Tuesday, August 07, 2007

An Marketable Solution to Alternative Fuels

Fire of Liberty

As you know, I'm pretty much in opposition of the government creating massive subsidies for alternative fuels in order to lead us down the road of reduced dependency to foreign energy. Like I've said in the past, I'm all for the creation of alternative fuel sources like ethanol(cellulosic), hydrogen, coal and even super battery technology but I have a serious problem when the government gets into the world of energy production via excessive regulations and massive subsidies much like we see going to the ethanol makers. As long as the government shells out billions of dollars to various companies and farmers to keep on producing this fancy moonshine, we will have an industry that will be an inefficient industry propped up by the government dole rather than being an industry that lives and dies by the actions of a free market and the demands of the consumer. Until we get the government out financing the production of ethanol and leaving it to the private sector, which should be on the energy companies dime, we're going to continue to see the depletion of our valuable cropland and forests to plant such crops, thus less land to grow produce to fill our grocery stores, less feed corn for pigs, chickens, cows, which will result in more expensive groceries for the American people. No matter what, the free market is a far better place to look towards alternative fuels than government subsidies.

Someone who has taken notice of how venture capitalists and entrepreneurs are better players at this than the government is Bloomberg columnist Kevin Hassett who points out in a recent column that Congressman Devin Nunes(R-CA) is pushing forward legislation which would establish a futures market for alternative fuels. Now while I could try to explain the Congressman's good idea, I figure you'd be served better by what Hassett's own words. Here's a look:

If you want some action in the next few years, you can operate in existing markets. If you want to buy the right to sell your alternative fuel for the equivalent of $70 at any time in the next couple of decades, you are out of luck.

The Nunes solution is to have the government create a market for long-run put options for alternative fuels. This would give those who have constructed qualifying facilities the right to sell (or ``put'') their product at a minimum price to the government should the actual price drop below that.

If you are planning to invest a couple of billion dollars in a coal-to-liquid plant, then you could purchase a U.S. government-backed option that would guarantee you a minimum price of, say, $70 a barrel. If the actual price is above that, you can sell your product for more than that. If the price drops below $70, the government pays you the difference between the market price and $70.

The price of these futures contracts would, under the Nunes bill, be set at auction. Accordingly, the policy would probably raise revenue in near-term forecasts. In the long run, taxpayers would be taking on a risk that oil prices will drop, but that risk is a natural one for them take.

Booming Economy

If oil prices fall so low that the government must pay lots of money to alternative fuel providers who have purchased these options, then that would mean the economy will be booming because of the low energy prices. In addition, tax revenue will be flowing in, and the Treasury's coffers will be full.

The beauty of this policy is that it should remove a major source of uncertainty for those who would produce alternative energy. This should increase the amount of money that flows to this area and lower the cost of capital for alternative fuel providers. In other words, it uses markets, and not subsidies, to solve our problems.

While this might not be a big topic at a dinner party or make it through Congress, it far outshines the Democrats' horrific energy bill that increase subsidies and forces energy companies to spend a certain portion of their profits on the production of alternative fuels, which in turn results in corporate welfare on the taxpayers dole and the companies passing the added cost onto the consumer. I just hope that the Congressman gets a shot at passing such a bill to start us on the right track to greater energy independence.

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