogen is produced using electric-ity, it is most likely to be produced by coal, which means that hydrogen production may cause more pollution than the internal combustion engine. Although natural gas is cleaner than coal, it is in short supply and is unlikely to be used in the large-scale production of hydrogen.28

Fuel cells may well be the wave of the future. If U.S. automakers allow foreign manufacturers, such as the Japanese and Europeans, to take the technological lead, they may find themselves in the same position as they were during the energy crisis of the 1970s, when consumers demanded fuel-efficient automobiles. U.S. automakers could not match the Japanese in the development of fuel-efficient cars. As a result, U.S. auto-makers permanently lost market share, and the American economy lost high-paying jobs to the Japanese. Unless U.S. automakers can develop competitive cars powered by fuel cells, they may again lose significant market share. With the emergence of China as an automotive economy concerned with fuel efficiency, the United States could well be closed out of that large market.

When one considers the fact that a hydrogen economy would mean the replacement of the vast infrastructure that supports the gasoline economy, it is obvious that these technologies will create millions of new jobs, jobs that can be done only by American work-ers. Also, there will be a vast demand for these technologies by both the developed and developing worlds. The United States can be a leading sup-plier of clean-energy products. It would be a terrible loss to America if the lack of vision and political will left these developments to Japanese

and European firms to pursue at the expense of jobs, income, and profits in the United States.

Both Metro and Retro states would benefit from reduced reliance on fossil fuels. Both would experi-ence lower energy costs and reduced

pollution. Even with a shift away from fossil fuels, Retro states will still be the major energy provider for Metro states. Retro states will house most of the wind farms and solar arrays. They will grow the biomass crops. Along with Metro states, they

TOP: Amtrak’s Acela train is the only high-speed passenger train in the U.S. It runs between Boston, New York, and Washington, D.C. © Angela Rowlings/AP Wide World Photos BOTTOM: A zero-emission fuel cell bus waits at Aldgate bus station on its first day of service in central London, January 14, 2004. The bus, which emits only water vapor, will be tested for two years as part of a European trial involving nine cities, aimed at reduc-ing air and noise pollution. © Toby Melville/Reuters/CORBIS


will also engage in the manufacture of alternative energy technologies. A switch from a fossil fuel economy will create jobs and income for Retro America, especially if the United States becomes a major exporter of alternative energy technologies.

China: Our Next Energy Supply Problem?As we argue throughout this book, Retro America is fixated on the extraction industries, and the Bush administration mirrors that mind-set, especially when it comes to energy. We have also argued that America must wean itself off fossil

fuels if it is to gain independence from oil-producing countries, an absolute necessity if we are to have a rational foreign policy. Although these arguments have been made countless times by others, they have had no effect on the Bush admin-istration’s energy policies. And they will continue to have no effect because fossil energy sufficiency is the lens through which Bush and company view America’s position in the world. They cannot conceive of a good life that is energy effi-cient and where cities and suburbs are much less dependent on SUVs, roadways, and urban sprawl.

Unfortunately for America, this is a fatally flawed view of the world. Nothing could make these flaws clearer than the rise of China as an economic giant. In the not-so-distant future, China will have an economy that is larger than the United States’. China has cho-sen to follow the U.S. path of eco-nomic development, and soon the two great energy problems facing America—pollution and increasing demand for oil—will double. Plac-ing China in the energy equation begins with the problem of pollu-tion. According to Zhang Jianyu, of the Beijing Office of Environmental

LEFT: Glacier, Peruvian Andes, Cordillera Blanca. Fan glacier at the top of Jacabamba Valley as it appeared in 1980 when it filled the valley. © Bryan Lynas/Peter Arnold RIGHT: the Cordillera Blanca glacier in 2003, shot from the same perspective, shows the effects global warming has caused here and in many other areas of the Peruvian Andes. © Mark Lynas/Peter Arnold


Defense, “The world cannot afford a second United States.”29 In China, coal is the primary source of energy and also of greenhouse gases; just a decade and a half from now, China will be the world’s largest producer of greenhouse gases. When the tem-perature rises another 5 or so degrees and the Oklahoma sun shines ever brighter, even Senator Jim Inhofe might be willing to take back his claim that catastrophic global warm-ing is one of the greatest scientific hoaxes perpetrated on the Ameri-can public. Clearly, the only way either the United States or China is going to solve the problem of global warming is to migrate to a nonfossil energy regimen.30

When we turn to the second problem, the demand for oil, we enter the realm of foreign policy. This prob-

lem is of immediate concern to every American. If the Middle East were not a major source of oil, we would not have turned the Arab states into clients that produce ter-rorists. But we have turned them into clients, and they do produce terrorists. This has vastly increased the problem of oil security, as evi-denced by the Bush administration’s war in Iraq, designed to turn the country into a democratic model to be adopted by all Arab countries, which would then be reliable suppli-ers. Even if by some miracle the Arab states do become friendly democra-cies, it will still not solve the problem.

America’s oil supply was vulnera-ble to local shocks before the War on Iraq, but now the terrorists have greatly intensified and expanded their range of targets. “The U.S. is bracing for an

era of continuing attacks by insurgents bent on blocking the flow of a com-modity vital to the world’s economy.”31 It has forced the largest deployment of U.S. armed forces since the Cold War and they are being sent to Africa, the Caucasus region, South America, and the Middle East. In short, Mr. Bush’s war has helped to turn a local sporadic problem into a continuous global problem—so much for the neo-con argument that unilateralism has increased America’s security.

As much as a quarter of today’s price [of oil] is thought to be a “terror pre-mium,” reflecting worries that attacks could cut oil supplies. In addition, since the early 1980s, the U.S. military has spent an average of $4 to $5 per barrel to protect oil leaving the Persian Gulf, esti-mates Amy Myers Jaffe, an analyst at the

Glenn Foden/Artizans.com


James A. Baker III Institute for Public Policy at Rice University in Houston. Such hidden costs appear likely to rise.

The Persian Gulf buildup comes as the region’s oil appears to be growing even more vital. With global oil demand expected to rise more than 50% in a quarter-century, much new oil will have to come from the Gulf region, which holds almost two-thirds of reserves... .

The widening turmoil in the Mid-dle East has dealt the U.S. Coast Guard an urgent new task: protecting over-seas oil. Along with the Navy, the Coast Guard is gearing up to fight what prom-ises to be a long-term threat of sabo-tage, most prominently here in a region that provides more than a quarter of the world’s oil.32

No matter how high the “terror premium” rises in our attempts to

create a global supply protection sys-tem, we will not be able to spend enough to solve the problem. China’s economic rise will slowly render all those efforts ineffective. In 2003, Chi-na’s oil imports jumped by more than 30 percent, and at that rate of growth, the nation’s demand for oil will soon equal that of the United States. There is little doubt that China will be as driven as the United States to protect its oil supply, and that will present a problem dwarfing the ones we face in the Middle East. Now, the United States can face down any country, but it would be unwise even to try that with China.

A December 2003 Deutsche Bank analysis of China’s energy situation noted that, in response to the Iraq war, China has begun building a group of storage facilities to create a

strategic oil reserve. The report also noted that the country is aggressively pursuing oil deals around the world, from neighboring Kazakhstan and Russia to other oil fields in South America and even Canada. Earlier this year, President Hu Jintao made visits to African countries with sig-nificant oil fields.33

The United States has neither the resources nor the will to continue to pursue a policy of oil security that encompasses the Middle East, Africa, Latin America, and Asia. Simply put, we must wean ourselves off the need for vast quantities of foreign oil. We can do that only if we turn our invest-ment dollars and our scientific and technology talent to the task of energy independence. We have the money and talent, but we lack the will. With leadership, we would have the will.34

Smoke and pollutants billow from the chimneys of one of China’s largest iron and steel works at Ashan, in the province of Liaoning, the heart of China’s industrial belt. As China’s industrial output has increased over the last decade, so has its environmental pollution. In May of 2004, 3,000 Chinese enterprises, including power, petrochemical and aluminum plants, were blacklisted by Chinese newspapers as the major sources of industrial pollution. © CORBIS

If we wish to make a new world we have the material ready. The first one, too, was made out of chaos.

- Robert Quillen, Humorist & Syndicated Writer

The Economics of Corporate Welfare

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